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


                                   FORM 10-K


                 Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                   For the Fiscal Year Ended January 28, 1998


                          Commission File No. 0-21486


                          HARRY'S FARMERS MARKET, INC.

                             A Georgia Corporation
                  (IRS Employer Identification No. 58-2037452)
                            1180 Upper Hembree Road
                            Roswell, Georgia  30076
                                 (404) 667-8878

                Securities Registered Pursuant to Section 12(b)
                    of the Securities Exchange Act of 1934:

                                      None


                Securities Registered Pursuant to Section 12(g)
                    of the Securities Exchange Act of 1934:

                       Class A Common Stock, no par value
                                        


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

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

The aggregate market value of the Class A Common Stock of the registrant held by
nonaffiliates of the registrant on April 23, 1998, was approximately $7,055,052.
For the purposes of this response, officers, directors and holders of 10% or
more of the registrant's common stock are considered affiliates of the
registrant at that date.

The number of shares outstanding of the registrant's Class A Common Stock, no
par value, as of April 23, 1998: 4,132,257 shares.  The number of shares
outstanding of the registrant's Class B Common Stock, no par value, as of April
23, 1998:  2,050,701 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1998 are incorporated by reference in answer to
Part III of this report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
<PAGE>
 
                                     PART I

ITEM 1. BUSINESS.
------  -------- 

   Harry's Farmers Market, Inc. ("Harry's" or the "Company") owns and operates
concept megastores and convenience stores specializing in perishable food
products -- fresh fruits and vegetables; fresh meats, poultry and seafood; fresh
bakery goods; freshly made ready-to-eat, ready-to-heat and ready-to-cook
prepared foods; and deli, cheese and dairy products.  Harry's stores also
feature lines of specialty, hard-to-find and gourmet nonperishable food products
that are complementary to the fresh food offerings.  In addition, the Company's
stores carry kitchen-oriented housewares, floral items, natural health and
beauty aids, and a full line of wines and imported and domestic beers.  The
Company's bakery and prepared foods departments are fully-integrated food
manufacturing operations.  The Company presently owns and operates three
megastores and three Harry's In A Hurry convenience stores, all in the Atlanta,
Georgia, metropolitan area. The Company has entered into certain leases to open
three additional Harry's in a Hurry stores during 1998, also in the Atlanta,
Georgia, metropolitan area.

HARRY'S MEGASTORES

   Harry's megastores are presently located in Alpharetta, Georgia; Gwinnett
County, Georgia and Cobb County, Georgia. Each megastore is within 30 miles of
downtown Atlanta.  The Alpharetta store, which opened in 1988, is housed in a
132,500 square foot facility with approximately 95,000 square feet devoted to
retailing and retailing support.  The Alpharetta facility also houses the
Company's receiving, inspection and distribution operations, prepared foods
manufacturing plant and corporate offices.  The Gwinnett County store, which
first opened in 1991 and was expanded in 1994, is a 95,000 square foot facility
devoted entirely to retailing and retailing support. During the latter part of
fiscal 1996, the Company utilized the expanded square footage to add a full line
of perishable and nonperishable ethnic foods.  The Cobb County store, which
opened in October 1993, is a 100,000 square foot facility, also entirely devoted
to retailing and retailing support.

   Harry's stores utilize an open warehouse format with high ceilings and fully
stocked bins, cases and shelves.  The store layout directs customers through
each department, maximizing buyer exposure to the full range of Harry's
products.  Shopping aisles are two to three times wider than those of the
typical grocery store to accommodate a higher traffic volume.  Fresh food work
spaces (produce preparation and meat and seafood cutting areas) are incorporated
onto the selling floor to enhance the open market atmosphere and animation,
although such areas are restricted from customer traffic flow.  Each store has
approximately 30 check-out stations.

HARRY'S IN A HURRY STORES

   To increase the retail outlets for Harry's manufactured products (bakery and
prepared food items), the Company operates three strategically located specialty
stores under the name "Harry's In A Hurry."  A 3,700 square foot Harry's In A
Hurry opened in the Buckhead area of Atlanta in June 1993.  A second 7,200
square foot Harry's In A Hurry opened in March 1994 approximately four miles
from the first Harry's In A Hurry and a third 15,000 square foot Harry's In A
Hurry opened in January 1998 in the Cobb County area of Atlanta.  These stores
carry a full range of 

                                      -1-
<PAGE>
 
Harry's bakery goods and prepared food items, a limited line of fresh food
products and selected complementary foods. The Harry's In A Hurry stores provide
more convenient, quick stop shopping for those customers less inclined to visit
the megastores. In addition, the Company plans to open a 15,400 square foot
Harry's In A Hurry in Dunwoody, Georgia during the summer of 1998 and, during
the last quarter of 1998, an 11,600 square foot Harry's In A Hurry in the
Virginia-Highland area of Atlanta and a 12,800 square foot Harry's In A Hurry in
Norcross, Georgia.

HARRY'S PRODUCTS AND DEPARTMENTS

   Harry's megastores are operationally divided into category-managed
departments, each of which is supervised by an experienced manager.  Each
department operates independently and has its own procedures and methods for
purchasing, receiving, storage and handling and merchandising.  The bakery and
prepared foods departments are fully integrated food manufacturing operations.
Substantial processing and food preparation are likewise involved in the
delicatessen, seafood, and meat and poultry departments.  Fresh produce is the
largest department of Harry's megastores, generating between 25 to 35 percent of
the total revenue.  Seafood, meat, staples and wine and beer are the next
largest departments.  No other department makes up more than eight percent of
any megastore's sales.  The following is an overview of the major departments.

  Perishable Products

     Fresh Fruits and Vegetables.  Harry's offers approximately 1,000 varieties
of fresh produce items during the year.  In addition to the traditional
selection of domestically grown fruits and vegetables, Harry's offers exotic
products from around the world, a full line of organically grown produce and
produce particular to ethnic cuisines.

     Most fresh produce offered at Harry's is purchased directly from growers
through a network of field buyers, some of whom are full-time employees of the
Company and the remainder are independent buying brokers.  Most of Harry's
produce is domestically grown, primarily in California, Arizona, Florida,
Washington, Texas and the East Coast, with the bulk of the remainder being
purchased from South American growers during off-growing season in the northern
hemisphere.  Small amounts of products are also purchased from European and
Middle Eastern countries.  A minimal amount of produce is also grown under
contract for Harry's.

     Approximately 35 percent of the produce offered at Harry's is transported
from the grower to the Company's receiving facility located at the Alpharetta
megastore under special arrangements with a single contract carrier, for whom
Harry's represented a major portion of revenues for such carrier's most recent
fiscal year.  Produce is picked up at the point of origin in, where appropriate,
refrigerated and temperature-monitored trucks.  Transportation requirements
usually are communicated to the carrier within hours of the purchase commitment.

     Incoming shipments are immediately off-loaded and directed to inspection
stations where trained produce inspectors sample and test incoming pallets for
quality and freshness.  Shipments or lots which do not meet Harry's rigorous
quality standards are immediately rejected.  In addition, incoming produce is
regularly sampled and tested by Nutriclean, an independent food testing

                                      -2-
<PAGE>
 
laboratory, for compliance with federal standards regarding toxic contamination
and pesticide and herbicide residues.

     After inspection, the fresh produce is moved to storage in one of six
separate temperature-controlled environments appropriate for maintaining
freshness of the various products.  The produce is also separated where there is
a risk of cross-contamination by taste or smell.  Produce is transported to the
stores as needed in temperature-controlled trucks.

     Fresh produce is displayed on the sales floor on movable bins/racks, with
temperature-sensitive items kept on beds of crushed ice.  Floor display
quantities are intentionally limited and controlled so that temperature-
sensitive items turn three to four times per day.  The produce displays are
continuously replenished from the temperature-controlled storage coolers and
hand-culled to remove bruised or damaged items.  At the end of each selling day,
the movable produce racks are returned to the appropriate temperature-controlled
storage environment.  To further ensure freshness, the entire selling floor is
maintained at temperatures substantially below normal room temperature.

     Fresh Meats and Poultry.  Harry's meat department carries a full range of
beef, pork, veal, lamb, chicken, turkey and other poultry items.  Harry's stores
feature Coleman(R) Natural Beef (Colorado grain-fed beef which utilizes no
antibiotics, growth stimulants or other additives) and Perdue(R) grain-fed
chicken.  Harry's also offers exotic meats and poultry such as beefalo, venison,
duck, goose, quail, free range chicken and capon, as well as a variety of fresh
processed meats such as sausage and ground beef.  All meat and poultry is
purchased and sold fresh, except immediately before major holidays, when demand
upon the production facilities of Harry's suppliers requires fresh-frozen
shipments.  Harry's maintains a strict "sell by" date policy on all cut meat and
poultry, and ground meat must be sold the day it is ground.

     Meat is purchased by an experienced in-house buyer; delivered in
refrigerated trucks; and received, inspected and stored at the Company's
Alpharetta megastore which is used as the central Distribution Center.  Beef,
pork, lamb and veal are purchased in vacuum-packed primal cuts; lamb is also
purchased in whole carcasses; and chicken and other poultry products are
purchased both as whole birds and in prepackaged, precut pieces.  Both full-
service and self-service (precut and packaged) meat cases are available in each
megastore.  Each megastore has its own meat-cutting room, and all machinery is
cleaned and sanitized twice each day.  Meat cases are cleared and cleaned
nightly.  Separate processing areas are maintained for beef, pork and chicken to
avoid cross-contamination, and meat and poultry cases are checked hourly for
proper temperature.

     Fresh Fish and Seafood.  Harry's carries one of the most extensive
selections of fresh fish and seafood in the country.  Each megastore typically
carries between 200 and 250 seafood items, including whole and filleted fish
(over 100 species); crustacea such as shrimp, lobster, crab and crayfish; and
mollusks such as oysters, clams, scallops, mussels, squid and octopus.  Lobster,
blue crab, shellfish and crayfish are often offered live.

     Seafood is purchased by the Company's in-house buyer from a variety of
sources including independent growers, producers, importers, packers, processors
and distributors.  The Company regularly purchases seafood from over 40
suppliers.  Fish is purchased whole and processed where appropriate (head-off,
scaled, filleted, de-boned) in the store.  Harry's seafood department also makes
daily fresh sushi, seafood dim sum and a variety of marinated seafood items.

                                      -3-
<PAGE>
 
     Generally, seafood requires the greatest degree of care to maintain
freshness and quality, and temperature control and handling are the most
important aspects of preserving quality. Seafood is centrally received at the
Company's Alpharetta store, where it is extensively inspected by an experienced
staff of seafood inspectors who examine it for conformity to species
specification, the presence of any foreign materials and apparent freshness
(eyes clear, no odor, no gill discoloration or trauma). Shipments are then
sampled and tested by lot for bacteriological and chemical contamination.

     Harry's seafood department is certified by the United States Department of
Commerce to inspect and grade its own seafood.  The Company currently has 21
HACCP (Hazard Assessment Critical Control Point) certified personnel who are
responsible for the grading and inspection.

     Bakery.  Harry's bakery department offers approximately 200 items which are
fresh baked daily at the Company's bakery facility.  The baking facility is
fully equipped with state-of-the-art industrial baking equipment.  Bakery
products currently include approximately 60 different breads, 15 different types
of hand-rolled bagels, more than 9 varieties of cookies, 10 kinds of muffins and
35 different cakes, pies and desserts.  Bakery items include traditional recipes
from around the world, as well as recipes developed exclusively by Harry's.

