<PAGE>   1
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                                   ----------

                                   FORM 10-K
(Mark One)

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

For the fiscal year ended June 27, 1998            Commission File No. 0-11271

                             WALL STREET DELI, INC.
             (exact name of registrant as specified in its charter)

      DELAWARE                                               63-0514240
(State of Incorporation)                                (IRS Employer I.D. No.)

                       ONE INDEPENDENCE PLAZA, SUITE 100
                           BIRMINGHAM, ALABAMA 35209
                    (Address of principal executive offices)

                                 (205) 870-0020
                        (Registrant's Telephone Number)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                Name of each exchange
          Title of each class                   on which registered
          -------------------                  --------------------
                 None                                 None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT

                          Common Stock, $.05 par value
                          ----------------------------
                                (Title of Class)

Indicate whether the registrant 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, and 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. [X ]

The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $7,114,806 on September
15, 1998 based on the NASDAQ National Market System closing price on that date.

As of September 15, 1998 there were 2,966,077 shares of the registrant's
Common Stock, $.05 par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>   2



                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
             Item No                                                                                          Page
             -------                                                                                          ----
<S>          <C>    <C>                                                                                       <C>
PART I
             1.     Business..................................................................................... 3

             2.     Properties.................................................................................. 10

             3.     Legal Proceedings........................................................................... 11

             4.     Submission of Matters to a Vote of Security Holders......................................... 11

             4.1    Executive Officers.......................................................................... 12

PART II
             5.     Market for the Registrant's Common Equity and Related
                    Stockholder Matters......................................................................... 13

             6.     Selected Consolidated Financial Data........................................................ 14

             7.     Management's Discussion and Analysis of Financial Condition and
                    Results of Operations....................................................................... 15

             8.     Financial Statements........................................................................ 27

             9.     Changes in and Disagreements with Accountants on Accounting and
                    Financial Disclosure........................................................................ 53
PART III

             10.    Directors and Executive Officers                                                              *

             11.    Executive Compensation                                                                        *

             12.    Security Ownership of Certain Beneficial Owners and Management                                *

             13.    Certain Relationships and Related Transactions                                                *

PART IV
             14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 54

                           Index to Financial Statements........................................................ 26

                           Index to Schedules and Exhibits...................................................... 55

                           Signatures........................................................................... 57
</TABLE>

      *      Portions of the Proxy Statement for the Registrant's 1998 Annual
             Meeting of Shareholders are incorporated by reference in Part III
             of this Form 10-K.



                                       2

<PAGE>   3



                             WALL STREET DELI, INC.


                                     PART I

ITEM 1:   BUSINESS

GENERAL

      The executive headquarters and principal office of Wall Street Deli, Inc.
(the "Company") are located at One Independence Plaza, Suite 100, Birmingham,
Alabama 35209, telephone (205)870-0020. The Company operates a chain of quick
service, delicatessen style restaurants, presently located in sixteen cities:
Atlanta, Birmingham, Chicago, Cincinnati, Cleveland, Dallas, Denver, Houston,
Indianapolis, Los Angeles, Louisville, Minneapolis, Newark, Philadelphia, St.
Louis, and Washington, D.C. Most of the Company's 112 stores are located in
large suburban and downtown office buildings and are designed to serve the
population in and around those buildings.

1998 OPERATING RESULTS

      Wall Street reported net loss of approximately $3,842,000, or $1.24 per
share, in fiscal 1998 compared with a net income of approximately $63,000, or
$0.02 per share, for fiscal 1997. The fiscal 1998 loss included a non-cash
charge of $3.0 million related to a SFAS 121 write down. The fiscal 1997
results include a $700,000 ($500,000 or $0.15 per share, after tax) charge for
corporate office relocation. Excluding SFAS 121 charges and the relocation in
fiscal 1998 and 1997, respectively, earnings (loss) per share were a loss of
($0.97) in fiscal 1998 compared with earnings of $0.17 in fiscal 1997.

      Fiscal 1998 revenues were approximately $63.8 million compared with $65.5
million in fiscal 1997. The decline in revenues was primarily due to the sale
of the Memphis units effective during the second quarter of fiscal 1997,
combined with a 1.7 percent decline in same store sales, reflecting continuing
increased competition in the Company's markets. Store management and
operational difficulties in several primary markets, principally Chicago,
Dallas, Denver and Los Angeles, also contributed to this decline.

      Four new stores were opened during fiscal 1998, three were converted from
R.C. Cooper's stores, and eight other stores that did not meet the Company's
performance goals were sold or closed. At the end of fiscal 1998, 112 Wall
Street Deli stores were in operation.

      The Company converted to a new food distributor late in the third quarter
this year. While this change has not occasioned any significant difference in
costs, the Company believes it will



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<PAGE>   4


provide additional flexibility for introducing new products, as well as better
pricing control and improved service.

      The Company launched its national franchise program for the Wall Street
Deli concept during fiscal 1998. During this first full year after the initial
roll-out in late fiscal 1997, five franchise units were opened and six
agreements had been signed for development in fiscal 1999. Since fiscal year
end agreements for seven additional units have been signed.

      During fiscal 1998, the "Street Wraps" program, a tortilla-wrapped
sandwich, was rolled out in 80 stores. These seven new menu items combine
steak, chicken and/or vegetables in a warm, easy-to-hold plain or
spinach-flavored flour tortilla, wrapped into a roll. Breakfast versions with
steak, egg and cheese and smoked sausage, egg and cheese are also offered. Late
in the fourth quarter, a "Cool Wraps" program was introduced. These three new
cold wraps combine turkey, roast beef and chicken with bacon, cheese, lettuce,
corn, vegetables, salsa and dressings.

      During the fourth quarter of 1998, the Company's Board of Directors
approved the repurchase of up to 100,000 shares of the Company's common stock.
The Company purchased 94,000 shares at an average cost of $3.65 per share under
the fiscal 1997 fourth quarter program while 10,500 shares have been acquired
under the current fiscal 1998 repurchase as of June 27, 1998, at an average of
$3.76 per share under the current year program.

      A number of management and management structure changes occurred during
the year, and the Company completed the process of relocating the Memphis
operations center and consolidating it with the Birmingham headquarters.

RESTAURANT OPERATIONS AND MANAGEMENT

      Fiscal 1998 financial results were below expectations. However, the
Company made progress toward improving operations in a number of areas,
including the launch of the national franchise program, introduction of new
products, improvements in corporate cost structure, completion of the store
support center, and continued improvements in management information systems.
Management believes the investments of financial and human resources in these
programs is beginning to show positive benefits, and will enhance operating
results in the future.

      Following over two years of initial pilot projects and testing, the
Company embarked on a franchise program in late fiscal 1997. This year the
national franchise program was officially launched. Though there have not yet
been any earnings from this program, as of fiscal year-end, five franchised
Wall Street Deli units were in operation, and franchise agreements for six more
units had been signed. Following the end of the fiscal year, agreements for
seven additional units were signed.



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<PAGE>   5


      Preparation for the franchise program has been undertaken with a strategy
of positioning the Company for growth through franchised operations. Franchise
sales and support systems were strengthened during the year with focus on
design and construction, training and operations support areas. Franchise
advertising targeted to operators already familiar with the restaurant industry
was run in trade publications such as Nation's Restaurant News. Listings in
various franchise handbooks and directories, as well as articles in trade
publications about Wall Street Deli's franchise program also generated interest
and inquiries.

      During the year the Company entered into an agreement with Host Marriott
Services that allows Wall Street Deli franchise units to be developed in
airports, travel plazas and mall locations, both in the United States and
internationally, operated by Host Marriott Services. The initial unit to be
developed under this agreement is in the Palm Beach International Airport in
West Palm Beach, Florida. Several additional airport locations are being
reviewed by Wall Street Deli and Host Marriott Services for development in
fiscal 1999.

      The Company considers a major advantage of its franchise program to be
the flexibility of its restaurant format to fit the requirements of a wide
range of locations. Several prototypes of the Wall Street Deli "Express" unit
were developed during this fiscal year. These unit designs range in size from
200 square feet to almost 2000 square feet and are suitable for the industry's
"alternative" sites such as airports, hospitals, universities, malls, food
courts, strip shopping centers, C-stores and selected gas stations. The first
franchised Wall Street Deli unit, located in Atlanta's Hartsfield airport, is
an example of an Express unit and is the highest sales volume unit in the
system. Two new Wall Street Deli Express franchise units were opened during the
fiscal year, one in the student union at North Texas State University in
Denton, Texas and in a Texaco unit in Lake Jackson, Texas. The suburban-style
unit, more like the Company's flagship Wall Street Deli units, is also capable
of design flexibility for both free-standing and strip installations. In
addition, the Company continues working with co-branded partners, with the Wall
Street Deli concept added to date to TCBY and Taco Bell franchised operations.

      Strong emphasis on expansion through franchising is planned for the 1999
fiscal year, with a goal of 20-25 Wall Street Deli franchise units to be opened
during the year. The Company has identified several key markets where there are
Company-owned stores that could be sold to franchisees to support the
development of multi-unit operations. A primary objective of this plan is to
attract experienced multi-unit restaurant operations experience that will
enhance development potential.

      Management's primary focus continues to be improvements in overall
operations, both in support of Company-owned stores and in support of
franchised units.

      At the very end of fiscal 1997, the Memphis corporate offices were
consolidated with and relocated to Birmingham. Direct cost savings attributable
to the move have been minimal, and



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<PAGE>   6


while this undertaking certainly involved some adjustments and unavoidable
disruption, the Company believes overall management efficiency has been
significantly improved. Centralization of the offices has, among other things,
facilitated the strengthening of the management team to more effectively
address the challenges of our business today. Considerable effort has been
spent under Louis Henderson's, and now Jeff Kaufman's, leadership in building a
teamwork approach, based upon a clear mission and strategic goals.

      New information systems were installed during the year to provide
improved store-level information to the Company's central office. The new
system is expected to be an important part of managing future growth and
includes significant upgrades for the Company's catering operations, especially
in order entry. In fiscal 1998 the Company also began conducting several pilot
tests of point of sale information systems, and will be evaluating the
potential of such systems during fiscal 1999.

      Development and refinement of menus, always an important element in this
business, was another principal focus in fiscal 1998. The new Street Wraps
sandwich program unveiled in fiscal 1997 was introduced in 80 stores during
this fiscal year, at a cost of approximately $450,000. The program has been
expanded to include Cool Wraps, which is a smaller version of our Street Wraps
and is served cold with cold deli meat items. The chicken specialty sandwiches
introduced over the past two years, on the other hand, have yielded generally
disappointing results, and may be phased out in the near future. One of the
reasons for the Company's change to a new food vendor in late fiscal 1998 is
the expectation that this change will provide additional flexibility for the
ongoing process of testing and introducing new menu offerings. With the help of
this and other initiatives, the rate of same store sales decline was reduced
from 4.3% last year to 1.7% this year.

      Marketing efforts have also been stepped up. During the last quarter of
fiscal 1998, a separate budget cost category for marketing was created for the
first time, reflecting management's commitment to marketing as an integral
element of increasing sales. Plans were made for implementation in fiscal 1999
to introduce new sandwich offerings, new breads, new soup choices and to rework
the salad bar concept, with all new products to be supported with professional
point of sale materials and aggressive marketing. Plans also include
enhancement of the Frequent Diner program in order to track customer
preferences as well as encourage repeat customers.

      During fiscal 1998, there were several management and management
structure changes. In January 1998, Gary Fields, a nineteen-year veteran with
the Company, was promoted to Senior Vice President, National Operations. The
former structure of regional managers who reported to this senior vice
president was eliminated. Instead, three very capable and experienced former
store managers were promoted and now function as a team to provide direct
hands-on inspection, training, trouble-shooting and problem-solving to the
entire system. David Thomas also became a Senior Vice President, in charge of
marketing and corporate development, with the Company's construction and design
and purchasing functions also reporting to him; his experience as a former



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<PAGE>   7


regional manager gives him the ability to better blend all these functions with
store operations. On June 1, 1998, Jeff Kaufman, who was formerly Chief
Operating Officer, was promoted to President and Chief Executive Officer. He
replaced Louis Henderson, who held that position from February 1997 through
June 1998, and guided the Company through its successful corporate office
relocation and consolidation. In its letter accepting Mr. Henderson's
resignation, the Board of Directors noted with gratitude his accomplishment not
only of the consolidation, but also of significant progress toward
profitability during this demanding transition period. The Company considers
itself to have an experienced management team that with these changes will have
a positive impact on profitability.

      The strategic vision today is focused primarily on growing the franchise
part of our business, increasing same store sales and controlling margins. To
do this, the Company continues to look at ways to be both customer and employee
driven.

      Typical staffing for a flagship Wall Street Deli store includes a manager
and assistant manager, and 6 to 15 other employees. Most store employees work
at least 35 hours each week, which the Company considers full-time, but some
part-time employees are used as appropriate.

      Store managers, as well as division and district managers are compensated
on a salary plus bonus basis, with bonuses based on gross profits. Adjustments
were made in this bonus program near the end of fiscal 1998, to become
effective in fiscal 1999, that will include in the computation of bonuses more
items that are subject to the respective individuals' and groups'
responsibilities. This is one of the ways in which the Company is continuing to
empower its managers to succeed and holding them accountable for results. Since
most of the stores are geared to office environments, and thus to office
working hours, the Company also believes that it enjoys a competitive advantage
by its ability to attract and recruit employees, especially store managers,
because of the absence of night and weekend store hours.