     More than 90 percent of the Company's manufactured bakery products are
produced fresh daily and removed from the shelves if not sold on the day made.
All bakery dough is made from scratch-blended ingredients (not from mixes) and
hand or machine shaped before being baked in commercial ovens.

     Prepared Foods.  Harry's manufactures and sells a broad range of ready-to-
eat, ready-to-heat and ready-to-cook fresh prepared foods.  This line of
approximately 300 products includes fresh pasta, ready-to-heat pizzas, pasta
sauces, fresh casseroles, lasagnas, filled pastas, quiches and a line of
refrigerated (not frozen) microwaveable meals marketed under the name "Harry's
Hungry In A Hurry Meals."

     Prepared foods facilities which serve more than two retail outlets with
meat or poultry products are subject to approval and inspection by the United
States Department of Agriculture ("USDA") as a food manufacturing facility.  On
June 27, 1993, the Company obtained approval and opened its USDA food
manufacturing facility located within the same building as the Alpharetta
megastore. During fiscal 1998, the Company had a USDA compliance inspection
record of 99.7%.

     All of Harry's prepared foods are made fresh in the Company's USDA-approved
food manufacturing facility.  Harry's kitchens make approximately 30 varieties
of prepared salad items (such as potato and pasta salads).  Recipes are
developed in-house by Harry's product development staff.  They are then
extensively documented for commercial production (including step-by-step
production instructions and quality control procedures) and tested for customer
acceptance.

     Deli, Cheese and Dairy.  Harry's carries more than 85 varieties of
delicatessen meats, and features the quality Boar's Head(R) brand.  The deli
also prepares fresh rotisserie chicken, barbecue, roast beef, knishes and baked
hams.  In addition, Harry's offers more than 300 varieties of cheeses from
around the world which are purchased in bulk from distributors and importers and
directly from cheese processors.  The Company believes that its stores offer one
of the largest selections of 

                                      -4-
<PAGE>
 
cheeses in the southeastern United States. Harry's also offers a broad range of
dairy items such as milk, yogurt, cottage cheese, ice cream and butter.

  Nonperishable Products

     Staples, Housewares and Health and Beauty Aids.  Harry's offers a selection
of nonperishable food products generally consisting of hard-to-find and gourmet
items, natural products and foods useful in the preparation of ethnic cuisines
that are complementary to its fresh food offerings.  Harry's also carries a full
line of gourmet coffees.

     A limited line of quality kitchen-oriented housewares is also offered at
Harry's, including gourmet utensils and gadgets.  Harry's stores also feature
more than 150 health and beauty aid items, primarily natural products and
products marketed to the environmentally sensitive consumer.  Additionally,
Harry's stores feature a broad selection of blooming, in-pot and fresh cut
flowers and decorative plants which are purchased directly from growers both
domestically and abroad.

     Wine and Beer.  Harry's megastores offer a selection of more than 1,800
different foreign and domestic wines (including vintages) and more than 150
brands of domestic and imported beers, with Harry's in a Hurry stores offering a
somewhat smaller selection.

     The following table indicates sales (rounded to the nearest thousand) and
percentage of total revenues contributed by perishable and nonperishable
products for each of the last three fiscal years:

<TABLE>
<CAPTION>

MAJOR PRODUCT CATEGORY             FISCAL 1998 SALES     %       FISCAL 1997 SALES       %      FISCAL 1996 SALES       %
<S>                                <C>                  <C>      <C>                    <C>     <C>                    <C>
Perishables(1)                         $110,561,000     81%           $113,838,000      81%          $117,530,000      81%
Staples and Nonperishables(2)            26,438,000     19              26,324,000      19             28,408,000      19
</TABLE>
__________________
(1) Includes fresh fruits, vegetables, meats and poultry, fish and seafood,
    bakery and fresh prepared food items, cheeses, deli items, dairy products,
    flowers and coffee.
(2) Includes nonperishable food items, wine and beer, housewares, health and
    beauty aids and other complementary nonperishables.

MARKETING AND ADVERTISING

   While the Company participates in some traditional campaign-style media,
including print, billboard and broadcast, it spends less on traditional
advertising than is normative in the supermarket industry. In management's
opinion, non-traditional methods such as community involvement, promotional
events, local event sponsorship, newcomer programs and alliances with area
schools maintain and improve customer counts and sales volumes without the
expense typically associated with large media campaigns.  Harry's employs in-
store promotional activities, such as product sampling, cooking demonstrations,
educational materials and signage. During fiscal 1999, the Company plans to
continue to expand its marketing initiatives to more fully take advantage of
current programs and to optimize vendor and community relationships.

                                      -5-
<PAGE>
 
EMPLOYEES AND EMPLOYEE TRAINING

   The Company currently employs 1,221 people, of whom 82 percent are full-time
employees.  Approximately 202 employees are salaried, with the remainder being
paid on an hourly basis.  The Company believes that it devotes more time and
expense to the training and education of its employees, both in the operations
process and in product information, than does the typical food retailer.
Accordingly, the Company stresses the importance of maintaining and retaining a
greater portion of its workforce as full-time employees.  The Company has
devised, documented and implemented formal training procedures in areas such as
equipment operation, product handling and sanitation and product information.
None of the Company's employees are represented by a union and the Company
believes its employee relations are satisfactory.

COMPETITION

   The Company competes in the Atlanta metropolitan market area with traditional
grocery stores and supermarkets, other farmer's market format retailers,
specialty food shops such as butchers, bakeries, produce stands and seafood
shops, and home meal replacement retailers.  Competition for the consumer's food
dollar is generally intense and has increased in recent years with the entrance
of more regional chains in the Company's market area.  General food retailers
such as grocers and supermarkets compete primarily on the basis of promotional
pricing, convenience to the customer of location and one-stop shopping, and, to
a lesser extent, product selection and quality.  Farmer's markets and specialty
food shops compete primarily on the basis of quality and selection of products
and, to a lesser extent, price.  Club stores compete primarily on the basis of
price.  Harry's competitive strategy is to be unmatched in the freshness and
quality of its products and unequaled in the selection and overall pricing and
value of its products.  The Company's Harry's in a Hurry stores compete
favorably, in management's opinion, with both convenience outlets, restaurants
and traditional supermarkets.

GOVERNMENT REGULATION

   The distribution and sale of meat, poultry and dairy products and fresh
produce are regulated and subject to inspection by the USDA under, among others,
the Federal Meat Inspection Act and the Federal Poultry Products Inspection Act
and by various state agencies under applicable state legislation.  The USDA has
delegated its inspection responsibility to the states for fresh produce and
dairy products and for meat and poultry processing and handling facilities which
do not serve more than two retail outlets.  Meat or poultry processing
facilities which serve more than two retail outlets are subject to direct
inspection and approval by the USDA.

   The Company's seafood operations participate voluntarily in the United States
Department of Commerce self-inspection and rating program (HACCP), which
subjects it to standard specification and inspection by that agency.
Participation in the voluntary program permits the Company to label its fresh
seafood with the governmentally approved "Grade A" stamp.  The Company currently
has approximately 21 HACCP (Hazard Assessment Critical Control Point) certified
personnel who are responsible for such grading and inspection.

   In May 1994, all preparers of packaged foods were required to comply with the
federal Nutrition Labeling and Education Act, which requires that the labeling
of all manufactured food items must display specific nutritional content
information. Compliance with such act requires the Company to conduct extensive
testing of its prepared food items to determine the nutritional 

                                      -6-
<PAGE>
 
content and requires exact portion control of prepared food items. The Company
complies with all regulations under this act. Additionally, the Company
voluntarily complies with nonmandatory consumer information regulations under
this act, which provide for in-store posting of generic information on the
nutritional content of selected fruits and vegetables, meat, poultry and
seafood.

   The Company's relationship with its fresh food suppliers with respect to the
grading and commercial acceptance of product shipments is governed by the
federal Produce and Agricultural Commodities Act, which specifies standards for
sale, shipment, inspection and rejection of agricultural products.  The Company
is also subject to regulation by state authorities for accuracy of its weighing
and measuring devices.

   Management believes that the Company is currently in substantial compliance
with all applicable government regulations.

OFFICERS

   The officers of the Company are as follows:

   Name                  Position with Company
   ----                  ---------------------

   Harry A. Blazer       Chairman, President and Chief Executive Officer

   Harold C. Weissman    Treasurer and Chief Financial Officer

   John L. Latham        Corporate Secretary and General Counsel
_______________

   HARRY A. BLAZER, age 47, was the founder of the Company and served as the
sole General Partner of the predecessor to the Company and as Chief Executive
Officer from its inception in 1987.  Upon the Company's incorporation in 1993,
Mr. Blazer was named a director and President and Chief Executive Officer.  In
June 1994, Mr. Blazer was elected to the additional office of Chairman.  From
1979 to 1987, Mr. Blazer was employed at DeKalb Farmer's Market in Atlanta and
served as its General Manager from 1983 until he left to form the Company.
 
   HAROLD C. WEISSMAN, age 44, is a native of Atlanta, Georgia.  Mr. Weissman
graduated in 1976 from the University of Georgia with a B.B.A. in Accounting.
Mr. Weissman acquired an extensive background in bank auditing while employed
with Grant Thornton, LLP. and ten years of experience as controller for various
manufacturing firms.  Mr. Weissman joined the Company in 1990 spending nearly
one year in operations before becoming Director of Accounting in 1991. Mr.
Weissman was appointed Treasurer in 1995 and Chief Financial Officer in 1996.

   JOHN L. LATHAM, age 43, was appointed Secretary and General Counsel for the
Company in September 1995. From 1992 until 1996, Mr. Latham had been a partner
in the firm of Nelson Mullins Riley & Scarborough, L.L.P.  In August 1996 Mr.
Latham joined as a partner to the firm Alston & Bird LLP which now serves as
general counsel for the Company.

                                      -7-
<PAGE>
 
ITEM 2. PROPERTIES.
------  -----------

   Each of the Company's three present megastore sites is owned by the Company.
The 132,500 square foot Alpharetta site houses the Alpharetta megastore, which
has 95,000 square feet devoted to retailing and retailing support, the Company's
corporate offices, receiving, inspection, distribution operations and the
prepared foods manufacturing plant.  The Gwinnett County site and the Cobb
County site each house megastores, utilizing 95,000 square feet and 100,000
square feet, respectively.  The Gwinnett megastore was expanded in 1994 to its
current size.  Both the Gwinnett and Cobb megastores are devoted entirely to
retailing and retailing support.

   The 151,000 square foot Company-owned Distribution facility located
approximately two miles from the Alpharetta store houses the Company's baking
operation, which currently utilizes approximately 55,000 square feet of the
facility. The Company has decided to relocate such bakery facility to its 
Alpharetta store during fiscal 1999. Accordingly, the entire facility has been 
offered for sale or lease. At January 28, 1998, approximately 45,000 square feet
was leased to a third party through May 2000. 

   The Company leases each of the three existing Harry's In A Hurry locations in
Atlanta.  The first Harry's In A Hurry contains 3,700 square feet, is located on
Peachtree Road in the Buckhead area of Atlanta and is leased through 2002.  The
second Harry's In A Hurry location, which is leased with options through 2019,
contains 7,200 square feet and also is located in the Buckhead area of Atlanta,
approximately four miles north of the first location.  The third Harry's In A
Hurry location is 15,000 square feet, is located on Cobb Parkway in the Marietta
area of Atlanta and is leased through 2007 with options through 2017.  The
fourth Harry's In A Hurry location will be approximately 15,400 square feet and
is to be located off Mount Vernon Road in the Dunwoody area of Atlanta.  The
lease on such property is through 2008.  The fifth Harry's In A Hurry location,
which is also leased through 2008, will be approximately 11,600 square feet, and
is located on Ponce deLeon Avenue in the Virginia-Highland area of Atlanta.  The
sixth Harry's In A Hurry location, which is leased through 2008, with options
through 2018, will be approximately 12,800 square feet and is located on
Spalding drive in the Norcross area of Atlanta.