SITE SELECTION CRITERIA AND LEASING

      The Company continues to target major urban retail locations for its
stores. Wall Street Deli seeks for its company store locations that have high
pedestrian traffic and dense office populations in prime downtown sites in
large cities. The most desirable location for these restaurants is on the
ground floor of a large office building with both a lobby entrance and a street
entrance. The franchise emphasis is expected to be on suburban markets while
the company stores remain concentrated in urban areas. Four new stores were
opened in fiscal 1998, and four are presently planned for fiscal 1999.

      The Company believes the site selection process is critical in
determining the potential success of a store. A variety of factors are
considered in the site selection process for Wall Street Deli stores, including
local market demographics, site visibility and accessibility and proximity to



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<PAGE>   8


significant generators of potential customers in a two block radius. The
Company also reviews competition and attempts to analyze the sales of other
stores operating in the area.

      The Company leases all of its store locations. The leases vary
significantly in their terms and provisions. Annual rents generally are based
on the greater of a fixed rate or a percentage of net sales or revenues and
generally provide for escalation of rents based on increases in the lessor's
annual operating expenses. The terms of the leases vary from five to ten years,
with most of the more recent leases being ten years, typically with one
five-year renewal option. See also "Item 2 - Properties."

COMPETITION

      In a business long acknowledged as highly competitive, the Company
continues to face increasingly more competition for the quick service
restaurant customer. As more specialty concepts enter the market, such as the
coffees and bagels featured today at Wall Street Deli, customers have more
choices.

      The Company also must compete for store locations and labor force.
Competitors include a large number of national chains and national branded
concepts that have established brand recognition through marketing and have the
financial resources to increase market share through new locations. The
competition for employees is a growing problem also. With the ever-increasing
number of new concepts and restaurants, attracting and retaining qualified
employees is more and more difficult, even though the Company believes it
enjoys a competitive advantage because of its generally more popular business
hours.

      The quick service restaurant business also remains highly competitive
with respect to concept, price, location, food quality and service. While
competition has historically been affected by, among other things, changes in
customer taste, economic and real estate conditions, demographic trends,
traffic patterns, as well as national and local competitive factors, the number
of competitors is greater than ever, thus heightening the effect of all those
factors.

      With the advent of its franchising program, the Company is also competing
for franchisees with franchisors of other restaurants and various concepts.

GOVERNMENT REGULATION

      Each of the Company's stores is subject to inspection and regulation by
public health authorities. Most leasehold improvements made to the Company's
stores are subject to local and state building code requirements. The Company is
subject to the Fair Labor Standards Act which governs such matters as minimum
age requirements, overtime and other working conditions. The



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Company believes that its conduct of business is in substantial compliance with
these and other applicable government regulations.

      A large number of the Company's store personnel are paid at or based upon
the federal minimum wage level. Accordingly, changes in such minimum wage
levels affect the Company's labor costs. In August 1996, legislation was
enacted to increase the minimum wage from $4.25 per hour to $4.75 per hour on
October 1, 1996, and further to $5.15 effective September 1, 1997.
Approximately 30 employees were affected by the October 1996 increase and 66
employees were affected by the September 1997 increase.

      A significant number of the Company's employees are not covered by health
insurance. The Company is unable to predict the scope or effect, if any, of any
future government regulation or legislation affecting employee health care
benefits.

SERVICE MARKS

      The Company's trade name "WALL STREET DELI" and its design were
registered as a service mark on the Principal Register of the United States
Patent and Trademark Office in 1993. In 1990, the Company's trade name "R.C.
COOPER'S" was registered as a service mark. The service mark "SANDWICH CHEF"
and design was registered on the Principal Register of the United States Patent
and Trademark Office in 1974. The application for the Company's trade name
"STREET WRAPS" and its design were filed in 1998, and the statutory notice
period for the filing of opposition has passed, with none being filed.

EMPLOYEES

      As of June 27, 1998, the Company employed approximately 1188 persons,
including 43 managerial, 22 administrative and 1123 store employees. No labor
unions represent any of the Company's employees. The Company considers its
relationship with employees to be good.

INFORMATION AS TO CLASSES OF SIMILAR PRODUCTS OR SERVICES

      The Company operates in only one industry segment. All significant
revenues and pre-tax earnings relate to retail sales of food to the general
public through company-owned and company-operated stores. The Company does not
yet have significant revenues from franchise operations, and has no operations
outside the continental United States.



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<PAGE>   10


ITEM 2:  PROPERTIES

CORPORATE HEADQUARTERS

      The Company consolidated its corporate offices late in fiscal 1997,
relocating the Memphis operations center to Birmingham, Alabama. Corporate
headquarters is now housed in approximately 10,000 square feet of leased office
space which includes facilities for franchise training and support, as well as
for training and support for Company stores. Located near downtown Birmingham,
the corporate office is less than one block from a Wall Street Deli flagship
store. Management expects this facility to be adequate for the Company's
corporate headquarters and store support facility for the foreseeable future.

STORE LOCATIONS

      The Company leases all of its division offices and stores. The following
table shows the locations of the Company's stores by city at June 27, 1998:

<TABLE>
<CAPTION>
                                               Number of
    City                                     Restaurants
--------------------                         -----------
<S>                                          <C>
Atlanta                                                5
Birmingham                                            10
Chicago                                               16
Cincinnati                                             4
Cleveland                                              3
Dallas                                                13
Denver                                                 8
Houston                                               11
Indianapolis                                           1
Los Angeles                                            6
Louisville                                             1
Minneapolis                                            1
Newark                                                 1
Philadelphia                                           6
St. Louis                                              2
Washington, D.C.                                      24
                                                     ---
                              TOTALS                 112
                                                     ===
</TABLE>



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<PAGE>   11


      While the general economy in the various cities is an important element,
the Company's experience is that careful placement of stores in office
buildings and regional malls is in many respects unique to each situation. The
locations and character of the stores and their surroundings, and the effect of
those elements on their suitability, adequacy, productive capacity and
utilization is integral to the Company's business, and is discussed in Item 1
of this Report, particularly under the caption "Site Selection Criteria and
Leasing."

      Mr. Alan Kaufman, Chairman of the Board, and Mr. Robert Barrow, Vice
Chairman of the Board, are general partners of WESCO Associates, which until
February 1996 leased to the Company its executive offices and commissary in
Birmingham, Alabama, and of CBK Associates, which until October 27, 1996 leased
to the Company its catering offices in Memphis, Tennessee. During the Company's
1998, 1997 and 1996 fiscal years, rents paid to WESCO Associates were $0, $0
and $24,036, respectively, and rents paid to CBK Associates were $0, $12,000
and $74,712, respectively.

      Mr. Alan Kaufman, Mr. Robert Barrow, Mr. Jeffrey Kaufman, President and
Chief Executive Officer, and Mr. Steve Barrow, Secretary and Vice President, are
general partners in Rex Associates, which leased to the Company its former
administrative offices in Memphis, Tennessee. Pursuant to the relocation of the
Company's administrative offices from Memphis to Birmingham and the subsequent
consolidation with the Company's executive headquarters, the lease agreement
terminated effective September 30, 1997. The administrative office lease was
entered into May 1994 for a term of ten years beginning September 1, 1994, and
provided for an annual escalation of rents based on the consumer price index.
During the Company's 1998, 1997 and 1996 fiscal years, rents paid to Rex
Associates were $18,500, $69,672 and $62,690, respectively.

      Management believes these transactions to have been on terms no less
favorable than could have been obtained from unaffiliated third parties.


ITEM 3:   LEGAL PROCEEDINGS

      The Company is party to several pending legal proceedings, all of which
are deemed by the management of the Company to be ordinary routine litigation
incidental to the business, and none of which is believed likely to have a
material adverse effect on the Company, its financial position or operations.


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

      During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders, through the
solicitation of proxies or otherwise.



                                       11
<PAGE>   12


ITEM 4.1: EXECUTIVE OFFICERS

         The executive officers of the Company as of the end of fiscal 1998
were as follows:

<TABLE>
<S>                         <C>
Alan V. Kaufman             Chairman of the Board

Robert G. Barrow            Vice Chairman of the Board and Chief Financial Officer

Jeffrey V. Kaufman          President and Chief Executive Officer

Kevin D. Conaway            Treasurer and Chief Accounting Officer

David A. Thomas             Senior Vice President - National Operations

Kenneth M. Myres            Vice President and Director of Franchising

Steven G. Barrow            Vice President - Corporate Development and Secretary
</TABLE>

         Alan V. Kaufman, age 61, was Chairman of the Board, Chief Executive
Officer and President of the Company from its formation in 1966 through 1995.
After the close of the 1995 fiscal year, Mr. Kaufman stepped down as President
and Chief Executive Officer, and continues as its Chairman. Mr. Kaufman is the
father of Jeffrey V. Kaufman.

         Robert G. Barrow, age 62, served as President and Chief Executive
Officer from 1995 until February 1997, when he became Vice Chairman of the
Board. He also continues as Chief Financial Officer of the Company, and has
served in that capacity since 1981. Mr. Barrow was Executive Vice President
from 1981 to 1995, and has been a Director of the Company since 1967. Mr.
Barrow is the father of Steven G. Barrow.

         Jeffrey V. Kaufman, age 37, has been employed by the Company since
1985 and has served in the position of Executive Vice President and Chief
Operating Officer since 1995. He served as Vice President-Central Region, from
1989 until his promotion to Senior Vice President-National Operations Manager
in August 1992, and became President in June, 1998. Mr. Kaufman has been a
Director of the Company since 1995. Mr. Kaufman is the son of Alan V. Kaufman.

         Kevin D. Conaway, age 39, joined the Company as Treasurer and Chief
Accounting Officer in May, 1997. A Certified Public Accountant, Mr. Conaway was
employed by Coopers & Lybrand, LLP, from 1988 to 1995, and was an independent
accounting consultant prior to his employment by the Company. Mr. Conaway
resigned his position subsequent to the end of fiscal 1998.

         David A. Thomas, age 39, joined the Company in 1983 and was promoted
to the position of Senior Vice President-National Operations effective June
1997. He served as the Company's division manager for Washington, D.C. from
1984 until his appointment in 1992 to Vice President-Eastern Region.



                                       12
<PAGE>   13


         Kenneth Myres, age 46, joined the Company as Vice President and
Director of Franchising in May of 1997. He was Vice President of Franchise
Development for Metromedia Restaurant Group, Inc. from 1985 to 1996. Mr. Myres
resigned his position subsequent to the end of fiscal 1998.

         Steven G. Barrow, age 33, was the Company's Director of Information
Systems from 1993 until May 1997, when he was named Vice President-Corporate
Development. Mr. Barrow has also served as the Company's corporate Secretary
since 1993. Following the close of fiscal 1998 he became Vice President -
Information Systems. He was Senior Systems Analyst for M.S. Carriers from 1992
to 1993 and worked for the Company on a part-time basis in various capacities
related to information systems from 1988 until 1992. Mr. Barrow is the son of
Robert G. Barrow.

                                    PART II

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

         The Company's Common Stock is traded in the over-the-counter market
and is quoted in the NASDAQ National Market System under the symbol WSDI. The
following table sets forth, for the fiscal periods indicated, the high and low
sales prices as reported on the NASDAQ National Market System.

<TABLE>
<CAPTION>
FISCAL 1997                                     High                    Low
                                                ----                    ---
<S>                                            <C>                    <C>
Quarter Ended September 28, 1996               6 1/4                  4 3/4
Quarter Ended December 28, 1996                5 7/8                  4 3/4
Quarter Ended March 29, 1997                   5 1/4                  4 1/8
Quarter Ended June 28, 1997                    4 3/8                  3 7/8

<CAPTION>
FISCAL 1998                                     High                     Low
                                                ----                     ---
<S>                                            <C>                    <C>
Quarter Ended September 27, 1997               4                      3  1/2
Quarter Ended December 27, 1997                3 5/8                  3  1/4
Quarter Ended March 28, 1998                   3 3/4                  3 9/16
Quarter Ended June 27, 1998                    5 1/4                  4 1/16
</TABLE>

         On September 15, 1998, there were approximately 355 record holders of
the Company's Common Stock, including shares held in "street name" by nominees
who are record holders.

         The Company has never declared or paid a cash dividend, and it is the
present policy of the Board of Directors to retain all earnings for the
development of the Company's business. Any payment of dividends in the future
will depend upon the Company's earnings, capital requirements, financial
condition and such other factors as the Board of Directors may deem relevant.
In the past, the Company from time to time has effected stock splits in the
form of stock dividends, resulting in the issuance of additional shares of
Common Stock to the shareholders of



                                       13
<PAGE>   14


the Company. No assurances are made that the Company will effect any stock
splits or declare any stock dividends in the future.

ITEM 6:   SELECTED CONSOLIDATED FINANCIAL DATA

      The following table sets forth selected consolidated financial data for
the Company for each of the five fiscal years in the period ended June 27, 1998
and as of June 27, 1998, June 28, 1997, June 29, 1996, July 1, 1995 and July 2,
1994. The selected consolidated financial data set forth below have been
derived from the consolidated financial statements of the Company, which have
been audited by BDO Seidman, LLP, independent Certified Public Accountants, as
indicated in their report included elsewhere herein. The selected financial
data should be read in conjunction with, and are qualified in their entirety
by, the consolidated financial statements of the Company and related notes and
other financial information included elsewhere in this report.