ITEM 3. LEGAL PROCEEDINGS.
------  ----------------- 

   There are no (i) material legal proceedings to which the Company is a party
or to which its properties are subject; (ii) material proceedings known to the
Company to be contemplated by any governmental authority; (iii) material
proceedings known to the Company, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of the Company,
or any associate of any of the foregoing is a party or has an interest adverse
to the Company.

                                      -8-
<PAGE>
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------  --------------------------------------------------- 

   No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended January 28, 1998.


                                    PART II

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

   The Company's Class A Common Stock is traded on the NASDAQ National Market
under the symbol "HARY".  There is no established public trading market for the
Company's Class B Common Stock.  The following tables set forth, by fiscal
quarter, the high and low sales prices of the Class A Common Stock reported by
the NASDAQ National Market for the two most recent fiscal years.


<TABLE>
<CAPTION>

Fiscal Year Ended January 28, 1998                High Sale     Low Sale
------------------------------------------------  ---------     --------
<S>                                               <C>           <C>
First Quarter ended April 30, 1997                $  8 1/2       $  3 3/4
Second Quarter ended July 30, 1997                   4 5/8          3 1/8
Third Quarter ended October 29, 1997                 3 13/16        2 1/4
Fourth Quarter ended January 28, 1998                3 1/8          1
</TABLE> 

<TABLE> 
<CAPTION> 

FISCAL YEAR ENDED JANUARY 29, 1997                High Sale      Low Sale
------------------------------------------------  ---------      --------
<S>                                               <C>            <C>
First Quarter ended May 1, 1996                   $  3 7/8       $  2 1/2
Second Quarter ended July 31, 1996                   6 1/4          2 3/8
Third Quarter ended October 30, 1996                 5 1/8          3 1/4
Fourth Quarter ended January 29, 1997                4              2 1/4
</TABLE>

   On April 23, 1998, the closing sales price for the Class A Common Stock as
reported by the NASDAQ National Market was $1.75 per share.  The Company had 857
record holders and approximately 6,200 beneficial holders of its Class A Common
Stock as of April 23, 1998, and two record and beneficial holders of its Class B
Common Stock.  The Company has not declared or paid any cash dividend on either
class of its Common Stock.  The policy of the Board of Directors of the Company
is to retain future earnings for use in operations and, if available, for the
expansion and development of the Company's business.  The Company's primary
credit facility prohibits the payment of dividends without the consent of the
lenders.  Future dividend policy and the payment of dividends, if any, will be
determined by the Board of Directors in light of 

                                      -9-
<PAGE>
 
circumstances then existing, including the Company's earnings, financial
condition, contractual restrictions and other factors deemed relevant by the
Board.

ITEM 6. SELECTED FINANCIAL DATA.

   The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED              
                                             ----------------------------------------------------------------------------------
                                              JANUARY 28,     JANUARY 29,     JANUARY 31,        FEBRUARY 1,        FEBRUARY 2,
                                                 1998            1997            1996               1995               1994
                                             ----------------------------------------------------------------------------------
STATEMENT OF OPERATIONS INFORMATION:                                (in thousands, except per share data)
-----------------------------------
<S>                                          <C>             <C>             <C>                <C>                <C>
Net sales..................................     $136,999         $140,162          $145,938          $143,814          $116,717
Cost of goods sold.........................      102,320          104,363           109,845           109,364            88,796
                                                --------         --------          --------          --------          --------
Gross profits..............................       34,679           35,799            36,093            34,450            27,921
Operating expenses.........................       42,318           36,002            43,677            38,301            32,570
                                                --------         --------          --------          --------          --------
Operating profit (loss)....................       (7,639)            (203)           (7,584)           (3,851)           (4,649)
Interest expense...........................       (2,254)          (2,600)           (3,198)           (3,032)             (840)
Other income...............................        4,026            1,321               906               159               656
                                                --------         --------          --------          --------          --------
Earnings (loss) before income taxes........       (5,867)          (1,482)           (9,876)           (6,724)           (4,833)
Income taxes...............................          -0-              -0-               -0-               -0-               -0-
                                                --------         --------          --------          --------          --------
Net earnings (loss)........................       (5,867)          (1,482)           (9,876)           (6,724)           (4,833)
Provision for Accretion of Warrants........         (148)            (229)             (229)              (19)              -0-
                                                --------         --------          --------          --------          --------
Net earnings (loss) applicable to
  common shareholders......................     $ (6,015)        $ (1,711)         $(10,105)         $ (6,743)         $ (4,833)
                                                ========         ========          ========          ========          ========
Net earnings (loss) per share..............     $  (0.97)        $  (0.28)         $  (1.64)         $  (1.09)         $  (0.86)
                                                ========         ========          ========          ========          ========
Weighted average shares outstanding........        6,183            6,168             6,167              6164             5,595
</TABLE>

<TABLE> 
<CAPTION> 
                                                                                     AS OF              
                                             ----------------------------------------------------------------------------------
                                              JANUARY 28,     JANUARY 29,     JANUARY 31,        FEBRUARY 1,        FEBRUARY 2,
                                                 1998            1997            1996               1995               1994
                                             ----------------------------------------------------------------------------------
<S>                                          <C>              <C>             <C>                <C>                <C> 
BALANCE SHEET INFORMATION:                 
-------------------------
Working capital (deficit)..................      $ 3,102          $ 4,009           $  (110)          $ 3,456           $(4,312)
Property and equipment, net................       38,046           45,817            49,380            59,145            65,157
Total assets...............................       57,247           60,428            66,963            76,102            78,870
Long-Term obligations, net of
  current maturities.......................       13,359           26,225            28,789            30,502            29,073
Convertible Debt...........................       13,042               --                --                --                --
Redeemable convertible preferred stock.....       10,434           10,352            10,124             9,895                --
Stockholders' equity.......................       11,528           16,330            17,666            27,756            33,880
</TABLE>

                                      -10-
<PAGE>
 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------  ---------------------------------------------------------------
        RESULTS OF OPERATIONS.
        --------------------- 

GENERAL

        The Company opened its first megastore, with an initial size of 63,000
square feet, in July 1988 in Alpharetta, Georgia.  In May 1991, the Company
expanded this facility to 132,500 square feet (approximately 95,000 square feet
of retailing space).  In October 1991, the Company opened a 60,000 square foot
megastore in Gwinnett County, Georgia.  In 1994, the Company expanded this
facility to 95,000 square feet.  In October 1993, the Company opened its third
megastore, a 100,000 square foot facility located in Cobb County, Georgia.  In
June 1993, the Company opened its first Harry's In A Hurry store, a 3,700 square
foot convenience store.  In March 1994, the Company opened its second Harry's In
A Hurry store, a 7,200 square foot convenience store and in January 1998, the
Company opened its third Harry's In A Hurry store, a 15,000 square foot
convenience store.  A fourth megastore was opened in May 1995 in Clayton County,
Georgia but was subsequently closed in November 1995 due to insufficient sales
volume to cover operating expenses of the store.  Currently, the Company has
three megastores and three convenience stores in the metropolitan Atlanta area.
The Company plans to open its fourth, fifth and sixth Harry's in a Hurry stores
in Dunwoody, Georgia, the Virginia-Highland area of Atlanta, Georgia and
Norcross, Georgia before the end of the fourth quarter of fiscal 1999 which
stores will be approximately 15,400, 11,600 and 12,800 square feet,
respectively. Net sales for the Company have increased from $98.9 million in
fiscal 1993 to $136.9 million in fiscal 1998.

   The closing of the Clayton County megastore combined with other factors
resulted in the Company having a loss for fiscal 1996. In order to reverse this
trend of losses as well as a decline in same store sales, the Company had taken
several actions. These actions included a reduction in the number of people
employed in the Company's general and administrative areas, consolidating the
produce inspection and distribution as well as meat, deli and dairy distribution
to the Alpharetta store, introduction of new prepared food items, an expanded
home replacement meal program, a hot bread program, new merchandising
initiatives, better operational performance at store level through higher
employee morale, a more cohesive management team and a focused effort to reduce
waste at the Company's manufacturing facilities and in its stores.  During
fiscal 1996, the Company introduced nearly 50 new prepared food products which
were more new products than in all of the last two years while at the same time
continuing to improve quality.    The Company also introduced a new label to be
used for bakery and prepared food items, new product signage and a totally new
packaging system to ensure an even fresher, more tamper resistant and more cost
efficient product.

   Fiscal 1997 consisted of maintaining and improving many of the initiatives
implemented during fiscal 1996.  Improving the merchandising efforts as well as
controlling the manufacturing expenses was a high priority for fiscal 1997.  The
Company focused on new management information systems in an effort to gain more
timely information to affect quicker decision making.  In addition, during
fiscal 1997, the Company attempted to utilize the excess capacity of its
manufacturing facilities by producing goods for sale by third-party retailers.
The Company also spent the summer of fiscal 1997 supplying many events related
to the Olympic games in the Atlanta metropolitan area.

                                      -11-
<PAGE>
 
   Fiscal 1998 was a year for growth and strategic planning in several major
areas for the Company.  First, the Company entered into several agreements with
Progressive Food Concepts, Inc. ("PFCI") as described below.  Secondly,
management of the Company decided to emphasize newcomer awareness to its stores,
more shopper convenience and local community involvement in its marketing
endeavors.  In addition, operational improvements were made to minimize waste
and maximize gross profit by product categories, while overall better
manufacturing utilization was a focal point of the Company's operations.
Furthermore, the Company's MIS department helped develop more timely and
accurate management reporting through the Company's intranet which provided
quick and precise on-line information to management to assist with the
aforementioned initiatives.  Finally, the implementation of a comprehensive
tracking system for the products being sold at the Harry's In A Hurry stores was
initiated during 1998, in order to assist the Company with properly and
efficiently opening the new Harry's In A Hurry stores during fiscal 1999.

   On January 31, 1997, the Company entered into a series of agreements with
PFCI, a majority owned subsidiary of Boston Chicken, Inc. formed for the purpose
of consummating such transaction (the "January Transaction").  In accordance
with the terms of the January Transaction, PFCI agreed to invest in the Company
in the form of (i) a $12 million refinancing loan, which was funded on January
31, 1997, and was exchangeable for shares of the Company's series B convertible
preferred stock, convertible into an aggregate of 3,000,000 shares of the
Company's Class A common stock, no par value ("Class A Common Stock"), and (ii)
a commitment to loan up to an additional $8 million in a development loan (the
"Development Loan"), which was exchangeable for shares of series B convertible
preferred stock of the Company, convertible into an aggregate of 2,000,000
shares of Class A Common Stock.  PFCI also purchased a warrant for $1.0 million
to purchase up to an additional 2,000,000 shares of Class A Common Stock (the
"Warrant") at exercise prices ranging from $4.00 to $5.50.  In addition, in
exchange for $1.5 million and a 2.5% equity interest in PFCI,  PFCI acquired the
beneficial interest in, and a royalty-free license to use, all of the Company's
intellectual property  rights outside the States of Georgia and Alabama.
Finally, the Company entered into a $0.5 million, five-year mutual consulting
arrangement with PFCI (the "Consulting Agreement").  See "-- Liquidity and
Capital Resources."

   On November 3, 1997, the Company entered into a series of further agreements
with PFCI pursuant to which the two entities amended and restructured certain
aspects of the January Transaction.  In accordance with such amendments, as more
particularly described below, PFCI has redeemed the 2.5% interest the Company
held in PFCI, as consideration for (i) PFCI's payment of $2.5 million, (ii) the
funding of $2.5 million under that certain Development Loan between the two
entities, (iii) the commitment by PFCI to make available to the Company $4.0
million under the Development Loan, as described below, within the next twelve
months, and (v) beginning in 1999, the Company's right to use certain
intellectual property, including the trademarks and developmental rights to the
Harry's Farmers Market and Harry's In A Hurry concepts, which had been sold to
PFCI in the January Transaction (collectively, the "Restructuring").

   The Company and PFCI amended the loan agreements between the parties whereby
the Company, using a portion of the consideration described above, repaid $2.5
million to reduce outstanding indebtedness under the Development Loan, of which
$1.5 million is currently outstanding.  PFCI has committed to loan the remaining
funds under the Development Loan to the Company by funding $2.0 million on May
3, 1998 and $2.0 million on November 3, 1998. The Development Loan is to be used
by the Company to fund expenditures in connection with the Consulting Agreement,
for refurbishment of existing Company stores, for development of new Harry's In
A Hurry stores and for general corporate purposes.

                                      -12-
<PAGE>
 
   As part of the January Transaction, the Company transferred certain federal
and state registered and unregistered trademarks, trademark applications,
registered and unregistered service marks, service mark trademarks, trade names,
trade name rights, copyrights, trade secrets and know-how and other proprietary
information of the Company (the "Intellectual Property") to a newly organized
business trust (the "Trust").  The Trust then issued to the Company two
ownership certificates, one of which entitled the holder to beneficial ownership
of, and a license to use, the Intellectual Property in the states of Georgia and
Alabama and one of which (the "Worldwide Certificate") entitled the holder to
beneficial ownership of, and a license to use, the Intellectual Property
throughout the rest of the world.  The Company then transferred the Worldwide
Certificate to PFCI.

   As a result of the Restructuring, and the redemption of the 712.3746 shares
of PFCI previously held by the Company, the Company's rights to use the
Intellectual Property were expanded.  Beginning on November 3, 1999, the Company
will be entitled to use the Intellectual Property, on a non-exclusive basis, in
the states of Tennessee, North Carolina and South Carolina.  However, in such
states, the Company will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name (the
"Harry's Marks") effective immediately.  Also on November 3, 1999, the Company's
exclusive rights to use the Intellectual Property in the states of Georgia and
Alabama ceases, notwithstanding the continued exclusivity on behalf of the
Company to the Harry's Marks in such states.  In addition, on January 31, 2004,
the Company will be entitled to use the Intellectual Property, on a non-
exclusive basis, throughout the world; provided however, that the Company's
exclusive right to use the Harry's Marks on a worldwide basis are subject to
PFCI having not made the decision to use the Harry's Marks by such time.

   The statements which are not historical facts contained in this Annual Report
on Form 10-K are forward looking statements that involve risks and
uncertainties, including, but not limited to, the effect of weather, the effect
of economic conditions, the impact of competitive products, services, pricing
capacity and supply constraints or difficulties, the impact of advertising and
promotional activities and the effect of the Company's accounting policies.

   The Company's fiscal year ends on the Wednesday nearest January 31.  Fiscal
1998 ended on January 28, 1998, fiscal 1997 ended on January 29, 1997 and
fiscal 1996 ended on January 31, 1996.

RESULTS OF OPERATIONS

   The following table sets forth the percentage relationship to net sales of
the listed items included in the Company's consolidated statements of operation:

                                      -13-
<PAGE>
 
<TABLE>
<CAPTION>
                                                            ---------------------------------------------
                                                            JANUARY 28,       JANUARY 29,     JANUARY 31,
                                                               1998              1997            1996
                                                            ---------------------------------------------
<S>                                                         <C>               <C>             <C>
Net sales..............................................       100.0%            100.0%            100.0%
Cost of goods sold.....................................        74.7              74.5              75.3
                                                              -----             -----             -----
   Gross profit........................................        25.3              25.5              24.7
Operating Expenses
   Direct store expenses...............................        17.0              15.4              15.8
   Selling, general and administrative expenses........         9.3               7.8               8.1
   Depreciation and other amortization.................         2.5               2.4               2.6
   Amortization of pre-opening expenses................         0.0               0.0               0.3
   Provision for Store Closing.........................         0.0               0.0               3.1
   Impairment Loss.....................................         2.1               0.0               0.0
                                                              -----             -----             -----
        Loss from Operations...........................        (5.6)             (0.1)             (5.2)
Other income (expense)
   Interest expense....................................        (1.6)             (1.9)             (2.2)
   Other income........................................         2.9               1.0               0.6
Income taxes...........................................         0.0               0.0               0.0
                                                              -----             -----             -----
         Net (loss)....................................        (4.3)%            (1.0)%            (6.8)%
                                                              =====             =====             =====
</TABLE>


Comparison of Fiscal 1998 to Fiscal 1997
----------------------------------------

    Net sales in fiscal 1998 decreased 2.3% to $136.9 million from $140.2
million in fiscal 1997.  Comparable store sales decreased 1.5% for the year.
This decrease is primarily the result of the inclusion in fiscal 1997 of
approximately $1.2 million of revenues directly associated with the 1996 Olympic
and Paralympic Games in the Atlanta metropolitan area.  Additionally, during
fiscal 1997, the Company indirectly benefited by increased sales during the
Olympic and Paralympic Games.  Increased competition in the Atlanta area during
fiscal 1998 also contributed towards lower sales during such period.

    Gross profit as a percentage of net sales in fiscal 1998 decreased to
approximately $34.7 million or 25.3% from approximately $35.8 million or 25.5%
in fiscal 1997.  This decrease resulted mainly from the Company's efforts during
fiscal 1998 to markdown and close out slow moving non-perishable merchandise,
which accounted for approximately $0.8 million of the decrease.  In addition,
gross profit during fiscal 1997 was enhanced by approximately $0.3 million as a
result of certain adjustments to workers' compensation expense.

    Direct store expenses increased to approximately $23.3 million or 17.0% of
net sales in fiscal 1998 from approximately $21.6 million or 15.4% of net sales
for fiscal 1997.  During fiscal 1998 direct store expenses were higher as a
result of (i) higher labor and labor related expenses due to (a) wage increases,
(b) one-time costs related to additional labor hours (time spent in addition to
regular duties) for training and consulting with PFCI employees and consultants
and (c) personnel expenses relating to the new Harry's In A Hurry store which
opened in January 1998, which although one-time costs, as relates to the new
store, similar costs may occur with the anticipated additional new stores, (ii)
increased workers' compensation expense due to retrospective workers'
compensation adjustments, (iii) higher repairs and maintenance expenses as a
result of the implementation of a more preventive maintenance program for
extending the useful lives of the assets, and (iv) rent for the new Harry's in a
Hurry store which opened in January 1998.  These expenses were partially offset
with (i) a decrease in the cost of supplies, as a result of the 

                                      -14-
<PAGE>
 
Company's continuing efforts to improve operating efficiencies and (ii) a
decrease in lease expenses as a result of certain operating leases expiring
prior to or during fiscal 1998.

   Selling, general and administrative expense for fiscal 1998 increased to
approximately $12.7 million or 9.3% of net sales from approximately $10.9
million or 7.8% of net sales for fiscal 1997.  The increase in fiscal 1998 is
primarily attributable to  (i) higher labor and labor related expenses incurred
as a result of adding new personnel to support growth, including the costs
related to the hiring process for such employees, (ii) higher consulting costs
directly relating to the development of new management information systems and
the training of new personnel for the new Harry's In A Hurry store, (iii) higher
professional expenses in preparation for the new Harry's In A Hurry locations,
(iv) higher repairs and maintenance expenses, (v) additional advertising costs,
as the Company increased its market exposure, and (vi) higher bank fees due to
an increase in credit card purchases by the Company's customers.  These expenses
were partially off set with a decrease in the cost of supplies and general
insurance.

    Depreciation and amortization, which includes depreciation and amortization
for the stores and the corporate facilities but not manufacturing (which is
included in cost of goods sold) remained relatively unchanged in fiscal 1998 at
approximately $3.45 million or 2.5% as a percentage of net sales as compared to
approximately $3.44 million or 2.4% in fiscal 1997.  This slight increase
resulted from additional depreciation on new assets purchased during fiscal
1998.

    The Company recorded a loss on the impairment of its bakery and distribution
center of approximately $2.9 million or 2.1% of net sales.  The book value of
this asset has been adjusted to reflect the amount the Company could expect upon
its sale.

    Due to reasons set forth above, in fiscal 1998 the Company had an operating
loss of approximately $7.6 million or (5.6)% of net sales as compared to an
operating loss in fiscal 1997 of approximately $0.2 million or (0.1)%.

    Interest expense in fiscal 1998 decreased to approximately $2.3 million or
1.6% of net sales in fiscal 1998 from approximately $2.6 million or 1.9% in
fiscal 1997.  This decrease is primarily attributable to the January Transaction
between the Company and PFCI, whereby the Company used approximately $13.0
million of proceeds to repay a portion of its bank term loan.  Such bank term
loan was bearing interest at LIBOR plus 3.5% or prime plus 1.5%, which resulted
in an effective rate of interest of 9.0% at January 29, 1997.   The amounts now
outstanding under the Loan Agreement with PFCI, as further described below, bear
interest at 5.0% per annum, which has resulted in a significant decrease in the
Company's borrowing rate.

   Other income in fiscal 1998 decreased to approximately $1.0 million or 0.7%
of net sales compared to approximately $1.3 million or 1.0% of net sales in
fiscal 1997.  This decrease is primarily due to a gain in fiscal 1997 of an
aggregate of approximately $0.4 million from the sale of an outparcel at the
Gwinnett megastore and the Nashville, Tennessee property, while during fiscal
1998, the Company recognized approximately $0.1 million of consulting income
from PFCI.  In addition, the Company received rental income from the shopping
center it currently owns in Cobb County, Georgia, at which the Cobb County
megastore is a major component.  Rent received during fiscal 1998 and fiscal
1997 was approximately $0.86 million and $0.85 million, respectively, which
amounts are net of the Cobb County megastore rent.  The shopping center is
currently approximately 99.4% occupied.

                                      -15-
<PAGE>
 
   In addition to the other income described above, during fiscal 1998, the
Company sold certain intellectual property in the amount of approximately $1.4
million, net of expenses, to PFCI, and recognized $2.5 million from the
redemption of the 2.5% interest the Company held in PFCI during the
Restructuring. The Company has also increased its allowance for doubtful
accounts during 1998 by approximately $0.9 million or 0.7% of net sales to cover
potential losses in connection with notes receivable from its principal supplier
of premium quality tomatoes.

   In fiscal 1998 the Company owed no income taxes as the Company incurred a net
loss.  The Company has net operating loss carry forwards of approximately $23.5
million which may be applied against future earnings.

   As a result of the above, the Company's operations generated a net loss for
fiscal 1998 of approximately $6.0 million or ($0.97) per common share compared
with a net loss of approximately $1.7 million, or ($0.28) per common share for
fiscal 1997.