<TABLE>
<CAPTION>
                                     1998(1)          1997(2)          1996(3)           1995(4)         1994
                                     ----             ----             ----              ----            ----
<S>                               <C>              <C>              <C>               <C>             <C>
Net sales                         $63,780,406      $65,453,642      $69,399,058       $68,228,119     $58,858,043

Net income (loss)                 $(3,842,430)     $    62,822      $(2,457,706)      $  (921,011)    $ 1,956,807

Basic and Diluted
   earnings (loss) per
   common share                   $     (1.24)     $       .02      $      (.72)      $      (.27)    $       .58

Average shares outstanding          3,094,762        3,254,908        3,407,874         3,422,701       3,381,892

Total assets                      $19,862,808      $23,065,627      $25,668,894       $29,163,709     $26,669,807

Stockholders' equity              $12,716,924      $16,936,508      $18,229,590       $20,653,157     $21,485,457

Return on average
   stockholders' equity                 (25.9)%            0.4%           (12.6)%            (4.4)%           9.6%

Return on average assets                (17.9)%            0.3%            (9.0)%            (3.3)%           8.0%

Stores in operation at
    year-end                              112              116              124               128             122
</TABLE>

1.    Net loss included a non-cash charge of $3.0 million taken as an operating
      expense related to the adoption of Statement of Financial Accounting
      Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
      and for Long-Lived Assets to be Disposed Of."

2.    In June 1997, the Company relocated its administrative offices from
      Memphis, Tennessee to Birmingham, Alabama and consolidated them with its
      executive headquarters in order to centralize the marketing and franchise
      operations and establish a store support center. In connection therewith
      a charge of $0.7 million was taken as an operating expense.

3.    Net loss included a non-cash charge of $4.7 million taken as an operating
      expense related to the adoption of Statement of Financial Accounting
      Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
      and for Long-Lived Assets to be Disposed Of."



                                       14
<PAGE>   15


4.    During the fourth quarter of fiscal 1995, the Company formally adopted a
      plan to close 11 existing stores and its commissary locations. In
      connection therewith a charge of $3.2 million to implement the plan was
      recognized as an operating expense.

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

      The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying consolidated balance
sheets and statements of operations.

Forward Looking Statements. The statements in this Form 10-K that are not
historical fact are forward looking statements. Such statements are subject to
a number of risks and uncertainties which could cause actual results to differ
materially from those projected, including, among others, competition for
customers, labor force and store sites, the effects of changes in the economy
such as inflation and unemployment rates, weather conditions and seasonal
effects, the uncertainties of new products and programs, and recent changes in
management. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available
information. Readers are also urged to carefully review and consider the
various disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, including the
disclosures made in other periodic reports on Forms 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission.

Results of Operations

      The following table sets forth, for the periods indicated, the
percentages of net sales represented by certain items in the Company's
consolidated statements of income.

<TABLE>
<CAPTION>
                                                              Fiscal Year Ended
                                                    ------------------------------------
                                                    JUNE 27,      JUNE 28,      JUNE 29,
                                                      1998          1997          1996
                                                    --------      --------      --------
<S>                                                 <C>           <C>           <C>
Net sales                                              100.0%        100.0%        100.0%
Cost of sales                                           90.3          88.9          89.3
                                                    --------      --------      --------
Gross profit                                             9.7          11.1          10.7
Administrative and general                              10.8          11.6          10.1
Impairment of long-lived assets                          4.7            --           6.8
Operating income (loss)                                 (5.8)          (.5)         (6.2)
Other income (expenses)
  (Interest expense) and other income, net              (0.2)           .6            .4
                                                    --------      --------      --------
Income (loss) before taxes (benefit) on income          (6.0)           .1          (5.8)
Taxes (benefit) on income                                 --            --          (2.2)
                                                    --------      --------      --------
Net income (loss)                                       (6.0)%          .1%         (3.6)%
                                                    ========      ========      ========
</TABLE>



                                      15
<PAGE>   16

FISCAL 1998 COMPARED TO FISCAL 1997

Net Sales

      Net sales decreased approximately $1,673,000 or 2.6 percent from fiscal
1997, primarily due to an approximate 1.7 percent decline in same store sales
and the sale of the Memphis division during the second quarter of fiscal 1997.
Net sales from the Memphis division were approximately $1,551,000 in fiscal
1997. During fiscal 1998, the Company opened four new stores, and sold or
closed eight stores that were not meeting performance goals.

      At June 27, 1998, the Company had 95 Wall Street Deli "flagship"
restaurants and 17 other stores, compared to 93 and 23, respectively, at June
28, 1997. Stores categorized as "other" do not meet the criteria of flagship
restaurants generally due to location and store size. Through fiscal 1997, the
Company recorded net sales from the "other" group (which included the few
remaining R.C. Cooper's units and off-premises catering sales) separately from
its flagship restaurants, primarily because of the significant variance in
sales volume between the two groups. The number of stores in the "other" group
continues to decrease and the Company now considers these groupings to have
lost any material significance and no longer records separate financial
information based on store concept.

      Average annual sales per store for all stores were approximately $565,000
and $551,000 in fiscal year 1998 and 1997, respectively. The increase in
average annual sales per store reflects primarily the continuing change in the
mix of store types from other concepts to flagship restaurants.

      Same store sales in fiscal 1998 declined 1.7 percent as compared to
fiscal 1997. Although management believes "Street Wraps" did not have a
significant effect on net sales, it serves as an alternative product.
Management believes this negative effect on same store sales is generally
attributable to the continuing pressures of competition in expansion and
marketing by competitors, combined with management and operating difficulties
in some cities.

      As in prior years, the Company continued during fiscal 1998 to implement
pricing adjustments and price changes that were not significant on an overall
basis, and considers price changes in products sold to have had, in the
aggregate, an immaterial effect on sales in the current year.

      During the fourth quarter of fiscal 1997 the Company announced the
initiation of a franchise program for both stand-alone Wall Street Deli stores
and the Wall Street Deli stores co-branded with TCBY yogurt products. Five
franchised stores were opened and operating at June 27, 1998. Franchise
agreements for six additional units were also signed prior to fiscal year end.
Subsequent to year end, agreements for seven additional units have been signed.
Initial franchise fees and royalty payments were not significant in 1998.



                                       16
<PAGE>   17

      The Company historically has experienced lower sales in the second fiscal
quarter of each year due to the number of holidays in the months of October,
November and December. This seasonal effect has a negative impact on sales
because the Company's stores are generally located in or near office buildings.

Cost of Sales

      Cost of sales as a percent of net sales increased in fiscal 1998 to 90.3
percent from 88.9 percent in fiscal 1997. The major components of cost of sales
are set out below:

<TABLE>
<CAPTION>
                          Fiscal 1998         % of Sales        Fiscal 1997       % of Sales
                         -------------        ----------       -------------      ----------
<S>                      <C>                  <C>              <C>                <C>
Food/Paper               $  22,414,460           35.1%         $  23,020,494         35.2%
Labor                       14,496,226           22.7             14,917,950         22.8
Store Expenses              20,663,103           32.4             20,219,542         30.9
                         -------------           ----          -------------         ----
                         $  57,573,789           90.3%         $  58,157,986         88.9%
                         =============           ====          =============         ====
</TABLE>

      The modest decrease in total food/paper cost of 0.1 percent as a
percentage of net sales reflects continued efforts toward improving operational
efficiencies. Late in the third fiscal quarter of 1998, the Company changed its
single source food vendor; this change has not resulted in any significant
effect on cost, but is expected over the longer term to further the objectives
of improvements in service, additional new product flexibility, and pricing and
inventory control.

      Labor costs as a percent of net sales decreased 0.1 percent due to a 0.6
percent decrease in average store manager salaries, offset by a 0.5 percent
increase in aggregate hourly wages. The federal minimum wage increase,
effective September 1, 1997, has not had a material effect on fiscal 1998 labor
costs.

      Store expenses as a percent of net sales increased 1.5 percent.
Significant store expenses are fixed costs and, on a percentage basis, are
adversely affected by the decrease in same store sales. Restaurant supplies and
promotional expenses increased 0.1 and 0.4 percent, respectively, primarily due
to the implementation of new products, particularly the "Street Wraps" program.
Other store expenses that increased as compared to the previous annual period
included rent- operating expenses (0.1 percent), percentage rent (0.3 percent),
taxes and licenses (0.1 percent), depreciation (0.1 percent), amortization (0.2
percent) and register rental (0.1 percent).

Administrative and General Expenses

      Administrative and general expenses decreased approximately $683,000, or
9.0 percent to approximately $6,904,000 for fiscal 1998 from approximately
$7,587,000 in fiscal 1997. In June 1997, the Company recorded a charge of
approximately $700,000 related to the relocation of its administrative offices
from Memphis to Birmingham and the subsequent consolidation with the Company's
executive headquarters. This move established a store support center and
centralized



                                       17

<PAGE>   18


the operations and administrative functions. Excluding the non-recurring cost
related to this relocation and consolidation, administrative and general
expenses increased approximately $17,000 in fiscal 1998 as compared to the
prior fiscal year.

Impairment of Long-Lived Assets

      As discussed in Note 4 of the Notes to the Consolidated Financial
Statements, the Company recorded an initial, non-cash charge upon adoption of
SFAS No. 121 in 1996. Historically, the Company had evaluated and measured its
store properties for impairment by groups on a regional basis to determine if
the region was operating at a loss or was expected to operate at a loss in the
future. As a result of adopting SFAS No. 121, the Company now evaluates and
measures for impairment on an individual store basis. During 1998, events and
circumstances indicated that certain equipment, fixtures and leasehold
improvements associated with ten under-performing stores, accounting for
approximately 9 percent of all Company stores, were impaired. Accordingly, the
Company recorded a pre-tax charge in the fourth quarter of 1998 amounting to
approximately $3.0 million to adjust the carrying value of these assets to
their estimated fair market value and to provide for associated disposal
liabilities. While management believes that estimates used in evaluation of
impairment were reasonable, actual results could vary significantly. The charge
represented approximately 19 percent of the total carrying amount of long-lived
assets. The reduced carrying amount of assets was then expected to reduce 1999
depreciation and amortization by approximately $450,000. Also, because the
Company now evaluates each store for impairment, future charges are reasonably
possible as estimates of future cash flows change. These charges will generally
arise as estimates used in the evaluation and measurement of impairment upon
adoption of SFAS No. 121 are refined based on new information or as a result of
future events or changes in circumstances that cause other stores to be
impaired. Also, any future expenditures for impaired stores that would
otherwise be capitalized will have to be immediately evaluated for
recoverability.

      The adoption of SFAS No. 121, as well as its ongoing application, has and
will generally result in lower closure costs or increased gains for impaired
stores that are closed or sold, respectively.

Sale of Memphis Division

      Effective October 27, 1996, the Company sold the operating assets of its
Memphis division. This sale decreased net sales approximately $1,551,000 as
compared to fiscal 1997.

Interest Expense, Net

      In fiscal 1998, the Company had net interest expense of approximately
$227,000 compared to net interest expense of approximately $47,000 in fiscal
1997. Interest expense is related primarily to the Company's $7,500,000
unsecured line of credit which bears interest at the lower of the 30-day LIBOR
rate plus 175 basis points (7.41 percent at June 27, 1998) or the bank's



                                       18
<PAGE>   19


quoted cost of funds plus 175 basis points (8.4 percent at June 27, 1998). The
Company had approximately $2,005,000 outstanding against this line at June 27,
1998 as compared to approximately $983,000 at June 28, 1997. The Company also
paid approximately $51,000 in interest due to amended tax return filings in
1998. The interest expense for fiscal 1998 of approximately $227,000 was offset
by $30,000 of interest earned by the Company on notes receivable from prior
sales of fixtures and equipment in various stores.

Taxes (Benefit) on Income

      The Company did not recognize an income tax benefit from losses incurred
in fiscal 1998. A valuation allowance of $1,437,000 was established against
deferred tax assets created by the impairment charge recognized in the fourth
quarter and from tax benefits generated from current year losses, reducing the
Company's effective tax to 0.0 percent. Realization of deferred tax assets
associated with equipment and improvements and with net operating loss and
credit carryforwards is dependent upon generating sufficient taxable income to
utilize depreciation deductions on impaired long-lived assets and net operating
loss and credits carryforwards prior to their expirations. Management believes
there is risk that certain of these deferred tax assets may not be realized
and, accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings or alternative tax strategies. The Company provided for income
taxes of $26,000 for fiscal 1997 with an effective tax rate of 29.3 percent.

FISCAL 1997 COMPARED TO FISCAL 1996

Net Sales

      Net sales decreased approximately $3,945,000 or 5.7 percent over the
prior year primarily due to the sale of the Memphis division and a 4.3 percent
decline in same store sales. The sale of the Memphis division, consisting of
ten stores and related catering operations, which was effective October 27,
1996, decreased net sales by approximately $3,414,000 as compared to fiscal
1996, and accounted for 86.5% of the sales decrease. During fiscal 1997, the
Company opened four new stores and, in addition to the ten Memphis stores, sold
or closed three other stores that no longer met performance goals.

      Components of the Company's net sales and the respective percentages of
total sales for those components for the fiscal years 1997 and 1996, in the
categories used by the Company for the past several years, are shown in the
schedule below:



                                       19
<PAGE>   20


<TABLE>
<CAPTION>
                       Total Sales                        Total Sales
     Concept           Fiscal 1997      % of Total        Fiscal 1996     % of Total
-----------------      -----------      ----------        -----------     ----------
<S>                    <C>              <C>               <C>             <C>
Wall Street Deli       $61,913,503         94.6%          $58,962,226        85.0%
R. C. Cooper's           2,370,367          3.6             7,114,922        10.3
Catering                 1,169,772          1.8             3,321,910         4.7
                       -----------        -----           -----------       -----
Total                  $65,453,642        100.0%          $69,399,058       100.0%
                       ===========        =====           ===========       =====
</TABLE>

      Fiscal 1997 was the last year in which the Company separately tracked
sales information for the R.C. Cooper's concept and catering. The Company has
been closing or converting R.C. Cooper's restaurants for several years, and at
the end of fiscal 1997 had only five R.C. Cooper's restaurants remaining. The
catering sales reported above as a separate component of sales consists only of
the off premises catering operations from the Memphis division, which accounted
for the majority of such sales and which was sold in the second quarter of
fiscal 1997, and the off premises operation in the Washington, D.C. division.
All other catering sales are made from the restaurants and are not separately
reported but included in the Wall Street Deli and R.C. Cooper's sales
information above.