Comparison of Fiscal 1997 to Fiscal 1996
----------------------------------------

   Net sales in fiscal 1997 decreased 4.0% to $140.2 million from $146.0 million
in fiscal 1996.  This decrease is primarily the result of the inclusion in
fiscal 1996 of approximately $8.7 million of revenues associated with the
opening of the Clayton County megastore in May 1995 and was subsequently closed
in November 1995.  However, the 1997 fiscal year included approximately $1.2
million of business related to the 1996 Olympic and Paralympic Games in the
Atlanta metropolitan area.  Comparable store sales increased 0.8% for the year.
This increase can be attributed to improved marketing and merchandising efforts
partially offset from extreme weather conditions during the first Quarter of
fiscal 1997, as well as growing competition in the Atlanta area.

   Gross profit as a percentage of net sales in fiscal 1997 increased to 25.5 %
in fiscal 1997 from 24.7% in fiscal 1996.  This increase resulted mainly from
improvements in operational efficiencies, in particular, manufacturing,
distribution and procurement.  Despite the continued under-utilization of
manufacturing and distribution facilities, continued improvement has occurred.
However, due to the inclusion of revenues from the Clayton County megastore in
fiscal 1996, gross profit decreased to approximately $35.8 million in fiscal
1997 from approximately $36.1 million in fiscal 1996.  Gross profit during
fiscal 1997 was enhanced by approximately $0.3 million as a result of
adjustments to workers' compensation expense (the "Workers' Compensation
Adjustments"), which adjustment is the result of the Company's better than
expected claim experience in workers' compensation.  In addition, gross profit
during fiscal 1996 was adversely affected due to above normal waste and
promotional pricing associated with the opening of the Clayton County megastore.

   Direct store expenses decreased to approximately $21.6 million or 15.4% as a
percentage of net sales in fiscal 1997 from approximately $23.1 million or 15.8%
for fiscal 1996.  This was primarily due to a reduction in fiscal 1997 of
approximately $1.4 million of labor and labor related expenses primarily due to
the fiscal 1996 opening the Clayton County megastore.  In addition, fiscal 1997
direct store expenses were reduced by $0.2 million as a result of the Workers'
Compensation Adjustments.

                                      -16-
<PAGE>
 
   Selling, general and administrative expenses in fiscal 1997 decreased to
approximately $10.9 million or 7.8% as a percentage of net sales from
approximately $11.8 million or 8.1% for fiscal 1996.  The decrease is primarily
attributable to lower labor and labor related expenses.  In addition, selling,
general and administrative expenses for fiscal 1997 contains a favorable
adjustment of approximately $0.1 million due to certain workers' compensation
adjustments.

   Depreciation and amortization, which includes depreciation and amortization
for the stores and the corporate facilities but not manufacturing (which is
included in cost of goods sold) declined to approximately $3.5 million or 2.4%
as a percentage of net sales from approximately $3.8 million or 2.6% in fiscal
1996.  This reduction resulted from the physical transfer and reclassification
of assets and depreciation expense from stores to other property and equipment
which has been taken out of service and is not currently being depreciated and
from certain other assets becoming fully depreciated prior to or during fiscal
1997.  Fiscal 1996 also included approximately $0.4 million or 0.3% of net sales
of pre-opening expenses for the Clayton County megastore.

   Due to reasons set forth above, the Company in fiscal 1997 had an operating
loss of approximately $0.2 million or (0.1)% of net sales as compared to an
operating loss in fiscal 1996 of approximately $7.6 million or (5.2)%.

   Interest expense decreased to approximately $2.6 million or 1.9% of net sales
in fiscal 1997 from approximately $3.2 million or 2.2% in fiscal 1996.  This
decrease is primarily attributable to the reduction in long term obligations
from proceeds received from the sale of: (i) the Clayton County megastore, (ii)
one outparcel at the Gwinnett County megastore and (iii) the sale of the
Nashville, Tennessee property.  In addition, in December 1996, the Company
refinanced it bakery/distribution facility at a lower interest rate over a loan
period of 15 years.  The Company believes that this will also reduce interest
expense in future months.

   Other income in fiscal 1997 increased to approximately $1.3 million or 1.0%
of net sales from approximately $0.9 million or 0.6% in fiscal 1996.  The major
component of the increase is a gain on the sales of the Gwinnett County
outparcel and the Nashville, Tennessee property.  Included in other income is
rental income received from the shopping center the Company owns in Cobb County,
Georgia, at which the Cobb County megastore is a major component.  Rent received
during fiscal 1997 and 1996 exceeded $850,000 and $825,000 respectively, which
amounts are net of the Cobb County megastore rent.  The shopping center is
approximately 97% occupied at this time.

   In fiscal 1997 the Company owed no income taxes as the Company incurred a net
loss.  The Company has net operating loss carry forwards of approximately $22.3
million which may be applied against future earnings.

   As a result of the above, the Company's operations generated a net loss for
fiscal 1997 of approximately $1.7 million or ($0.28) per common share compared
with a net loss of approximately $10.1 million, or ($1.64) per common share.
Fiscal 1996 includes a provision of approximately $4.6 million or (3.1)% of net
sales for closing the Clayton County megastore, or ($0.75) per common share.

                                      -17-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

   The Company's operating activities provided or (used) net cash of
approximately $1.0 million, $2.0 million and ($1.2) million in fiscal 1998, 1997
and 1996, respectively.

   Cash provided or (used) by investing activities in fiscal 1998, 1997 and 1996
was approximately ($1.8) million, $4.0 million and $0.2 million, respectively.
Cash used by investing activities consisted of capital expenditures for property
and equipment relating to stores and distribution and manufacturing facilities,
totaling approximately $4.7 million, $1.4 million and $4.5 million in fiscal
1998, 1997 and 1996, respectively, as well as an approximately $1.2 million
increase in notes receivable, which was primarily offset by the Company's
increase in reserves by approximately $0.9 million related to that certain
Security Agreement with Ritter Farms and Grainger County Tomato Company, as
described below.  Cash provided by investing activities for fiscal 1998
consisted, in part, of approximately $1.4 million in net proceeds from the sale
of the Intellectual Property and approximately $2.5 million from the redemption
of the 2.5% interest the Company held in PFCI during the Restructuring.  In
addition, proceeds from the sale of property and equipment in fiscal 1998, 1997
and 1996, were approximately $0.1 million, $5.4 million and $4.8 million,
respectively.

   Cash provided or (used) by financing activities in fiscal 1998, 1997 and 1996
was approximately $0.9 million, ($5.8) million and ($0.3) million.  In fiscal
1998, financing activities consisted of approximately $0.6 million paid on the
Company's line of credit and, in connection with the January Transaction,
approximately $12.6 million paid on its long term obligations.  During fiscal
1998, the Company received approximately $13.1 million net of expenses pursuant
to the PFCI Loan Agreement.  At the end of fiscal 1998, the Company had $1.7
million available on its line of credit and $4.0 million available on its PFCI
development loan.

   The Company's working capital position in 1998 and 1997 was $3.1 million and
$4.0 million, respectively. The decrease in working capital in fiscal 1998 is
due largely to (i) an increase in the Company's insurance reserves and (ii) an
increase in the Company's accruals consisting of quarterly interest payable to
PFCI, deferred consulting revenue from PFCI, and additional property tax
accruals for the new Harry's In A Hurry locations.
 
   On March 28, 1997, the Company entered into a Loan and Security Agreement
(the "Security Agreement") with Ritter Farms and Grainger County Tomato Company
(collectively, the "Borrower") pursuant to which the Company provided up to $1.0
million in financing to the Borrower.  The Borrower has been the Company's
principal supplier of premium quality tomatoes, and the Security Agreement was
entered into in connection with the Borrower's reorganization under Chapter 11
of the United States Bankruptcy Code.  All funds advanced under the Security
Agreement bear interest at the rate of ten percent (10%) per annum, and were due
and payable not later than December 31, 1997.  The Company has been advised that
the intended source of repayment of the loan by the Borrower, the revenue
generated by the sale of the Borrower's 1997 crop production, was insufficient
to satisfy fully the Borrower's indebtedness to the Company.  In addition to a
first priority security interest in the Borrower's crops, the Company holds a
subordinated mortgage and security interest in other assets of the Borrower
including real estate and certain intangible property.  The Company intends to
use its best efforts to satisfy the debt from the proceeds of sale of the other
collateral, which assets are subject to another entities' primary security
interest. There is no assurance that such secondary interest in the collateral
will be sufficient to repay in full the Borrower's indebtedness to the Company.
Although the Company 

                                      -18-
<PAGE>
 
previously received approximately $87,000 in principal repayments from the
Borrower, as a result of the above, the Company has increased its allowance for
doubtful accounts by approximately $0.9 million in the 1998 Period to reserve
against a potential loss.

   Pursuant to a Secured Loan Agreement (the "Loan Agreement") dated as of
January 31, 1997, the Company received a commitment from PFCI for certain loans
in an aggregate principal amount not to exceed $20 million outstanding.  The
aggregate amount includes a term loan to the Company in the principal amount of
$12 million ("Refinancing Loan"), which loan was funded on January 31, 1997 and
used by the Company to repay certain indebtedness, and an $8 million Development
Loan (together, with the Refinancing Loan, the "Loans") to be used by the
Company for general corporate purposes and to fund development costs relating to
the development of a business model for the improvement of the Company's
business and facilities as contemplated by the Consulting Agreement.  The Loans
shall accrue interest at a rate of 5% per annum for a period of five years from
January 31, 1997 and at the "reference rate," as set by the Bank of America,
Illinois, plus 1%, thereafter.  The Loans are subordinated in right of payment
to certain indebtedness of the Company and are secured by a second priority lien
on substantially all of the assets of the Company and its subsidiaries.

   Pursuant to the Transaction Agreement (the "Transaction Agreement"), dated as
of January 31, 1997, PFCI has issuance of the Warrant.  The Warrant, which
expires on January 31, 2001, is exercisable at prices ranging from $4.00 to
$5.50 per share, subject to adjustment in certain circumstances.

   In addition, in accordance with the terms of the Transaction Agreement, the
Company agreed that at any time the Company desires to seek additional financing
(whether debt or equity financing), the Company will negotiate in good faith
with PFCI for a period of 20 days with regard to any portion of the entire
amount (at the option of PFCI) of such financing prior to negotiating with any
other entity with regard thereto.

   In connection with that certain Security Agreement by and among the Company,
Ritter Farms and Grainger Tomato Company, and in order to provide an additional
source of liquidity to fund advances made to the Borrower thereunder, on June 6,
1997, the Company amended the Loan Agreement with PFCI to provide for the
advance to the Company of up to $1.0 million of the amount PFCI has committed to
loan under the Loans for the purpose of assisting the Company in funding
obligations under the Security Agreement.

   On November 3, 1997, the Company entered into a series of agreements with
PFCI, pursuant to which the two entities amended and restructured certain
aspects of the January Transaction.  In accordance with such amendments, as more
particularly described below, PFCI has redeemed the 2.5% interest the Company
held in PFCI, as consideration for (i) PFCI's payment of $2.5 million, (ii) the
funding of $2.5 million under the Development Loan, (iii) the commitment by PFCI
to make available to the Company $4.0 million under the Development Loan, within
the next twelve months, and (v) beginning in 1999, the Company's right to use
certain intellectual property, including the trademarks and developmental rights
to the Harry's Farmers Market and Harry's In A Hurry concepts, which had been
sold to PFCI in the January Transaction, as described below, (collectively, the
"Restructuring").