      The steadily decreasing sales attributable to the R.C. Cooper's units and
off premises catering, both in absolute dollars and as percentages of total
sales, reflects the change in the Company's store concept mix during the last
several years as the Wall Street Deli concept continued to predominate. The
Company considers these other groupings now to have lost any material
significance to an understanding of the Company's business.

      Primarily because of the variation in sales volume between the Wall
Street Deli "flagship" restaurant style and the "other" Wall Street Delis, the
Company continued to record sales data separately for these two types or
groups. Beginning in fiscal 1998, the Company planned to include sales
information from the R.C. Cooper's units in the "other" category. The following
table sets forth the Company's average annual sales per store by current
concept group and for all stores, and the same store sales comparisons for
stores open the entire twelve months of fiscal 1997 and 1996, respectively.

<TABLE>
<CAPTION>
                                      Average Annual                Same Store Sales
                                      Sales Per Store            Change From Prior Year
                                 ------------------------        ----------------------
                                   1997             1996           1997          1996
                                 --------        --------        --------       -------
<S>                              <C>             <C>             <C>            <C>
Wall Street Deli Flagships       $610,891        $642,824            (4.8)%        (5.5)%
Wall Street Deli Other           $319,843        $366,487            (0.1)%        (3.6)%
R.C. Cooper's                    $387,979        $246,353            (3.2)%        (3.3)%
All Stores                       $551,432        $532,395            (4.3)%        (5.1)%
</TABLE>

      Average annual sales per store as shown above were computed retroactively
on the basis of current concept grouping, reflecting in some instances
conversions of R.C. Cooper's stores to Wall Street Deli stores. The Memphis
division sale included one Wall Street Deli Flagship store, two Wall Street
Deli Other stores and seven R.C. Cooper's stores with approximate fiscal 1996



                                       20
<PAGE>   21


average annual sales per store of $242,000, $282,000 and $139,000,
respectively. This transaction therefore created a significant increase in
average annual sales per store for the five R.C. Cooper's stores remaining at
fiscal 1997 year end.

      Same store sales in fiscal 1997 declined 4.3 percent as compared to
fiscal 1996. Management believes this negative impact on same store sales is
generally attributable to continually more formidable competition in expansion
and marketing by competitors, combined with management and operational
difficulties in several cities.

      During fiscal 1997, the Company again implemented pricing adjustments and
price changes that were insignificant on an overall basis, and therefore
considers price changes in products sold to have had, in the aggregate, an
immaterial effect on sales in the current year.

      During the fourth quarter of fiscal 1997 the Company announced the
initiation of a franchise program for both stand-alone Wall Street Deli stores
and the Wall Street Deli stores co-branded with TCBY yogurt products. There
have not yet been any significant revenues from this early stage program.

      The Company historically has experienced lower sales in the second fiscal
quarter of each year due to the greater number of holidays in the months of
October, November and December. This seasonal effect has a negative impact on
sales because most of the Company's stores are located in or near office
buildings.

Cost of Sales

      Cost of sales as a percentage of net sales decreased in fiscal 1997 to
88.9 percent from 89.3 percent in fiscal 1996. The major components of cost of
sales for the last two years are set out below:

<TABLE>
<CAPTION>
                                    Fiscal 1997         % of Sales        Fiscal 1996       % of Sales
                                   -------------        ----------       -------------      ----------
<S>                                <C>                  <C>              <C>                <C>
Food/Paper                         $  23,020,494           35.2%         $  24,160,921          34.9%
Commissary                                    --             --                789,190           1.1
                                   -------------           ----          -------------          ----
Total Food/Paper/Commissary           23,020,494           35.2             24,950,111          36.0
Labor                                 14,917,950           22.8             16,156,153          23.3
Store Expenses                        20,219,542           30.9             20,852,569          30.0
                                   -------------           ----          -------------          ----
                                   $  58,157,986           88.9%         $  61,958,833          89.3%
                                   =============           ====          =============          ====
</TABLE>

      The decrease in total food/paper and commissary expenses of 0.8 percent
as a percentage of sales reflects the completion of the Company's delivery
system conversion. Final stages of the commissary phase-out were completed
during fiscal 1996 and by June 1996 the single source vendor system was fully
implemented.



                                       21
<PAGE>   22


      Labor costs as a percentage of net sales decreased 0.5 percent due to a
1.5 percent decrease in aggregate hourly wages offset by a 1.0 percent increase
in store manager salaries. The minimum wage increase, effective October 1,
1996, has not had a material effect on labor costs.

      Store expenses as a percentage of net sales increased 0.9 percent due
mainly to the fact that many store expenses are fixed and are therefore
adversely affected by a decrease in same store sales. There was also a 0.2
percent increase in equipment repairs and maintenance expense compared to the
prior year.

Administrative and General Expenses

      Administrative and general expenses increased $581,556, or 8.3 percent,
to $7,586,774 for fiscal 1997 from $7,005,218 in fiscal 1996. In June 1997, the
Company took a $700,000 one-time charge related to the relocation of its
administrative offices from Memphis to Birmingham and the subsequent
consolidation with the Company's executive headquarters. This move established
a store support center and centralized the operations and administrative
functions. Excluding the $700,000 one-time charge, administrative and general
expenses decreased $118,444, or 1.7 percent, in fiscal 1997 as compared to the
prior fiscal year.

Sale of Memphis Division

      Effective October 27, 1996, the Company sold the operating assets of its
Memphis division to Executive Chef Catering, L.L.C., which is owned by Mr.
Robert Barrow, current Vice Chairman of the Board and former President and
Chief Executive Officer of the Company, and Ms. Judy Gupton, former manager of
the Memphis division. Total sale price for the assets was $1,017,000,
consisting of $810,305 in cash and short-term notes, 25,000 shares of Company
stock valued at $5.55 per share, and $68,739 payable in two years, with
interest at the prime rate and paid quarterly. Prior to the close of fiscal
1997, one note in the amount of $47,990 was paid with 11,250 shares of Company
stock valued at $4.125 per share, with the balance paid in cash. The book value
of the assets sold was approximately $867,000.

      The assets included in the sale were ten Memphis stores, three operating
under the Wall Street Deli trade name and seven operating as R.C. Cooper's
stores, and the Memphis catering operation conducted under the trade name
Executive Chef Catering. In fiscal 1996, average annual sales approximated
$178,000 for each of the ten Memphis stores while the catering operation had
annual sales of approximately $2,900,000. Operating income for the Memphis
division for fiscal 1996 was approximately $268,000. Management considers this
transaction to have been on terms at least as favorable as could have been
obtained from unaffiliated third parties.

Interest Expense, Net

      In fiscal 1997, the Company had net interest expense of $47,089 compared
to net interest expense of $188,038 in fiscal 1996. Interest expense is related
primarily to the Company's



                                       22
<PAGE>   23



$7,500,000 unsecured line of credit which bears interest at the lower of the
30-day LIBOR rate plus 175 basis points (7.47 percent at June 28, 1997) or the
bank's quoted cost of funds plus 175 basis points (6.64 percent at June 28,
1997). The Company had $982,936 outstanding against this line at June 28, 1997
as compared to $2,500,000 at June 29, 1996. The interest expense for fiscal
1997 of $129,075 was offset by $81,986 of interest earned by the Company on
notes receivable from prior sales of fixtures and equipment in various stores.

Taxes (Benefit) on Income

      The Company incurred income taxes of $26,000 for fiscal 1997 as compared
to a tax benefit of $1,536,500 for fiscal 1996. The effective tax rate in
fiscal 1997 was 29.3 percent as compared to the effective tax benefit of 38.5
percent in fiscal 1996.

IMPACT OF INFLATION

      Many of the Company's employees are paid hourly rates related to the
federal minimum wage. Accordingly, inflation-related annual increases in the
minimum wage have historically increased the Company's labor costs. In August
1996, legislation was enacted to increase the minimum wage from $4.25 per hour
to $4.75 on October 1, 1996, and further to $5.15 effective September 1, 1997.
Approximately 66 employees were affected by the September 1997 minimum wage
increase. Construction costs have also increased to developers who lease space
to the Company. Developers have in turn increased and may continue to increase
rents for Company stores. In addition, most of the leases for Company stores
contain rent escalation clauses based upon cost increases incurred by lessors.
In most cases, the Company has been able to increase prices sufficiently to
match increases in its operating costs, but there is no assurance that it will
be able to do so in the future.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's ability to obtain the cash required for the conduct of its
business depends upon cash from operations and, to a lesser extent, bank
borrowings. Historically, cash flow from operations and periodic bank
borrowings generally have been sufficient to finance the expansion of the
Company's business. The Company does not maintain significant receivables or
inventory and it receives trade credit in purchasing food and supplies. Stores
not meeting the Company's performance criteria may be closed or sold. The terms
of some such sales require the Company to take back notes, which are contained
in the Company's notes receivable balance, for all or a portion of the sale
price.

      At 1998 fiscal year end, the ratio of the Company's current assets to
current liabilities was .48 to 1.00, as compared to a current ratio of .51 to
1.00 at 1997 fiscal year end. This change reflects the Company's use in 1998 of
available cash for acquisition of treasury stock as well as for continued
investment in store facilities. The Company has no long term debt.



                                       23
<PAGE>   24


      The Company's principal capital requirement is for new equipment and
leasehold improvements for new and existing stores. Capital expenditures for
these purposes were approximately $3,283,000, $2,993,000 and $3,990,000 for
fiscal years 1998, 1997 and 1996, respectively. It is presently anticipated
that the Company's capital expenditures for fiscal 1999 will be approximately
$1,650,000. During the fourth quarter of 1998, the Company's Board of Directors
approved the repurchase of up to 100,000 shares of the Company's common stock.
The Company purchased 94,000 shares at an average cost of $3.65 per share under
the fiscal 1997 fourth quarter repurchase program while 10,500 shares had been
acquired as of June 27, 1998, at an average cost of $3.76 per share under the
fiscal 1998 fourth quarter program. During fiscal 1998, a total of 104,500
shares were purchased at an acquisition cost of approximately $382,000.

       The Company has historically met its capital needs from short term bank
borrowings and internally generated funds. Cash generated from operations
totaled approximately $2,168,000, $3,426,000 and $4,944,000 for fiscal years
1998, 1997 and 1996, respectively. The Company currently has in place a line of
credit which provides for borrowings up to $7,500,000 from AmSouth Bank of
Alabama pursuant to the terms of a Credit Agreement dated June 19, 1996 (the
"Credit Agreement"). The Credit Agreement contains certain covenants that
require, among other things, the Company to maintain a certain tangible net
worth and to limit the annual capital expenditures of the Company. As of the
end of the second quarter of fiscal 1998, the Company's debt service coverage
ratio was 1.21, which was less than the 1.30 then required by the Credit
Agreement. The lender waived compliance with the debt service coverage ratio
covenant for the 1998 second fiscal quarter and reduced the debt service
coverage ratio from 1.30 to 1.15 for the fiscal quarters ended March 28, 1998
and June 27, 1998. At June 27, 1998, the Company's debt service coverage ratio
was 1.29. The Company expects its future capital needs will be met primarily by
internally generated funds and supplemented as needed by additional bank
borrowings.

IMPACT OF YEAR 2000

      The Company is in the process of conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the Year
2000 issue. The problem is complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00.
Systems that do not properly recognize date sensitive information could
generate erroneous data or cause a system to fail. The Company is utilizing
internal and external resources in an attempt to identify and correct, or
reprogram, all systems for year 2000 compliance. It is anticipated that all
reprogramming efforts will be completed by mid-1999, allowing adequate time for
testing. The Company's sales reporting and inventory system was developed
internally, and will need modifications which are scheduled for completion in
January 1999. Management considers these modifications to involve a moderate
effort and expects to use internal resources for completion. All computer
hardware and other electronic equipment is currently undergoing compliance
testing. The Company has budgeted $40,000 for installation and training of the
upgraded systems. Due to the fact that most of the Company's computer and
telecommunications equipment are relatively new, the costs to bring it into
compliance are not expected to result in



                                       24
<PAGE>   25


material expenditures. The Company believes its Year 2000 plans are sufficient,
but will develop contingency plans as needed in the future.

NEW ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.

      In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.

      In February 1998, the Financial Accounting Standards Board issued SFAS
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"), which amends the disclosure requirements of the following FASB
Statements: SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting of Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS 132 does not
affect the recognition and measurement requirements of those Statements, but
standardizes disclosure requirements to the extent practicable and suggests
combined formats for presentation of pension and other postretirement benefit
disclosures.

      SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent issuance of
these standards, management has been unable to evaluate fully the impact, if
any, these standards may have on future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of these standards.



                                       25
<PAGE>   26


      In June 1998, the Financial Accounting Standards Board Issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 amends the guidance in SFAS No. 52, "Foreign Currency Translation," to
permit special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It also supersedes SFAS No. 80, "Accounting for
Futures Contracts," SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and SFAS No. 119, "Disclosure about Derivative
Financial Instruments." In addition, it amends SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," to include in SFAS No. 107 the disclosure
provisions about concentrations of credit risk from SFAS No. 105.

      SFAS 133 is effective for financial statements for periods beginning
after June 15, 1999. Historically, the Company has not entered into derivatives
contracts either to hedge existing risk or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on July
2, 2000 to affect its financial statements.


ITEM 8:   FINANCIAL STATEMENTS

      The following financial statements are contained at pages 27 through 52
of this report:

<TABLE>
<CAPTION>

                                                                                                               Page
                                                                                                               ----
         <S>                                                                                                   <C>
         Report of Independent Certified Public Accountants..................................................... 27
         Consolidated Financial Statements for Years ended June 27, 1998, June
                  28, 1997 and June 29, 1996:
                  Consolidated Balance Sheets - June 27, 1998 and June 28, 1997................................. 28
                  Consolidated Statements of Operations......................................................... 30
                  Consolidated Statements of Stockholders' Equity............................................... 31
                  Consolidated Statements of Cash Flows......................................................... 32

         Summary of Accounting Policies......................................................................... 34
         Notes to Consolidated Financial Statements............................................................. 40
         Selected Quarterly Financial Data (unaudited) (appearing at Note 11
                  of the Notes to Consolidated Financial Statements)............................................ 52
</TABLE>





                                      26
<PAGE>   27


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Wall Street Deli, Inc.
Birmingham, Alabama

We have audited the accompanying consolidated balance sheets of Wall Street
Deli, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 27, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wall Street Deli, Inc. and
subsidiaries at June 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1998, in conformity with generally accepted accounting principles.




Memphis, Tennessee
August 7, 1998


                                       27
<PAGE>   28


                                                    CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                              JUNE 27, 1998           June 28, 1997
---------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>
ASSETS
CURRENT
     Cash and cash equivalents                                 $    409,044            $    490,058
     Accounts and notes receivable (Note 1)                       1,319,436               1,055,924
     Inventories                                                    583,405                 684,280
     Refundable income taxes                                        333,411                      --
     Deferred tax assets (Note 5)                                   570,000                 624,000
     Prepaid expenses and other                                     242,659                 263,129
----------------------------------------------------------------------------------------------------

TOTAL CURRENT ASSETS                                              3,457,955               3,117,391
---------------------------------------------------------------------------------------------------

EQUIPMENT AND IMPROVEMENTS (Note 4)
     Equipment and fixtures                                      19,674,714              18,258,482
     Leasehold improvements                                      16,319,331              15,905,021
---------------------------------------------------------------------------------------------------

                                                                 35,994,045              34,163,503

Less accumulated depreciation and amortization                  (22,973,956)            (18,035,661)
---------------------------------------------------------------------------------------------------

NET EQUIPMENT AND IMPROVEMENTS                                   13,020,089              16,127,842
---------------------------------------------------------------------------------------------------

OTHER
     Cash surrender value of insurance ($3,174,495 and
         $3,273,638 face amount) on officers' lives                 781,362                 718,165
     Long-term portion of notes receivable (Note 1)                 211,402                 453,229
     Deferred tax assets (Note 5)                                 2,392,000               2,649,000
---------------------------------------------------------------------------------------------------

TOTAL OTHER ASSETS                                                3,384,764               3,820,394
---------------------------------------------------------------------------------------------------

                                                               $ 19,862,808            $ 23,065,627
===================================================================================================
</TABLE>



                                       28
<PAGE>   29


                                                   CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                JUNE 27, 1998           June 28, 1997
-----------------------------------------------------------------------------------------------------
<S>                                                             <C>                     <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Notes payable (Note 2)                                      $  2,004,810            $  1,005,400
     Accounts payable                                               1,582,901               1,267,758
     Accruals:
         Taxes other than income                                      572,800                 546,073
         Compensation                                                 818,765                 755,240
         Rent                                                       1,018,824                 781,545
         Workers' compensation                                        781,145                 742,242
         Corporate relocation (Note 10)                                    --                 532,121
         Miscellaneous                                                366,839                 498,740
-----------------------------------------------------------------------------------------------------

TOTAL CURRENT LIABILITIES                                           7,146,084               6,129,119
-----------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Note 3)
     Common stock, $.05 par - shares authorized
         20,000,000; issued 3,414,802 and 3,413,777                   170,740                 170,689
     Additional paid-in capital                                    10,787,369              10,782,448
     Retained earnings                                              3,523,082               7,365,512
-----------------------------------------------------------------------------------------------------

                                                                   14,481,191              18,318,649

Treasury stock, at cost, 368,325 and 263,825 shares                (1,764,467)             (1,382,141)
-----------------------------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                                         12,716,724              16,936,508
-----------------------------------------------------------------------------------------------------


                                                                 $ 19,862,808            $ 23,065,627
=====================================================================================================
</TABLE>


      See accompanying summary of accounting policies and notes to consolidated
      financial statements.



                                       29
<PAGE>   30


                                          CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                          Year ended
                                                      ---------------------------------------------------
                                                       JUNE 27, 1998      June 28, 1997     June 29, 1996
---------------------------------------------------------------------------------------------------------

<S>                                                    <C>                <C>               <C>
NET SALES                                               $ 63,780,406       $ 65,453,642      $ 69,399,058
---------------------------------------------------------------------------------------------------------

COST OF SALES
     Food and paper costs                                 22,414,460         23,020,494        24,160,921
     Direct labor                                         14,496,226         14,917,950        16,156,153
     Other operating expenses                             20,663,103         20,219,542        21,641,759
---------------------------------------------------------------------------------------------------------

TOTAL COST OF SALES                                       57,573,789         58,157,986        61,958,833
---------------------------------------------------------------------------------------------------------

GROSS PROFIT                                               6,206,617          7,295,656         7,440,225

ADMINISTRATIVE AND GENERAL                                 6,904,235          7,586,774         7,005,218
IMPAIRMENT OF LONG-LIVED ASSETS (Note 4)                   2,999,642                 --         4,712,562
---------------------------------------------------------------------------------------------------------

OPERATING LOSS                                            (3,697,260)          (291,118)       (4,277,555)
---------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSES)
     Gain on disposal of leasehold improvements
         and equipment                                        14,127            204,361           369,573
     Interest expense                                       (226,795)          (129,075)         (245,752)
     Interest income                                          30,218             81,986            57,714
     Other income - net                                       37,280            222,668           101,814
---------------------------------------------------------------------------------------------------------

TOTAL OTHER INCOME                                          (145,170)           379,940           283,349
---------------------------------------------------------------------------------------------------------

INCOME (LOSS) BEFORE TAXES (BENEFIT) ON INCOME            (3,842,430)            88,822        (3,994,206)

TAXES (BENEFIT) ON INCOME (Note 5)                                --             26,000        (1,536,500)
---------------------------------------------------------------------------------------------------------

NET INCOME (LOSS)                                       $ (3,842,430)            62,822        (2,457,706)
=========================================================================================================

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
     SHARE (NOTES 2 AND 6)                              $      (1.24)      $        .02      $       (.72)
=========================================================================================================
</TABLE>

       See accompanying summary of accounting policies and notes to consolidated
       financial statements.



                                       30
<PAGE>   31
                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                       Common Stock                                                         Treasury Stock
                                 -------------------------                                             -----------------------
                                     Number                       Additional                            Number
                                         of                          Paid-in           Retained             of
                                     Shares         Amount           Capital           Earnings         Shares        Amount
------------------------------------------------------------------------------------------------------------------------------

<S>                               <C>             <C>         <C>                   <C>                <C>         <C>
BALANCE, July 1, 1995             3,403,354       $170,168    $   10,733,141        $ 9,760,396          1,075     $    10,548

Net loss for the year                    --             --                --         (2,457,706)            --              --
Exercise of stock options             7,689            384            33,755                 --             --              --
------------------------------------------------------------------------------------------------------------------------------

BALANCE, June 29, 1996            3,411,043        170,552        10,766,896          7,302,690          1,075          10,548

Net income for the year                  --             --                --             62,822             --              --
Exercise of stock options             2,734            137            15,552                 --             --              --
Treasury stock acquired                  --             --                --                 --        262,750       1,371,593
------------------------------------------------------------------------------------------------------------------------------

BALANCE, June 28, 1997            3,413,777        170,689        10,782,448          7,365,512        263,825       1,382,141

Net loss for the year                    --             --                --         (3,842,430)            --              --
Exercise of stock options             1,025             51             4,921                 --             --              --
Treasury stock acquired                  --             --                --                 --        104,500         382,326
------------------------------------------------------------------------------------------------------------------------------

BALANCE, June 27, 1998            3,414,802       $170,740    $   10,787,369        $ 3,523,082        368,325     $ 1,764,467
==============================================================================================================================
</TABLE>

      See accompanying summary of accounting policies and notes to consolidated
      financial statements.



                                       31
<PAGE>   32


                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                Year ended
                                                          -------------------------------------------------------
                                                               JUNE 27, 1998      June 28, 1997     June 29, 1996
-----------------------------------------------------------------------------------------------------------------

<S>                                                            <C>                <C>               <C>
OPERATING ACTIVITIES
     Net income (loss)                                           $(3,842,430)       $    62,822       $(2,457,706)
     Adjustments to reconcile net income (loss)
        to net cash provided by operating
        activities:
           Impairment of long-lived assets                         2,999,642                 --         4,712,562
           Depreciation and amortization                           3,647,079          3,464,330         3,490,447
           Gain on sale of property and
               equipment                                             (14,127)          (369,182)         (369,573)
           Deferred income taxes                                     311,000           (275,000)       (1,343,500)
           Provision for loss on accounts and
           notes receivable                                          114,022              1,950           167,193
           Changes in operating assets and liabilities:
                  Receivables                                       (582,880)           579,508           137,498
                  Inventories                                        100,875            (46,483)          373,694
                  Refundable income taxes                           (333,411)           239,670          (118,941)
                  Prepaid expenses and other                          20,470             15,603           774,062
                  Accounts payable                                   315,143           (450,863)         (154,808)
                  Accruals                                          (567,588)           203,502          (266,440)
-----------------------------------------------------------------------------------------------------------------

Cash provided by operating activities                              2,167,795          3,425,857         4,944,488
-----------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
     Payments for purchase of equipment
        and improvements                                          (3,282,982)        (2,992,719)       (3,990,107)
     Proceeds from sale of equipment
        and improvements                                             308,141            599,193           338,101
     Net collections on notes receivable                             167,173            397,461           296,394
     Increase in cash surrender value of insurance
        on officers' lives                                           (63,197)          (110,824)          (11,787)
-----------------------------------------------------------------------------------------------------------------

Cash used by investing activities                                 (2,870,865)        (2,106,889)       (3,367,399)
-----------------------------------------------------------------------------------------------------------------
</TABLE>



                                       32

<PAGE>   33


                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                Year ended
                                                          -------------------------------------------------------
                                                               JUNE 27, 1998     June 28, 1997     June 29, 1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>               <C>
FINANCING ACTIVITIES
     Net borrowings (payments) under line of
         credit                                                    $ 999,410       $(1,494,600)      $  (650,000)
     Proceeds from exercise of stock options                           4,972            15,689            34,139
     Acquisition of treasury stock                                  (382,326)       (1,232,843)               --
----------------------------------------------------------------------------------------------------------------

Cash provided (used) by financing activities                         622,056        (2,711,754)         (615,861)
----------------------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH FOR THE
     PERIOD (Note 7)                                                 (81,014)       (1,392,786)          961,228

CASH AND CASH EQUIVALENTS, beginning of period                       490,058         1,882,844           921,616
----------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of period                           $ 409,044       $   490,058       $ 1,882,844
================================================================================================================
</TABLE>

         See accompanying summary of accounting policies and notes to 
         consolidated financial statements.



                                       33

<PAGE>   34
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


NATURE OF BUSINESS         The Company owns and operates delicatessen-style
                           restaurants which are located primarily in office
                           buildings or in high foot traffic retail or business
                           complexes, primarily in central business districts
                           of large metropolitan cities throughout the United
                           States. The Company also provides limited catering
                           services in those cities in which its restaurants
                           are located.

PRINCIPLES OF              The consolidated financial statements include the
CONSOLIDATION              accounts of the Company and its wholly-owned
                           subsidiaries. All material intercompany accounts and
                           transactions are eliminated.

USE OF ESTIMATES           Certain estimates used by management are particularly
                           susceptible to significant changes in the economic
                           environment. These include estimates of the
                           realization of long-lived assets and deferred tax
                           assets. Each of these estimates, as well as the
                           related amounts reported in the financial statements,
                           are sensitive to near term changes in the factors
                           used to determine them. A significant change in any
                           one of those factors could result in the
                           determination of amounts different from those
                           reported in the consolidated financial statements and
                           the effect of such differences could be material.
                           Management believes that, as of August 7, 1998, the
                           estimates used in the consolidated financial
                           statements are adequate based on the information
                           currently available. The preparation of financial
                           statements in conformity with generally accepted
                           accounting principles requires management to make
                           estimates and assumptions that affect the reported
                           amounts of assets and liabilities and disclosure of
                           contingent assets and liabilities at the date of the
                           financial statements. Estimates also affect the
                           reported amounts of revenues and expenses during the
                           reporting period. Actual results could differ from
                           those estimates.

FISCAL                     YEAR The Company operates on a 52-53 week fiscal
                           year ending on the Saturday closest to June 30 of
                           each year. All fiscal year periods presented include
                           52 weeks.

FAIR VALUE OF              The carrying amounts of the Company's financial
FINANCIAL                  instruments, consisting of cash and cash
INSTRUMENTS                equivalents, notes and accounts receivable, cash
                           surrender value of life insurance, accounts payable
                           and notes payable approximate their respective fair
                           values.

INVENTORIES                Inventories of food and restaurant supplies are
                           valued at the lower of cost (first-in, first-out) or
                           market. Maintenance and office supplies are not
                           inventoried.