   As part of the Restructuring, the Company and PFCI amended the Loan Agreement
between the parties whereby the Company, using a portion of the consideration
described above, paid $2.5 

                                      -19-
<PAGE>
 
million to reduce outstanding indebtedness under the Development Loan. The
amount available under the Development Loan was reduced to $5.5 million of which
$1.5 million is currently outstanding. PFCI has committed to loan the remaining
funds under the Development Loan to the Company by funding $2.0 million on May
3, 1998 and $2.0 million on November 3, 1998. The Development Loan is to be used
by the Company to fund expenditures in connection with the Consulting Agreement,
for refurbishment of existing Company stores, for development of new Harry's In
A Hurry stores and for general corporate purposes.

   As part of the January Transaction, the Company transferred to a newly
organized business trust (the "Trust") certain federal and state registered and
unregistered trademarks, trademark applications, registered and unregistered
service marks, service mark applications, trade names, trade name rights,
copyrights, trade secrets and know-how and other proprietary information of the
Company (the "Intellectual Property").  The Trust issued to the Company two
ownership certificates, one of which entitled the holder thereof to beneficial
ownership of the Intellectual Property in the States of Georgia and Alabama and
one of which (the "Worldwide Certificate") entitled the holder thereof to
beneficial ownership of the Intellectual Property throughout the rest of the
world.  Neither the Company nor either certificate holder is entitled to any
continuing royalties or other fees associated with the use of the Intellectual
Property by the other party.  The Trust also granted to the Company and PFCI
licenses to use the Intellectual Property in their respective territories.

   The Company then sold the Worldwide Certificate to PFCI for $1.5 million in
cash and 712.3746 shares of the common stock, of PFCI ("PFCI Common Stock"),
representing 2.5% of the PFCI Common Stock on a fully diluted basis.

   As a result of the Restructuring, the Company's rights to use the
Intellectual Property were expanded.  Beginning on November 3, 1999, the Company
will be entitled to use the Intellectual Property, on a non-exclusive basis, in
the states of Tennessee, North Carolina and South Carolina.  However, in such
states, the Company will have the exclusive right to use the "Harry's" name and
trademarks, service marks and trade names incorporating the "Harry's" name (the
"Harry's Marks") effective immediately.  Also on November 3, 1999, the Company's
exclusive rights to use the Intellectual Property in the states of Georgia and
Alabama ceases, notwithstanding the continued exclusively on behalf of the
Company to the Harry's Marks in such states.  In addition, on January 31, 2004,
the Company will be entitled to use the Intellectual Property, on a non-
exclusive basis, throughout the world; provided however, that the Company's
exclusive right to use the Harry's Marks on a worldwide basis are subject to
PFCI having not made the decision to use the Harry's Marks by such time.

   In addition, the Restructuring provides the Company, at its option, with the
ability to create or develop a new name or identity for the Harry's In A Hurry
stores and the Harry's Farmers Market megastores, and such new name will not be
included in the Intellectual Property, as ownership thereof will belong
exclusively to the Company.

   The Company, Harry A. Blazer and PFCI have entered into the Consulting
Agreement, a five year agreement pursuant to which the Company has agreed to
provide, for the period ending on January 31, 2002, certain consulting services
and access to personnel, information and facilities of the Company for the
purpose of developing a business model based on the current businesses (and
certain businesses related to the current businesses) of the Company, including
the creation of new organizational, systems, human resources, accounting and
financial structures and models.  A 

                                      -20-
<PAGE>
 
portion of the expenses of such development by the Company are funded by the
Company through the Development Loan. In addition, PFCI has agreed to make
available its general business know-how and the information and know-how it
acquires under the Consulting Agreement to the Company during the term of the
Consulting Agreement. PFCI paid the Company on January 31, 1997 a consulting
services fee of $0.5 million under the Consulting Agreement.

   In connection with the above-described transactions, the Company used
approximately $13.0 million of proceeds, $12.0 million of which was funded by
the Refinancing Loan advanced under the Loan Agreement and the remainder of
which was funded by moneys that the Company received for the sale of the
Worldwide Certificate to PFCI and in exchange for the Warrant issued under the
Transaction Agreement, to repay in full all of the obligations owing under the
Amended and Restated Credit Agreement (as amended, the "Senior Credit
Agreement") to NationsBank, N.A. (South), formerly known as NationsBank of
Georgia, National Association ("NationsBank").  In addition, the Company and
other related parties consummated the following transactions:  (i) NationsBank
assigned to Creditanstalt-Bankverein ("Creditanstalt") all of its revolving
commitment and its interest in the revolving loans advanced under the Senior
Credit Agreement; (ii) NationsBank resigned as agent under the Senior Credit
Agreement; (iii) Creditanstalt was appointed successor agent; and (iv)
NationsBank transferred to Creditanstalt all of its warrants to purchase shares
of Class A Common Stock, of which Creditanstalt retained 72,000 warrants (having
an exercise price of $3.00 per share) and surrendered to the Company for
cancellation 144,000 warrants.

   Further, the Company and Creditanstalt amended the Senior Credit Agreement
to, among other things: (i) provide for the consummation of the transactions set
forth in the Transaction Agreement, including without limitation, the commitment
of the Loans and the grant of the Option under the Secured Loan Agreement, the
issuance of the Warrants under the Transaction Agreement, the sale of the
Worldwide Certificate, and all other transactions contemplated therein and
thereby; and (ii) amend certain provisions thereof, including certain negative
covenants and certain financial covenants.  In addition, the Company and
Creditanstalt agreed to reduce the exercise price of warrants to purchase 48,000
shares of Class A Common Stock from $6.00 to $3.00.  As a result of these
transactions, Creditanstalt now holds warrants to purchase an aggregate of
216,000 shares of Class A Common Stock, all at an exercise price of $3.00 per
share.

   In connection with the above described transactions with PFCI and the
Company's banks, in an effort to make the Company's then outstanding Series A
Preferred Stock maintain similar rights and preferences and properly rank with
the preferences of the newly issued Series B Preferred Stock, all of the
outstanding Series A preferred shares were exchanged by the shareholders for an
equal number of the Company's newly issued Series AA preferred stock, with a
stated value of $9 per share.  The Series AA preferred stock is mandatorily
redeemable on December 1, 2001 at the stated value (total redemption value of
$11.0 million).  At any time prior to redemption, each share of the series AA
preferred stock is convertible into the number of shares of Class A common stock
obtained by dividing the aggregate liquidation preference of the Series AA
preferred stock by the applicable conversion price.  The initial conversion
price is $6.50 per share and is subject to adjustment in certain circumstances.
In connection with the exchange of Series A preferred shares for Series AA
preferred shares, the Company reduced the exercise price of the warrants
outstanding from $10 to $4.

   As a result of the January Transaction and the Restructuring, the Company has
a line of credit and term loan agreement with Creditanstalt that allows 

                                      -21-
<PAGE>
 
borrowing up to $12.0 million bearing interest at LIBOR plus 3.5% or prime plus
1.5% which matures on January 29, 2000. The average outstanding borrowings on
the line of credit during fiscal 1998 was approximately $3.3 million. The
weighted average interest rate during fiscal 1998 was approximately 9.98%. The
maximum borrowings on the line of credit outstanding at any month end during
fiscal 1998 totaled approximately $4.9 million. The line of credit and term loan
are collateralized by substantially all assets of the Company. The total amount
drawn at January 28, 1998 was approximately $10.3 million. The total amount
available at January 28, 1998 was approximately $1.7 million.

   The Company's ability to fund its working capital and capital expenditure
requirements, make interest payments and meet its other cash requirements
depends, among other things, on the availability of internally generated funds
and the continued availability of and compliance with its credit facilities.
Management believes that internally generated funds and its available credit
facilities, as restructured, will provide the Company with sufficient sources of
funds to satisfy its anticipated cash requirements in fiscal 1999. However, such
forward-looking statements are subject to risks, uncertainties and other factors
which could cause actual results to differ materially from results expressed or
implied by such forward looking statements. Potential risks and uncertainties
include, but are not limited to: economic conditions, changes in consumer
spending, weather, competition, changes in the rate of inflation, potential
sales by the Company of certain out-parcels and other assets, the inability to
develop new stores as planned and other uncertainties that may occur from time
to time. In the even of any significant reduction of internally generated funds,
the Company may require funds from outside financing sources. In such event,
there can be no assurance that the Company would be able to obtain such funding
as and when required or on acceptable terms.

SEASONALITY

   The Company's sales mix varies seasonally as the availability of fresh
product dictates and the Company generally experiences substantially increased
sales volume in the days immediately preceding major holidays.  In addition, the
Company realizes increased sales during its second quarter due to greater
availability and demand for produce.

EFFECTS OF INFLATION

   The Company generally has been able to pass on increased costs attributable
to inflation through appropriate increases in selling prices of its products
and, accordingly, has not experienced any material adverse effect from
inflation.

                                      -22-
<PAGE>
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------  -----------------------------------------------------------

   Not Applicable.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
------    ------------------------------------------- 

   The following financial statements are filed with this report:

        Report of Independent Certified Public Accountants

        Consolidated Balance Sheets -- Fiscal Years Ended, January 28, 1998 and
             January 29, 1997

        Consolidated Statements of Operations -- Fiscal Years Ended, January 28,
             1998, January 29, 1997 and January 31, 1996

        Consolidated Statements of Changes in Equity -- Fiscal Years Ended,
             January 28, 1998, January 29, 1997 and January 31, 1996

        Consolidated Statements of Cash Flows -- Fiscal Years Ended, January 28,
             1998, January 29, 1997 and January 31, 1996

        Notes to Consolidated Financial Statements


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

   There has been no occurrence requiring a response to this item.


                                    PART III

   Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement for the Company's Annual Meeting of Stockholders to be held on June
17, 1998 (the "Proxy Statement").  The Company will, within 120 days of the end
of its fiscal year, file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------   -------------------------------------------------- 

   The information responsive to this item is incorporated by reference from the
sections entitled "Agenda Item One -- Election of Directors" and "-- Compliance
with Section 16(a) of the Securities Exchange Act of 1934" contained in the
Proxy Statement.

                                      -23-
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.
-------   ---------------------- 

   The information responsive to this item is incorporated by reference from the
section entitled "Executive Compensation" contained in the Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------   -------------------------------------------------------------- 

   The information responsive to this item is incorporated by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------   ---------------------------------------------- 

   The information responsive to this item is incorporated by reference from the
sections entitled "Certain Relationships and Related Transactions" and
"Executive Compensation -- Compensation Committee Interlocks and Insider
Participation" contained in the Proxy Statement.


                                    PART IV

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

(a)  1. Financial Statements and Auditors' Report.
        ----------------------------------------- 

   The following financial statements and auditors' report have been filed as
Item 8 in Part II of this report:

        Report of Independent Certified Public Accountants

        Consolidated Balance Sheets --Fiscal Years Ended, January 28, 1998 and
             January 29, 1997

        Consolidated Statements of Operations -- Fiscal Years Ended, January 28,
             1998, January 29, 1997 and January 31, 1996

        Consolidated Statements of Changes in Equity -- Fiscal Years Ended,
             January 28, 1998, January 29, 1997 and January 31, 1996

        Consolidated Statements of Cash Flows -- Fiscal Years Ended, January 28,
             1998, January 29, 1997 and January 31, 1996

        Notes to Consolidated Financial Statements

                                      -24-
<PAGE>
 
   2.   Financial Statement Schedules.
        ----------------------------- 

   The following supporting financial statement schedule is filed with this
report:
 
        Schedule II  -  Consolidated Schedule of Valuation and Qualifying
Accounts
 
   All other schedules are omitted as the required information is inapplicable,
or the information is presented in the consolidated financial statements or
related notes.