                                       34
<PAGE>   35
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


EQUIPMENT,                 Equipment and improvements are stated at cost. 
IMPROVEMENTS,              Depreciation of equipment is computed using the 
DEPRECIATION AND           straight-line method for financial reporting 
AMORTIZATION               purposes over a seven year estimated useful life.

                           Leasehold improvements are amortized using the
                           straight-line method for financial reporting
                           purposes over the lesser of the useful life of the
                           improvements or the term of the applicable lease.

                           As discussed in Note 4, the Company adopted
                           Statement of Financial Accounting Standards No. 121,
                           "Accounting for the Impairment of Long- Lived Assets
                           and for Long-Lived Assets to Be Disposed Of" ("SFAS
                           121"), in 1996 for purposes of determining and
                           measuring impairment of certain long-lived assets.

                           The Company reviews long-lived assets to be held and
                           used in the business for impairment whenever events
                           or changes in circumstances indicate that the
                           carrying amount of an asset or a group of assets may
                           not be recoverable. The Company considers a history
                           of operating losses to be its primary indicator of
                           potential impairment. Assets are grouped and
                           evaluated for impairment at the lowest level for
                           which there are identifiable cash flows. The Company
                           has identified the appropriate grouping of assets to
                           be individual restaurants. The Company deems a
                           restaurant's assets to be impaired if a forecast of
                           undiscounted future operating cash flows directly
                           related to the assets, including disposal value, if
                           any, is less than their carrying amount. If a
                           restaurant's assets are determined to be impaired,
                           the loss is measured as the amount by which the
                           carrying amount of the assets exceeds their fair
                           value. Fair value is based on quoted market prices
                           in active markets, if available. If quoted market
                           prices are not available, an estimate of fair value
                           is based on the best information available,
                           including prices for similar assets or the results
                           of valuation techniques such as discounting
                           estimated future cash flows as if the decision to
                           continue to use the impaired assets was a new
                           investment decision.

                           The Company generally measures fair value based on
                           the Company's experience in disposing of similar
                           under-performing properties.



                                       35
<PAGE>   36
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


                           Management judgment is necessary to estimate fair
                           value. Accordingly, actual results could vary
                           significantly from such estimates.

REVENUE RECOGNITION        In connection with its business activity of selling
                           individual and area franchises, the Company has no
                           significant commitments or obligations resulting
                           from the franchise agreements. The Company
                           recognizes income from area franchise sales in
                           accordance with Statement of Financial Accounting
                           Standards No. 45. Franchise agreements with
                           franchisees provide for initial franchise fees and
                           continuing royalty payments to the company based on
                           a percent of sales. The Company generally charges an
                           initial franchise fee for each new franchised store
                           that is added. These fees are recognized ratably
                           when substantially all the services required of the
                           Company are complete and the stores covered by such
                           agreements commence operations.

TAXES ON INCOME            Income taxes are calculated using the liability
                           method specified by Statement of Financial
                           Accounting Standards No. 109, "Accounting for Income
                           Taxes" ("SFAS 109"). Under SFAS 109, the Company
                           provides for estimated income taxes payable or
                           refundable on current year income tax returns as
                           well as the estimated future tax effects
                           attributable to temporary differences and
                           carryforwards. Measurement of deferred income taxes
                           is based upon enacted tax laws and tax rates, with
                           the measurement of deferred income tax assets
                           reduced by estimated amounts of tax benefits not
                           likely to be realized.

EMPLOYEE BENEFITS          The Company provides a defined contribution
                           retirement plan for substantially all of its
                           full-time employees which meets the requirements of
                           Section 401(k) of the Internal Revenue Code. The
                           Company's policy is to fund the retirement plan
                           costs accrued.

STOCK OPTIONS              Stock options are granted, under the Company's
                           Incentive Stock Option Plan, to certain officers and
                           key employees at the prevailing market price on the
                           date of the grant. Proceeds from the sale of common
                           stock issued under these options are credited to
                           common stock or treasury stock and additional
                           paid-in capital at the time the options are
                           exercised. The Company maintains an Employee Stock
                           Purchase Plan, which allows eligible employees to
                           receive grants of stock purchase rights at generally



                                       36
<PAGE>   37
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


                           85% of the prevailing market rate on the offering
                           date. The Company makes no charge to earnings with
                           respect to these options.

                           Statement of Financial Accounting Standards No. 123,
                           "Accounting for Stock-Based Compensation" ("SFAS No.
                           123") issued by the Financial Accounting Standards
                           Board is effective for transactions entered into in
                           fiscal years that begin after December 15, 1995. As
                           allowed under the provisions of SFAS No. 123, the
                           Company will continue to measure compensation cost
                           for employee stock-based compensation plans using
                           the intrinsic value based method of accounting
                           prescribed by the Accounting Principles Board
                           Opinion No. 25, "Accounting for Stock Issued to
                           Employees," and has made pro forma disclosures of
                           net income and earnings per share as if the fair
                           value based method of accounting had been applied
                           (see Note 3).

EARNINGS PER SHARE         Effective June 27, 1998, the Company adopted the
                           provisions of Statement of Financial Accounting
                           Standards No. 128, "Earnings Per Share" ("SFAS
                           128"). This statement simplifies the standards for
                           computing earnings per share ("EPS") previously
                           found in APB Opinion NO. 15, "Earning Per Share", as
                           the presentation of "Primary" and "Fully-Diluted"
                           EPS under APB 15 is replaced by "Basic" and
                           "Diluted" EPS. Basic EPS excludes dilution and is
                           computed by dividing income available to common
                           stockholders by the weighted-average number of
                           common shares outstanding for the period. Diluted
                           EPS reflects the potential dilution that could occur
                           if securities or other contracts to issue common
                           stock are exercised or converted into common stock,
                           or result in the issuance of common stock that then
                           shares in the earnings of the Company.


                           In accordance with the provisions of SFAS 128,
                           earnings per share amounts for the years ended June
                           28, 1997 and June 29, 1996 have been recalculated to
                           give effect to the application of this new standard.
                           The effect of this restatement had no material
                           effect on either year.



                                       37
<PAGE>   38
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


NEW ACCOUNTING             In June 1997, the Financial Accounting Standards
PRONOUNCEMENTS             Board issued Statement of Financial Accounting
                           Standards No. 130, "Reporting Comprehensive Income"
                           ("SFAS 130"), which establishes standards for
                           reporting and display of comprehensive income, its
                           components and accumulated balances. Comprehensive
                           income is defined to include all changes in equity
                           except those resulting from investments by owners
                           and distributions to owners. Among other
                           disclosures, SFAS 130 requires that all items that
                           are required to be recognized under current
                           accounting standards as components of comprehensive
                           income be reported in a financial statement that is
                           displayed with the same prominence as other
                           financial statements.

                           In June 1997, the Financial Accounting Standards
                           Board issued SFAS No. 131, "Disclosures about
                           Segments of an Enterprise and Related Information,"
                           ("SFAS 131") which supersedes SFAS No. 14,
                           "Financial Reporting for Segments of a Business
                           Enterprise." SFAS 131 establishes standards for the
                           way that public companies report information about
                           operating segments in annual financial statements
                           and requires reporting of selected information about
                           operating segments in interim financial statements
                           issued to the public. It also establishes standards
                           for disclosures regarding products and services,
                           geographic areas and major customers. SFAS 131
                           defines operating segments as components of a
                           company about which separate financial information
                           is available that is evaluated regularly by the
                           chief operating decision maker in deciding how to
                           allocate resources and in assessing performance.

                           In February 1998, the Financial Accounting Standards
                           Board issued SFAS 132, "Employers' Disclosures about
                           Pensions and Other Postretirement Benefits" ("SFAS
                           132"), which amends the disclosure requirements of
                           the following FASB Statements: SFAS No. 87,
                           "Employers' Accounting for Pensions, SFAS No. 88,
                           Employers' Accounting of Settlements and
                           Curtailments of Defined Benefit Pension Plans and
                           for Termination Benefits," and SFAS No. 106,
                           "Employers' Accounting for Postretirement Benefits
                           Other Than Pensions." SFAS 132 does not affect the
                           recognition and measurement requirements of those
                           Statements, but standardizes disclosure requirements
                           to the extent practicable and suggests combined
                           formats for presentation of pension and other
                           postretirement benefit disclosures.



                                       38
<PAGE>   39
                                                  SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------------------------------


                           SFAS 130, SFAS 131 and SFAS 132 are effective for
                           financial statements for periods beginning after
                           December 15, 1997 and require comparative
                           information for earlier years to be restated.
                           Because of the recent issuance of these standards,
                           management has been unable to evaluate fully the
                           impact, if any, these standards may have on future
                           financial statement disclosures. Results of
                           operations and financial position, however, will be
                           unaffected by the implementation of these standards.

                           In June 1998, the Financial Accounting Standards
                           Board Issued SFAS No. 133, "Accounting for
                           Derivative Instruments and Hedging Activities"
                           ("SFAS 133"). SFAS 133 requires companies to
                           recognize all derivatives contracts as either assets
                           or liabilities in the balance sheet and to measure
                           them at fair value. If certain conditions are met, a
                           derivative may be specifically designated as a
                           hedge, the objective of which is to match the timing
                           of gain or loss recognition on the hedging
                           derivative with the recognition of (i) the changes
                           in the fair value of the hedged asset or liability
                           that are attributable to the hedged risk or (ii) the
                           earnings effect of the hedged forecasted
                           transaction. For a derivative not designated as a
                           hedging instrument, the gain or loss is recognized
                           in income in the period of change. SFAS 133 amends
                           the guidance in SFAS No. 52, "Foreign Currency
                           Translation," to permit special accounting for a
                           hedge of a foreign currency forecasted transaction
                           with a derivative. It also supersedes SFAS No. 80,
                           "Accounting for Futures Contracts," SFAS No. 105,
                           "Disclosure of Information about Financial
                           Instruments with Off-Balance-Sheet Risk and
                           Financial Instruments with Concentrations of Credit
                           Risk," and SFAS No. 119, "Disclosure about
                           Derivative Financial Instruments." In addition, it
                           amends SFAS No. 107, "Disclosures about Fair Value
                           of Financial Instruments," to include in SFAS No.
                           107 the disclosure provisions about concentrations
                           of credit risk from SFAS No. 105.

                           SFAS 133 is effective for financial statements for
                           periods beginning after June 15, 1999. Historically,
                           the Company has not entered into derivatives
                           contracts either to hedge existing risk or for
                           speculative purposes. Accordingly, the Company does
                           not expect adoption of the new standard on July 4,
                           1999 to affect its financial statements.



                                       39
<PAGE>   40

                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------


1.  ACCOUNTS AND        Accounts and notes receivable consist of the following:
    NOTES RECEIVABLE

<TABLE>
<CAPTION>
                                                           JUNE 27,        June 28,
                                                               1998            1997
                      =============================================================
                      <S>                             <C>             <C>          
                       Accounts receivable            $   1,262,505   $     749,625
                       Notes receivable                     333,530         579,105
                       Other receivables                    420,001         350,001
                      -------------------------------------------------------------

                                                          2,016,036       1,678,731

                       Less allowance for doubtful       
                           accounts                        (485,198)       (169,578)
                      -------------------------------------------------------------

                                                          1,530,838       1,509,153

                       Less non-current portion of
                           notes receivable                (211,402)       (453,229)
                      -------------------------------------------------------------

                                                      $   1,319,436   $   1,055,924
                      =============================================================
</TABLE>


                      The Company's notes receivable generally arise from sales
                      of equipment in connection with store closings, bear
                      interest at rates ranging from 7% to 12%, are repayable
                      monthly and are due at various dates through January 2003.
                      The notes are collateralized by store equipment.

                      Activity in the allowance for possible losses is
                      summarized as follows:


<TABLE>
<CAPTION>
                                                   JUNE 27,     June 28,     June 29,
                      Year ended                       1998         1997         1996
                      ===============================================================
                      <S>                         <C>          <C>          <C>      
                      Balance, at beginning  
                          of period               $ 169,578    $ 167,628    $ 244,801
                      Charged to expense            428,927      106,892      167,193
                      Uncollected balances   
                          written off, net of
                          recoveries               (113,307)    (104,942)    (244,366)
                      ---------------------------------------------------------------

                      Balance, at end of period   $ 485,198    $ 169,578    $ 167,628
                      ===============================================================
</TABLE>


                                       40

<PAGE>   41


                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

2. NOTES PAYABLE        Notes payable consists of:


<TABLE>
<CAPTION>
                                                                             JUNE 27,        June 28,   
                                                                                 1998            1997   
                        =============================================================================== 

                        <S>                                             <C>             <C>
                        $7,500,000 unsecured revolving line                                             
                            of credit with bank, borrowings                                             
                            payable on demand, bearing                                                  
                            interest at lower of either (i) the                                         
                            30-day LIBOR rate plus 175 base                                             
                            points (7.41% at June 30, 1998),                                            
                            or (ii) the quoted cost of funds                                            
                            rate plus 175 base points (8.4%                                             
                            at June 30, 1998), maturing                 $   2,004,810   $     982,936   
                            October 1998                                                                
                                                                                                        
                            Other, repaid in 1998                                   -          22,464   
                        ------------------------------------------------------------------------------- 
                                                                                                        
                        Notes payable                                   $   2,004,810   $   1,005,400
                        ===============================================================================
</TABLE>


                        The maximum amount of short-term borrowings outstanding
                        during the years ended June 27, 1998, June 28, 1997 and
                        June 29, 1996 were $4,383,000, $2,878,000 and
                        $3,800,000, respectively. Such borrowings averaged
                        approximately $2,457,000 in 1998, $1,824,000 in 1997 and
                        $3,283,000 in 1996, with a weighted average interest
                        rate of 7.17%, 7.08% and 7.21%, respectively, for such
                        periods. The weighted average interest rate was
                        calculated by dividing the related interest expense by
                        the average short-term borrowings outstanding during the
                        respective periods.

                        The Company's unsecured line of credit contains
                        covenants that require, among other things, that the
                        Company maintain specified levels of adjusted tangible
                        net worth and debt service coverage ratios. The line of
                        credit agreement also restricts additional indebtedness,
                        capital expenditures and declaration and payment of
                        dividends.

                        On December 27, 1997, the Company was not in compliance
                        with its debt service coverage ratio covenant and
                        accordingly, had received


                                       41

<PAGE>   42


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



                        waivers and amendments to such covenant from its lender
                        for periods up to and including June 27, 1998.
                        Additionally, the Company is in the process of seeking
                        and expects to receive future relief from this covenant
                        covering periods through October 31, 1998, the date the
                        line of credit expires. There can be no assurance that
                        the Company will obtain such waiver or require
                        additional waivers in the future or if required, that
                        the lender will grant them.

                        Management expects, in accordance with the terms of the
                        line of credit agreement, to extend the expiration date
                        from October 31, 1998 to October 31, 1999. In the event
                        it is not extended, management believes there are a
                        number of viable refinancing alternatives.

3.   STOCKHOLDERS'      The Company maintains an incentive stock option plan
     EQUITY             under which officers, employees and directors may be
                        granted options to purchase shares of the Company's 
                        common stock at the grant date fair market value.
                        Options are generally exercisable upon issuance and
                        expire up to five years from the date granted.


<TABLE>
<CAPTION>
                                                             JUNE 27, 1998            June 28, 1997          June 29, 1996
                                                         ===================================================================
                                                                    WEIGHTED-                 Weighted              Weighted
                                                                      AVERAGE                  average               average
                                                                     EXERCISE                 exercise              exercise
                                                         SHARES         PRICE     Shares         price    Shares       price
                       -----------------------------------------------------------------------------------------------------
                       <S>                               <C>        <C>           <C>         <C>         <C>       <C> 
                       Options outstanding,
                           beginning of                   338,400         7.05    238,550         8.38    178,850       9.39
                           period
                       Options granted                     75,100         3.92    133,200         4.55     72,600       5.99
                       Options exercised                        -            -          -            -     (5,400)      6.22
                       Options canceled                  (109,300)        7.89    (33,350)        6.50     (7,500)     11.02
                       -----------------------------------------------------------------------------------------------------

                       Options outstanding,
                           end of period                  304,200         5.84    338,400         7.05    238,550       8.38

                       Option price range at              $ 3.38 to               $ 4.00 to               $ 5.25 to
                           end of period                  $13.06                  $13.06                  $13.06

                       Options available for
                           grant at end of
                           period                         68,950                  34,750                  134,600
                       -----------------------------------------------------------------------------------------------------

                       Weighted-average fair
                           value of options,
                           granted during
                           the period                                  $  1.17                $   1.58               $  1.90
                       =====================================================================================================
                       </TABLE>

                                       42

<PAGE>   43

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                        At June 27, 1998, 373,150 shares were reserved for
                        issuance under the plan.

                        The Company also maintains an Employee Stock Purchase
                        Plan which covers full-time employees which meet certain
                        defined employment requirements. A maximum of 142,500
                        shares may be issued under the plan, and the employees'
                        purchase price is the greater of 85 percent of the fair
                        market value of the stock on the date of grant or 85
                        percent of the Company's cost to acquire stock for
                        issuance under the plan. Rights to acquire shares expire
                        within 12 months from date of grant if not exercised.
                        Rights to acquire 9,425, 1,650 and 6,334 shares remained
                        outstanding as of June 27, 1998, June 28, 1997 and June
                        29, 1996, respectively. A total of 64,277 shares were
                        reserved under this plan as of June 27, 1998.

                        STOCK-BASED COMPENSATION

                        All stock options issued to employees have an exercise
                        price not less than the fair market value of the
                        Company's common stock on the date of grant, and in
                        accordance with accounting for such options utilizing
                        the intrinsic value method there is no related
                        compensation expense recorded in the Company's financial
                        statements. Had compensation cost for stock-based
                        compensation been determined based on the fair value at
                        the grant dates consistent with the method of SFAS 123,
                        the Company's net income and earnings per share would
                        have been reduced to the pro forma amounts presented
                        below for the years ended:

<TABLE>
<CAPTION>
                                                         JUNE 27,     June 28,        June 29,
                                                             1998         1997            1996
                        ===========================================================================

                        <S>                          <C>             <C>          <C>
                        Net income (loss):
                           As reported               $ (3,842,430)   $  62,822    $ (2,457,706)
                           Pro forma                 $ (3,942,717)   $ (84,275)   $ (2,554,288)

                        Earnings (loss) per share
                           of common stock:
                           As reported               $      (1.24)   $    0.02    $      (0.72)
                           Pro forma                 $      (1.27)   $   (0.03)   $      (0.75)

                        ============================================================================
</TABLE>

                                       43
<PAGE>   44

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                        The fair value of option grants is estimated on the date
                        of grant utilizing the Black-Scholes option-pricing
                        model with the following weighted average assumptions
                        for grants in 1998, 1997 and 1996; expected life of
                        option of 5 years for all years, expected volatility of
                        25% for 1998, 24.7% for 1997 and 22.8% for 1996 risk
                        free interest rate of 5.99% for 1998, 6.45% for 1997 and
                        5.5% for 1996 and a 0% dividend yield for all years. The
                        weighted average fair value at date of grants range from
                        $1.11 to $1.37 per option for 1998, $1.43 to $1.77 per
                        option for 1997 and $1.65 to $2.97 per option for 1996.

                        Additional information relating to stock options
                        outstanding and exercisable at June 27, 1998 summarized
                        by exercise price are as follows:


<TABLE>
<CAPTION>
                                        Outstanding         Weighted Average
                                                and   --------------------------
                       Exercise price   exercisable          Life       Exercise
                            per share        shares        (years)         price
                       ---------------------------------------------------------
                       <S>              <C>                 <C>         <C>
                           $3.38-4.10       147,300            3.6      $   4.00
                                 5.25        95,200            2.9          5.25
                                 8.63         4,000            2.1          8.63
                          10.00-11.50         6,500             .4         10.58
                          11.88-13.06        51,200            1.2         12.36
                                        ----------------------------------------

                        3.38 to 13.06       304,200            2.9          5.85
                       =========================================================
</TABLE>


4.  IMPAIRMENT OF       In March 1995, the FASB issued SFAS 121, "Accounting for
    LONG-LIVED          the Impairment of Long-Lived Assets and for Long-Lived
    ASSETS              Assets to Be Disposed Of," which requires the evaluation
                        of certain assets based upon estimated future cash
                        flows. The Company elected to adopt SFAS 121 in the
                        fourth quarter of 1996.

                        Adoption of SFAS 121 required that the Company group
                        assets at a lower level for evaluation and measurement
                        of impairment than under its previous accounting policy
                        and resulted in a 1996 noncash pre-tax charge of
                        approximately $4.7 million. Previously, long-lived
                        assets were evaluated as a group, on a regional basis,
                        for impairment if the region was operating at a loss or
                        was expected to operate at a loss in the future. The
                        Company now evaluates and measures for impairment on an
                        individual


                                       44

<PAGE>   45


                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

                        store basis. The charge in 1996 reduced the carrying
                        amount of impaired assets associated with individual
                        restaurant properties to their estimated fair market
                        values based on the Company's experience in disposing of
                        similar under-performing properties.

                        During 1998, events and circumstances indicated that
                        certain equipment, fixtures and leasehold improvements
                        associated with under-performing stores were impaired.
                        Accordingly, the Company recorded a pre-tax charge in
                        the fourth quarter of 1998 amounting to approximately
                        $3.0 million to adjust the carrying value of these
                        assets to their estimated fair market value and to
                        provide for associated disposal liabilities. While
                        management believes that estimates used in evaluation of
                        impairment were reasonable, actual results could vary
                        significantly.

5.  TAXES (BENEFIT)     The components of taxes (benefit) on income are as
    ON INCOME           follows:

<TABLE>
<CAPTION>
                                                         Year ended
                                             ====================================
                                             JUNE 27,      June 28,      June 29,
                                                 1998          1997          1996
                        =========================================================
                        <S>                <C>            <C>          <C> 
                        Current:
                              Federal      $ (311,000)    $ 252,000    $ (222,000)
                              State                 -        49,000        29,000
                        ---------------------------------------------------------

                        Total current        (311,000)      301,000      (193,000)
                        ---------------------------------------------------------

                        Deferred:
                              Federal         262,000      (246,000)   (1,202,300)
                              State            49,000       (29,000)     (141,200)
                        ---------------------------------------------------------

                        Total deferred        311,000      (275,000)   (1,343,500)
                        ---------------------------------------------------------

                        Taxes (benefit)
                              on income    $        -     $  26,000   $(1,536,500)
                        =========================================================
</TABLE>

                        Significant components of the Company's deferred tax
                        assets are comprised of the following at:



                                       45
<PAGE>   46
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     JUNE 27,       June 28,
                                                                         1998           1997
                       =====================================================================

                       <S>                                        <C>             <C>       
                       Equipment and improvements                 $ 3,116,800     $2,611,200
                       Accrual for contingent losses                  568,900        282,100
                       Accrual for relocation costs                         -         71,900
                       Bad debt allowance                             193,000         43,900
                       Alternative minimum tax and other
                           credits                                    308,000        203,000
                       State net operating loss carryforward          157,000         36,200
                       Other                                           55,300         24,700
                       ---------------------------------------------------------------------

                       Gross deferred tax asset                     4,399,000      3,273,000

                       Valuation allowance                         (1,437,000)             -
                       ---------------------------------------------------------------------

                       Net deferred tax asset                     $ 2,962,000     $3,273,000
                       =====================================================================
</TABLE>

                        Realization of deferred tax assets associated with
                        equipment and improvements and with net operating loss
                        and credit carryforwards is dependent upon generating
                        sufficient taxable income to utilize depreciation
                        deductions on impaired long-lived assets (Note 4) and
                        net operating loss and credits carryforwards prior to
                        their expirations. Management believes that there is
                        risk that certain of these deferred tax assets may not
                        be realized and, accordingly has established a valuation
                        allowance against them. Although realization is not
                        assured for the remaining deferred tax assets,
                        management believes it is more likely than not that they
                        will be realized through future taxable earnings or
                        alternative tax strategies.

                        State net operating loss and other credit carryforwards
                        expire at various dates from 2005 through 2010.
                        Alternative minimum tax credits totaling approximately
                        $90,000 may be carried forward indefinitely.




                                       46



<PAGE>   47


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



                        The effective tax rate on income before taxes on income
                        was different from the federal statutory tax rate. The
                        following summary reconciles taxes at the federal
                        statutory tax rate with actual taxes and the effective
                        rate:


<TABLE>
<CAPTION>
                                                                                 Year Ended
                                                     =======================================================================
                                                          JUNE 27, 1998           June 28, 1997             June 29, 1996
                       =====================================================================================================
                                                          $            %         $             %            $             %

                       <S>                           <C>             <C>       <C>            <C>      <C>             <C>   
                       Income taxes (benefit)
                          at statutory rate          (1,306,000)     (34.0)    30,200         34.0     (1,358,000)     (34.0)

                       Increase (decrease) in
                          taxes resulting from:
                            state income taxes,
                              net of federal tax
                              benefit                  (154,000)      (4.0)     3,600          4.1        (74,000)      (1.9)
                            Meals and enter-
                              tainment                   21,200         .6      7,900          8.8          7,700        0.2
                            Officer's life
                              insurance                   2,800        0.0    (15,000)       (16.8)        20,200        0.5
                            Other                        (1,000)      (0.0)      (700)         (.8)      (132,400)      (3.3)

                       Increase in  valuation
                          allowance                   1,437,000       37.4          -            -              -          -
                       -----------------------------------------------------------------------------------------------------
                       Taxes (benefit) on
                          income at effective
                          rate                                -          -     26,000         29.3     (1,536,500)     (38.5)
                       =====================================================================================================
</TABLE>

6. EARNINGS PER SHARE   Earnings per share of common stock and common stock 
                        equivalents have been computed using 3,094,762 shares in
                        1998, 3,254,908 shares in 1997 and 3,407,889 shares in
                        1996, which represent the weighted average number of
                        shares of common stock to be recognized during the
                        respective periods. The effect of shares issuable under
                        the stock option plan were excluded for 1998 and 1996 as
                        the effect would be anti-dilutive. The assumed exercise
                        of the common stock options is not included in the
                        computation of common stock equivalents for 1997 because
                        the significant majority of common options outstanding
                        were exercisable at prices which exceed the common stock
                        market price.



                                       47

<PAGE>   48


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


                        Earnings per share has been calculated using the
                        following weighted average number of shares:

<TABLE>
<CAPTION>
                                                       1998          1997           1996
                        ==================================================================
                        <S>                          <C>           <C>            <C>      
                        Weighted average
                        number at common
                        shares used for basic
                        EPS                          3,094,762     3,254,908      3,407,889

                        Effect of dilutive stock
                        options                              -             -              -
                        -------------------------------------------------------------------

                        Weighted average
                        number of common
                        shares and dilutive
                        potential common
                        stock used in diluted
                        EPS                          3,094,762     3,254,908      3,407,889
                        ===================================================================
</TABLE>


7.  SUPPLEMENTAL        For purposes of the statements of cash flows, the
    CASH FLOW           Company classifies cash on hand and in savings and 
    INFORMATION         checking accounts and short-term investments with a 
                        maturity of three months or less as cash equivalents.