   3.   Exhibits.
        -------- 

   The following exhibits are filed with or incorporated by reference into this
report.  The exhibits which are denominated by an asterisk (*) were previously
filed as part of and are hereby incorporated by reference from either: (i) the
Company's Form S-1 Registration Statement under the Securities Act of 1933,
Registration No. 33-60452,("Form S-1"), (ii) the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 1994 ("1993 Form 10-K"), (iii) the
Company's Quarterly Report on Form 10-Q for the quarter ended August 3, 1994
("8/3/94 10-Q"), (iv) the Company's Quarterly Report on Form 10-Q for the
quarter ended November 2, 1994 ("11/2/94 10-Q"), (v) the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on January
30, 1995 ("1/30/95 8-K"), (vi) the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1995 ("1995 Form 10-K"), (vii) the Company's
Quarterly Report on Form 10-Q for the quarter ended August 2, 1995 ("8/2/95 10-
Q"), (viii) the Company's Quarterly Report on Form 10-Q for the quarter ended
November 1, 1995 ("11/1/95 10-Q"), (ix) the Company's Annual Report on Form 10-K
for the year ended January 31, 1996 (the "1996 Form 10-K"), (x) the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
February 18, 1997 ("2/18/97 8-K"), (xi) the Company's Annual Report on Form 10-K
for the fiscal year ended January 29, 1997 ("1997 Form 10-K"), (xii) the
Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997
("4/30/97 10-Q"), (xiii) the Company's Quarterly Report on Form 10-Q for the
quarter ended July 30, 1997 ("7/30/97 10-Q") and (xiv) the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission on November
20, 1997 ("11/20/97 8-K").


EXHIBIT NO.   DESCRIPTION OF EXHIBIT
-----------   ----------------------

 *2.1         Transfer, Assignment and Assumption Agreement, dated March 31,
              1993, between Harry's Farmers Market, Ltd. (the "Partnership") and
              Harry's Farmers Market, Inc. (Form S-1, Exhibit 10.1)

 *3.1.1       Articles of Incorporation of HFM, Inc. (Form S-1 Exhibit 3.1)

 *3.1.2       Articles of Amendment to Articles of Incorporation of the Company
              (Form S-1 Exhibit 3.2)

 *3.1.3       Articles of Amendment to Articles of Incorporation of the
              Registrant (1/30/95 8-K Exhibit 3(I).2)

                                      -25-
<PAGE>
 
 *3.1.4       Articles of Amendment to Articles of Incorporation of the Company
              regarding Series AA Preferred Stock (2/18/97 8-K Exhibit 3(I).3)

 *3.1.5       Articles of Amendment to Articles of Incorporation of the Company
              regarding Series B Preferred Stock (2/18/97 8-K Exhibit 3(I).4)

 *3.2         By-Laws of HFM, Inc.  (Form S-1 Exhibit 3.3)

 *4.1         Specimen Certificate of Class A Common Stock (Form S-1 Exhibit 4)

 *4.2         Specimen Certificate of Series A Redeemable Preferred Stock
              (1/30/95 8-K Exhibit 4.2)

 *4.3         Share and Warrant Purchase Agreement dated December 30, 1994,
              among the Registrant and Robert Fleming Nominees Ltd., AXA Equity
              & Law Life Assurance Society, Orbis Pension Trustees Ltd., Ashford
              Capital Partners, L. P. and Theodore H. Ashford (1/30/95 8-K
              Exhibit 4.3)

 *4.4.1       Stockholders Agreement dated December 30, 1994, among the
              Registrant, Harry A. Blazer and Robert Fleming Nominees, Ltd.
              (1/30/95 8-K Exhibit 4.4)

 *4.4.2       Amended and Restated Stockholders Agreement dated as of January
              31, 1997 by and among the Company, Harry A. Blazer and Robert
              Fleming Nominees, Ltd. (2/18/97 8-K Exhibit 4.4.1)

 *4.5.1       Investors' Agreement dated December 30, 1994, by and among the
              Registrant, AXA Equity & Law Life Assurance Society, Orbis Pension
              Trustees Ltd., Ashford Capital Partners, L.P. and Theodore H.
              Ashford (1/30/95 8-K Exhibit 4.5)

 *4.5.2       Amended and Restated Investors' Agreement dated as of January 31,
              1997 by and among the Company, Harry A. Blazer and AXA Equity &
              Law Life Assurance Society, Orbis Pension Trustees Ltd., Ashford
              Capital Partners, L.P. and Theodore H. Ashford (2/18/97 8-K
              Exhibit 4.5.2)

 *4.6.1       Registration Rights Agreement dated December 30, 1994, between the
              Registrant and Robert Fleming Nominees Ltd. (1/30/95 8-K Exhibit
              4.6)

 *4.6.2       Amendment to Registration Rights Agreement dated as of January 31,
              1997 between the Company and Robert Fleming Nominees Ltd. (2/18/97
              8-K Exhibit 4.6.1)

 *4.7.1       Registration Rights Agreement dated December 30, 1994, between the
              Registrant and AXA Equity & Law Life Assurance Society, Orbis
              Pension Trustees Ltd., Ashford Capital Partners, L.P. and Theodore
              H. Ashford (1/30/95 8-K Exhibit 4.7)

 *4.7.2       Amendment to Registration Rights Agreement dated as of January 31,
              1997 between the Company and AXA Equity & Law Life Assurance
              Society, Orbis Pension Trustees Ltd., Ashford Capital Partners,
              L.P. and Theodore H. Ashford (2/18/97 8-K Exhibit 4.7.1)

                                      -26-
<PAGE>
 
 *4.8.1       Form of Warrant Certificates issued to Robert Fleming Nominees
              Ltd. (300,000 shares), AXA Equity & Law Life Assurance Society
              (56,250 Shares), Orbis Pension Trustees Ltd. (37,500 shares),
              Ashford Capital Partners, L.P. (15,000 shares) and Theodore H.
              Ashford (3,750 shares) (1/30/95 8-K Exhibit 4.8)

 *4.8.2       Amendment to Warrant Certificate dated January 31, 1997 between
              the Company and Robert Fleming Nominees Ltd. (2/18/97 8-K Exhibit
              4.8.1)

 *4.8.3       Amendment to Warrant Certificate dated January 31, 1997 between
              the Company and AXA Equity & Law Life Assurance Society (2/18/97
              8-K Exhibit 4.8.2)

 *4.8.4       Amendment to Warrant Certificate dated January 31, 1997 between
              the Company and Orbis Pension Trustees Ltd. (2/18/97 8-K Exhibit
              4.8.3)

 *4.8.5       Amendment to Warrant Certificate dated January 31, 1997 between
              the Company and Ashford Capital Partners, L.P. (2/18/97 8-K
              Exhibit 4.8.4)

 *4.8.6       Amendment to Warrant Certificate dated January 31, 1997 between
              the Company and Theodore H. Ashford (2/18/97 8-K Exhibit 4.8.5)

 *4.9         Form of Performance Warrant Certificates issued to Robert Fleming
              Nominees Ltd. (44,444 shares), AXA Equity & Law Life Assurance
              Society (8,333 shares), Orbis Pension Trustees Ltd. (5,556
              shares), Ashford Capital Partners, L.P. (2,222 shares) and
              Theodore H. Ashford (556 shares) (1/30/95 8-K Exhibit 4.9)

 *4.10        Bank Warrant Certificate issued to NationsBank (1/30/95 8-K
              Exhibit 4.10)

 *4.11.1      Bank Warrant Certificate issued to Creditanstalt-Bankverein
              (1/30/95 8-K Exhibit 4.11)

 *4.11.2      Amendment to Bank Warrant Certificate issued to Creditanstalt-
              Bankverein (2/18/97 8-K Exhibit 4.11.2)

 *4.12        Preferred Stock Exchange Agreement dated January 31, 1997 among
              the Company and Robert Fleming Nominees Ltd., AXA Equity & Law
              Life Assurance Society, Orbis Pension Trustees Ltd., Ashford
              Capital Partners, L.P. and Theodore H. Ashford (2/18/97 8-K
              Exhibit 4.12)

 *4.13        Registration Rights Agreement dated as of January 31, 1997 by and
              between the Company and HFMI Acquisition Corporation ("PFCI")
              (2/18/97 8-K Exhibit 4.13)

 *4.14        Warrant certificate issued on January 31, 1997 to PFCI (2/18/97 
              8-K Exhibit 4.14)

                                      -27-
<PAGE>
 
 *10.1        Harry's Farmers Market, Inc. 1993 Management Incentive Plan (Form
              S-1 Exhibit 10.2)

 *10.2        Harry's Farmers Market, Inc. 1993 Outside Directors' Incentive
              Plan (Form S-1 Exhibit 10.3)

 *10.3        Harry's Farmers Market, Inc. Employee Stock Purchase Plan (Form 
              S-1 Exhibit 10.4)

 *10.4        Master Lease Agreement dated September 5, 1991, between the
              Partnership and SouthTrust Bank of Alabama, N.A., as amended April
              1, 1993 (Form S-1 Exhibit 10.6)

 *10.4.1      Third Amendment to Master Lease Agreement dated as of June 8,1994,
              among the Registrant, Harry A. Blazer and SouthTrust Bank of
              Alabama, N. A. (8/3/94 10-Q Exhibit 10.6.2)

 *10.4.2      Waiver dated April 17, 1995, of certain conditions of default
              under Master Lease Agreement dated September 5, 1991 (as amended)
              (1995 Form 10-K Exhibit 10.6.3).

 *10.5        Lease Agreement dated July 1, 1992, between the Partnership and
              James B. Cumming (Form S-1 Exhibit 10.9)
 
 *10.6        Master Equipment Lease Agreement dated June 30, 1991, between the
              Partnership and Sun Financial Group, Inc. (Form S-1 Exhibit 10.11)
 
 *10.7        Agreement to Dissolve and Liquidate Harry's Farmers Market, Ltd.
              (L.P.), dated March 30, 1993 (Form S-1 Exhibit 10.14)

 *10.8.1      Amended and Restated Credit Agreement dated as of December 30,
              1994, among the Registrant, Marthasville Trading Company, Karalea,
              Inc., NationsBank of Georgia, National Association
              ("NationsBank"), as Agent, NationsBank and Creditanstalt-
              Bankverein, as Lenders (1/30/95 8-K Exhibit 10.16)

 *10.8.2      Amendment Number One and Waiver Agreement dated April 27, 1995,
              relating to Amended and Restated Credit Agreement dated December
              30, 1994, among the Registrant, Marthasville Trading Company,
              Karalea, Inc., NationsBank, Creditanstalt-Bankverein and
              NationsBank, as Agent (1995 Form 10-K Exhibit 10.16(a))

 *10.9.1      Revolving Credit Note of the Registrant dated December 30, 1994,
              in the original principal amount of $3,600,000 payable to the
              order of Creditanstalt-Bankverein (1/30/95 8-K Exhibit 10.16.1)

 *10.9.2      Revolving Credit Note of the Registrant dated December 30, 1994,
              in the original principal amount of $5,400,000 payable to the
              order of NationsBank (1/30/95 8-K Exhibit 10.16.2)

                                      -28-
<PAGE>
 
 *10.10       Term Loan Note of the Registrant dated December 30, 1994, in the
              original principal amount of $16,017,000 payable to the order of
              NationsBank (1/30/95 8-K Exhibit 10.16.4)

 *10.11       Warrant Agreement dated December 30, 1994, among the Registrant,
              NationsBank and Creditanstalt-Bankverein (1/30/95 8-K Exhibit
              10.16.5)