                        Supplemental cash flow information:

<TABLE>
<CAPTION>
                                                                                  Year ended
                                                                     ====================================
                                                                       JUNE 27,   June 28,       June 29,
                                                                           1998       1997          1996
                        =================================================================================
                        <S>                                          <C>         <C>           <C>      
                        Cash paid for (received from):
                            Interest                                   $226,795   $ 136,506    $ 241,567
                            Income taxes                                189,025     (19,554)     (76,588)
                        Non-cash financing and investing activities:
                                 Notes received from
                                     sale of property,
                                     equipment and
                                     accounts receivable                      -     454,031      445,159
                                 Treasury stock acquired
                                     from sale of
                                     property, equipment
                                     and accounts
                                     receivable                               -     138,750            -
                       =================================================================================
</TABLE>

                                       48
<PAGE>   49
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8.  COMMITMENTS        A.  Leases
    AND
    CONTINGENCIES      The Company and its subsidiaries lease various restaurant
                       facilities and computer equipment, under noncancellable
                       operating leases, which expire at various dates through
                       July 2007. At June 27, 1998, future minimum lease
                       payments required under operating leases that have
                       initial noncancellable terms in excess of one year are
                       as follows:


<TABLE>
<CAPTION>
                                              Minimum lease
                       Fiscal year ending          payments
                       ====================================
                       <S>                    <C>        
                       1999                     $ 6,479,000
                       2000                       6,490,000
                       2001                       6,127,000
                       2002                       6,347,000
                       2003                       4,879,000
                       After 2003                 7,354,000
                       ------------------------------------

                       Total                    $37,676,000
                       ====================================
</TABLE>


                       Rent expense for each of the three years in the period
                       ended June 27, 1998 is as follows:


<TABLE>
<CAPTION>
                                                              Year ended
                                                 ====================================
                                                   JUNE 27,    June 28,      June 29,
                                                       1998        1997          1996
                       ==============================================================
                       <S>                       <C>          <C>          <C>
                       Basic rentals:
                           Noncancellable
                                leases (net of
                                subleases)       $6,167,078   $6,507,892   $6,932,203
                           Cancellable equip-
                                ment leases         310,846      417,269      466,360
                       --------------------------------------------------------------

                                                  6,477,924    6,925,161    7,398,563

                       Contingent rentals
                           based on sales           590,935      418,703      418,356
                       --------------------------------------------------------------

                       Total rent expense        $7,068,859   $7,343,864   $7,816,919
                       ==============================================================
</TABLE>



                                       49

<PAGE>   50


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



                        The Company has leased certain properties from three
                        partnerships in which certain officers of the Company
                        are partners. Rents paid to these partnerships for the
                        fiscal years ended 1998, 1997 and 1996 were
                        approximately $18,500, $83,000 and $161,000,
                        respectively. The Company and its subsidiaries remain
                        obligated, in the event of default by the current
                        lessee, on 34 facilities formerly operating under
                        long-term leases. Future minimum lease payments
                        remaining under these noncancellable operating leases
                        are as follows:


<TABLE>
<CAPTION>
                                                                      Minimum
                                                                    remaining
                                                                        lease
                        Fiscal year ending                           payments
                        =====================================================

                        <S>                                       <C>
                        1999                                      $   134,000
                        2000                                          108,000
                        2001                                           48,000
                        2002                                           48,000
                        2003                                           48,000
                        After 2003                                     57,000
                        -----------------------------------------------------
                        Total                                     $   443,000
                        =====================================================
</TABLE>

                        B. Workers Compensation and Medical Claims

                        The Company is self-insured for workers compensation
                        claims up to $250,000 for each loss event. Provisions
                        for expected future payments are accrued based on the
                        Company's estimate of its aggregate liability for all
                        open claims.

                        C. Litigation

                        The Company is involved in various legal matters in the
                        ordinary course of its business. None of these matters
                        are expected to have a material adverse effect on the
                        Company's consolidated financial statements.

                        D. Retirement Plan

                        Effective January 1, 1996, the Company adopted a
                        tax-qualified employee


                                       50

<PAGE>   51



                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



                        benefit plan ("Plan") which meets the criteria of
                        Section 401(k) of the Internal Revenue Code. Under the
                        Plan, participants may elect to defer from 2% to 15% of
                        their compensation, and the Company may make
                        discretionary contributions, as determined annually by
                        the Company's management, of up to 10% of the employee's
                        compensation. Each participant's contribution is fully
                        vested at all times. Participants become fully vested in
                        contributions made by the Company on a graduated scale
                        over a seven-year period. Operations were charged with
                        approximately $47,000, $51,000, and $27,000 related to
                        this plan for the years ended June 27, 1998, June 28,
                        1997, and June 29, 1996, respectively.


9. SALE OF MEMPHIS      Effective October 27, 1996, the Company sold the
   DIVISION             operating assets of its Memphis division, consisting
                        of ten stores and related catering operations, to
                        Executive Chef Catering, L.L.C., of which Ms. Judy M.
                        Gupton, formerly manager of the Memphis division, and
                        Mr. Barrow, former President and Chief Executive Officer
                        and current Vice-Chairman of the Board of the Company,
                        are the owners. Total sales price for the assets was
                        $1,017,000, consisting of $810,305 in cash and
                        short-term notes, plus 25,000 shares of Company stock
                        valued at $5.55 per share, with the balance of $68,739
                        payable in two years, with interest at the prime rate,
                        paid quarterly. Prior to the close of the fiscal year,
                        one note in the amount of $47,990 was paid with 11,250
                        shares of Company stock valued at $4.125 per share, with
                        the balance paid in cash. The assets included in the
                        sale had a book value of approximately $867,000.


10. CORPORATE           The corporate offices of the Company were consolidated
    RELOCATION          and relocated to Birmingham, Alabama on June 20, 1997.
                        Accordingly, the Company recorded a fourth-quarter 1997
                        charge of $700,000 related to the consolidation.




                                       51

<PAGE>   52
 
11.     SELECTED QUARTERLY
        FINANCIAL DATA
        (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 Thousands of dollars,
                                                                 except per share data
                                                     ===============================================
                                                        1st         2nd         3rd        4th
                        ----------------------------------------------------------------------------
                        <S>                          <C>         <C>         <C>        <C>
                        Year ended June 27, 1998:
                             Net sales               $ 16,195    $ 15,852    $ 15,696   $ 16,037
                             Gross profit               1,449       1,398       1,554      1,806
                             Income (loss)
                               before taxes
                               (benefit) on
                               income                    (282)       (286)         13     (3,287)

                             Net income (loss)           (169)       (172)          8     (3,509)(a)

                             Basic and diluted
                               earnings (loss) per
                               common share              (.05)       (.06)         --      (1.15)

                        Year ended June 28, 1997:
                             Net sales               $ 17,328    $ 16,179    $ 15,680   $ 16,267
                             Gross profit               1,895       1,525       1,599      2,277
                             Income (loss)
                               before taxes
                               (benefit) on
                               income                     381         236         167       (695)

                             Net income (loss)            228         142         101       (408)(b)

                             Basic and diluted
                               earnings (loss)
                               per common share           .07         .04         .03       (.12)
                        ----------------------------------------------------------------------------
</TABLE>

                        (c)     See Note 4 for discussion of the fourth quarter
                                pre-tax charge of $2,999,642 related to
                                impairment of long lived assets.

                        (b)     See Note 10 for discussion of the fourth quarter
                                pre-tax charge of $700,000 related to the
                                consolidation and relocation of the corporate
                                offices of the Company to Birmingham, Alabama at
                                fiscal year-end.


                                       52

<PAGE>   53



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

         During the fiscal years 1998 and 1997 and through the date of this
report, there has been no change in the Company's independent accountants, nor
have any disagreements with such accountants or reportable events occurred.


                                    PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS

         Information required by this item is incorporated by reference from
the sections entitled "Election of Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.


ITEM 11: EXECUTIVE COMPENSATION

         Information required by this item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this item is incorporated by reference from
the sections entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.


                                       53

<PAGE>   54

                                     PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements

         The following financial statements are included in Part II of this
report (index at page 26):

         Report of Independent Certified Public Accountants

         Consolidated Financial Statements for Years ended June 27, 1998, June
         28, 1997 and June 29, 1996:

                  Consolidated Balance Sheets - June 27, 1998 and June 28, 1997
                  Consolidated Statements of Operations
                  Consolidated Statements of Stockholders' Equity
                  Consolidated Statements of Cash Flows

         Summary of Accounting Policies

         Notes to Consolidated Financial Statements

         Selected Quarterly Financial Data (unaudited) (appearing at Note 11 of
         the Notes to Consolidated Financial Statements)

Financial Statement Schedules

         All schedules have been omitted since the required information is not
applicable or the information required is included in the financial statements
or the notes thereto.


                                       54

<PAGE>   55

EXHIBITS

         The exhibits set forth in the following Index of Exhibits are filed as
a part of this report:

<TABLE>
<CAPTION>
Exhibit
Number                            Description
-------
<S>           <C>                                                                         <C>
 3.1(b)       Restated Certificate of Incorporation                                       page 60

 3.2          Bylaws (incorporated by reference from the Company's Proxy
              Statement for the Special Shareholders Meeting held on September
              25, 1986).

 4.4          Credit Agreement, dated June 19, 1996, between AmSouth Bank of
              Alabama and the Company, incorporated by reference from the
              Company's Form 10-K for the year ended June 29, 1996.

10.1          Commercial Lease dated April 16, 1979, between the Company and
              WESCO Associates, as amended effective July 1, 1989 (incorporated
              by reference from exhibits to the Company's Registration Statement
              on Form S-2 under the Securities Act of 1933 Registration No.
              33-61700, as filed on April 27, 1993).

10.1(a)       Extension to Commercial Lease between the Company and WESCO
              Associates, effective June 30, 1994 (incorporated by reference
              from the Company's Annual Report on Form 10-K for the year ended
              July 2, 1994).

10.2          Lease dated February 20, 1981, between the Company and CBK
              Associates, as amended by Amendment Numbers 1, 2 and 3
              (incorporated by reference from exhibits to the Company's
              Registration Statement on Form S-2 under the Securities Act of
              1933, Registration No. 33-61700, as filed on April 27, 1993).

10.3          Commercial Lease dated May 31, 1994, between the Company and Rex
              Associates (incorporated by reference from the Company's Annual
              Report on Form 10-K for the year ended July 1, 1995).

10.7          Extract of Minutes of the Board of Directors (incorporated by
              reference from exhibits to the Company's Registration Statement
</TABLE>


                                       55


<PAGE>   56

<TABLE>
<S>           <C>                                                                         <C>
              on Form S-l under the Securities Act of 1933 Registration No. 2-
              78902, as filed on September 28, 1982).

10.8          1983 Incentive Stock Option Plan (incorporated by reference from
              an exhibit to the Company's Annual Report on Form 10-K for the
              year ended June 30, 1984).

10.9          1989 Incentive Stock Option Plan, as amended (incorporated by
              reference from an exhibit to the Company's Annual Report on Form
              10-K for the year ended June 30, 1984).

10.10         Asset Purchase Agreement dated as of October 27, 1996, by and
              among Wall Street Deli, Inc., Downtown Food Services, Inc.,
              Executive Chef Catering, L.L.C., Robert G. Barrow and Judy Gupton
              (relating to sale of the Memphis division) (incorporated by
              reference from an exhibit to the Company's Quarterly Report on
              Form 10-Q for the quarter ended September 28, 1996).

11            Computation of Earnings Per Common Share, filed herewith.                   page 65

21            Subsidiaries of the Registrant, filed herewith.                             page 66

27            Financial Data Schedule, submitted to the Securities and Exchange
              Commission in electronic format
</TABLE>

Reports on Form 8-K

         During the quarter ended June 27, 1998, the Company filed no reports
on Form 8-K.


                                       56

<PAGE>   57

                                   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.

                                        WALL STREET DELI, INC.


                                         /s/ Jeffrey V. Kaufman
                                        --------------------------------
                                        By: JEFFREY V. KAUFMAN
                                            President

                                                             September 23, 1998
                                                                       
         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                            <C>                                <C>
 /s/ Jeffrey V. Kaufman        President, Chief Executive         September 23, 1998
--------------------------     Officer and Director                         
JEFFREY V. KAUFMAN        

 /s/ Robert G. Barrow          Vice Chairman, Chief Financial     September 23, 1998
--------------------------     Officer and Director                         
ROBERT G. BARROW          

 /s/ Alan V. Kaufman           Chairman of the Board              September 23, 1998
--------------------------                                                  
ALAN V. KAUFMAN

 /s/ William S. Atherton       Director                           September 17, 1998
--------------------------                                                  
WILLIAM S. ATHERTON

 /s/ Jake L. Netterville       Director                           September 23, 1998
--------------------------                                                  
JAKE L. NETTERVILLE
</TABLE>



                                       57

<PAGE>   58


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


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


                                    EXHIBITS
                                       AND
                          FINANCIAL STATEMENT SCHEDULES
                                       TO

                                    FORM 10-K



                             WALL STREET DELI, INC.




For the fiscal year ended June 27, 1998              Commission File No. 0-11271



                                       58
<PAGE>   59

                                TABLE OF CONTENTS
                                  FOR EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number                       Description                                   Page
-------                      -----------                                   ----
<S>           <C>                                                          <C>
3.1(b)        Restated Certificate of Incorporation                         60

11            Computation of Earnings Per Common Share                      65

21            Subsidiaries of the Registrant                                66

27            Financial Data Schedule, submitted to the
              Securities and Exchange Commission in electronic
              format
</TABLE>


                                       59