 *10.12       Marthasville Trading Company Amended and Restated Guaranty dated
              December 30, 1994 (1/30/95 8-K Exhibit 10.6.6)

 *10.13       Karalea, Inc. Amended and Restated Guaranty dated December 30,
              1994 (1/30/95 8-K Exhibit 10.16.7)

 *10.14       Harry's Farmers Market, Inc. Amended and Restated Security
              Agreement dated December 30, 1994, in favor of NationsBank
              (1/30/95 8-K Exhibit 10.16.8)

 *10.15       Marthasville Trading Company Amended and Restated Security
              Agreement dated December 30, 1994, in favor of NationsBank
              (1/30/95 8-K Exhibit 10.16.9)

 *10.16       Karalea, Inc. Amended and Restated Security Agreement dated
              December 30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit
              10.16.10)

 *10.17       Trademark Collateral Assignment and Security Agreement dated
              December 30, 1994, in favor of NationsBank (1/30/95 8-K Exhibit
              10.16.11)

 *10.18       Interpretation dated May 22, 1995 of the Amended and Restated
              Credit Agreement dated as of December 30, 1994 (8/2/95 10-Q
              Exhibit 10.16.12)
 
 *10.19       Waiver dated May 30, 1995 of certain prohibitions on the
              incurrence of indebtedness under the Amended and Restated Credit
              Agreement dated as of December 30, 1994 (11/1/95 10-Q Exhibit
              10.16.13)

 *10.20       Waiver dated July 14, 1995 regarding the Company's failure to meet
              minimum inventory days on hand under the Amended and Restated
              Credit Agreement dated as of December 30, 1994 (11/1/95 10-Q
              Exhibit 10.16.14)

 *10.21       Waiver dated September 6, 1995 relating to Harry A Blazer's
              relinquishing of the title and responsibilities of Chief Executive
              Officer under the Amended and Restated Credit Agreement dated as
              of December 30, 1994 (11/1/95 10-Q Exhibit 10.16.15)

 *10.21       Second Amendment dated September 15, 1995 relating to the Amended
              and Restated Credit Agreement dated as of December 30, 1994
              (11/1/95 10-Q Exhibit 10.16.16)

 *10.22       Forbearance Agreement, dated December 14, 1995, by and among the
              Company, NationsBank of Georgia, National Association and
              Creditanstalt-Bankverein (11/1/95 10-Q Exhibit 10.16.17)

                                      -29-
<PAGE>
 
 *10.23       Sixth Amendment, Waiver and Forbearance Agreement dated May 8,
              1996, by and among the Company, NationsBank, N.A. (South) and
              Creditanstalt-Bankverein (1996 10-K Exhibit 10.16.18)

 *10.24       Seventh Amendment, Waiver and Forbearance Agreement dated July 25,
              1996, by and among the Company, NationsBank, N.A. (South) and
              Creditanstalt-Bankverein (1997 10-K Exhibit 10.16.19)

 *10.25       Eighth Amendment, Waiver and Forbearance Agreement dated December
              31, 1996, by and among the Company, NationsBank, N.A. (South) and
              Creditanstalt-Bankverein (1997 10-K Exhibit 10.16.20)

 *10.26       Ninth Amendment to Loan Agreement dated January 31, 1997 between
              the Company, NationsBank, N.A. and Creditanstalt-Bankverein
              (2/28/97 8-K Exhibit 10.16.21)

 *10.27       Amendment to Loan Documents and Consent dated as of June 6, 1997
              between the Company, PFCI and Creditanstalt-Bankverein (7/30/97 
              10-Q Exhibit 10.16.22)

 *10.28       Lease Agreement dated September 16, 1993, between the Registrant
              and Metropolitan Life Insurance Company (1993 Form 10-K Exhibit
              10.21)

 *10.29       Agreement for the Sale and Purchase of Property dated April 9,
              1993, between Karalea, Inc. and MM Mooring #1 Corp., as amended by
              the First Amendment to Agreement for the Sale and Purchase of
              Property dated May 14, 1993, and the Second Amendment to Agreement
              for the Sale and Purchase of Property dated May 28, 1993 (1993
              Form 10-K Exhibit 10.22)

 *10.30       Agreement for the Sale of Property dated July 14, 1993, between
              the Registrant and Liberty Place Associates, Ltd., as amended by
              the First Amendment to Purchase Agreement dated September 10,
              1993, and the Second Amendment to Agreement for the Sale of
              Property dated September 20, 1993 (1993 Form 10-K Exhibit 10.23)

 *10.31       Agreement for Sale of Real Estate dated April 19, 1995, between
              the Registrant and Trammell Crow SE, Inc. (1995 Form 10-K Exhibit
              10.26)

 *10.32       Lease Agreement dated effective March 17, 1997, between U.S. 41 &
              I285 Company and the Registrant (1997 10-K Exhibit 10.27)

 *10.33       Transaction Agreement dated as of January 31, 1997 among PFCI and
              the Company (2/18/97 8-K Exhibit 10.28)

 *10.34.1     Secured Loan Agreement dated as of January 31, 1997 between PFCI
              and the Company (2/18/97 8-K Exhibit 10.29.1)

 *10.34.2     Second Amended and Restated Secured Loan Agreement dated as of
              November 3, 1997 between PFCI and the Company (11/20/97 8-K
              Exhibit 19.2)

                                      -30-
<PAGE>
 
 *10.35       Acquisition Agreement dated January 31, 1997 between the Company
              and PFCI (2/18/97 8-K Exhibit 10.30)

 *10.36.1     Trust Agreement dated as of January 30, 1997 between and among
              Wilmington Trust Company, PFCI and the Company (2/18/97 8-K
              Exhibit 10.31.1)

 *10.36.2     First Amendment to Trust Agreement dated as of November 3, 1997 by
              and among Wilmington Trust Company, PFCI and the Company (11/20/97
              8-K Exhibit 10.31.2)

 *10.37.1     Newco License Agreement dated as of January 31, 1997 between HFMI
              Trust and PFCI (2/18/97 8-K Exhibit 10.32.1)

 *10.37.2     First Amendment to Newco License Agreement dated as of November 3,
              1997 between HFMI Trust and PFCI (11/20/97 8-K Exhibit 10.32.2)

 *10.38.1     Newco License Agreement dated as of January 31, 1997 between HFMI
              Trust and the Company (2/18/97 8-K Exhibit 10.33.1)

 *10.39.2     First Amendment to HFMI License Agreement dated as of November 3,
              1997 between HFMI Trust and the Company (11/20/97 8-K Exhibit
              10.33.2)

 *10.40.1     Transfer Agreement dated as of January 31, 1997 between and among
              the Company, HFMI Trust and PFCI (2/18/97 8-K Exhibit 10.34.1)

 *10.40.2     First Amendment to Transfer Agreement dated as of November 3, 1997
              between and among the Company, HFMI Trust and PFCI (11/20/97 8-K
              Exhibit 10.34.2)

 *10.41       Trust Certificate dated January 30, 1997 issued to HFMI Trust
              regarding the Georgia Class Interests (2/18/97 8-K Exhibit 10.35)

 *10.42       Trust Certificate dated January 30, 1997 issued to HFMI Trust
              regarding the Worldwide Class Interests (2/18/97 8-K Exhibit
              10.36)

 *10.43       Administration and Servicing Agreement dated as of January 31,
              1997 between HFMI Trust, PFCI and the Company (2/18/97 8-K Exhibit
              10.37)

 *10.44       Assignment of Intellectual Property dated January 31, 1997, by and
              between the Company and HFMI Trust (2/18/97 8-K Exhibit 10.38)

 *10.45.1     Consulting Services Agreement dated as of January 31, 1997 between
              PFCI, the Company and Harry A. Blazer (2/18/97 8-K Exhibit
              10.39.1)

 *10.45.2     First Amendment to Consulting Services Agreement dated as of
              November 3, 1997 between PFCI, the Company and Harry A. Blazer
              (11/20/97 8-K Exhibit 10.39.2)

                                      -31-
<PAGE>
 
 *10.46       Loan and Security Agreement dated as of March 28, 1997 by and
              among Ritter Farms and Grainger Tomato Company and for Company
              (4/30/97 10-Q Exhibit 10.40)

 *10.47       Redemption Agreement dated as of November 3, 1997 between PFCI and
              the Company (11/20/97 8-K Exhibit 10.41)

 *21          Subsidiaries of the Registrant (1993 Form 10-K Exhibit 21)

  23          Consent of Grant Thornton LLP

  27          Financial Data Schedule

                                      -32-
<PAGE>
 
SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                          HARRY'S FARMERS MARKET, INC.

Dated:  April 27, 1998     By: /S/ HARRY A. BLAZER
                               -------------------
                               HARRY A. BLAZER
                               Chairman,  President and Chief Executive
                               Officer (principal executive officer)


Dated:  April 27, 1998     By: /S/ HAROLD C. WEISSMAN
                               ----------------------
                               HAROLD C. WEISSMAN
                               Treasurer and Chief Financial Officer
                               (principal financial and accounting officer)

   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:



April 27, 1998        By:  /S/ HARRY A. BLAZER
                           -------------------
                           HARRY A. BLAZER, Chairman, President,
                           Chief Executive Officer and Director

April 27, 1998        By:  /S/ TERRY L. RANSOM
                           -------------------
                           TERRY L. RANSOM, Director


April 27, 1998        By:  /S/ ROBERT C. GLUSTROM
                           ----------------------
                           ROBERT C. GLUSTROM, Director


April 27, 1998        By:  /S/ JOHN D. BRANCH
                           --------------------------
                           JOHN D. BRANCH, Director


April 27, 1998        By:  /S/ WILLIAM J. HORVATH
                           ----------------------
                           WILLIAM J. HORVATH, Director

                                      -33-
<PAGE>
 
              Report of Independent Certified Public Accountants



Board of Directors
Harry's Farmers Market, Inc.

     We have audited the accompanying consolidated balance sheets of Harry's
Farmers Market, Inc. and Subsidiaries as of January 28, 1998 and January 29,
1997, and the related consolidated statements of operations, changes in  equity,
and cash flows for each of the three years in the period ended January 28, 1998.
These financial statements are the responsibility of 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 consolidated financial position of Harry's Farmers
Market, Inc. and Subsidiaries as of   January 28, 1998 and January 29, 1997, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended January 28, 1998, in conformity
with generally accepted accounting principles.

     We have also audited Schedule II of Harry's Farmers Market, Inc. and
Subsidiaries, for each of the three years in the period ended January 28, 1998.
In our opinion, this schedule presents fairly, in all materials respects, the
information required to be set forth therein.



GRANT THORNTON LLP

Atlanta, Georgia
April 3, 1998



                                      F-1
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                          CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                    ASSETS
                                                            January 28,    January 29,
                                                               1998           1997
                                                           ------------   ------------
<S>                                                        <C>            <C>
CURRENT ASSETS
     Cash                                                  $  1,479,413   $  1,325,495
     Trade accounts receivable, net of an allowance for
       doubtful accounts of $60,000 and $25,000 in 1998
       and 1997                                                 108,860        254,043
     Inventories                                              8,568,329      9,109,823
     Prepaid expenses                                           697,698        585,273
     Other current assets                                       642,688        255,881
                                                           ------------   ------------
     Total current assets                                    11,496,988     11,530,515
 
PROPERTY AND EQUIPMENT
     Buildings                                               28,561,748     34,528,368
     Equipment                                               25,509,902     23,721,031
     Vehicles                                                   190,692        102,331
                                                           ------------   ------------
                                                             54,262,342     58,351,730
     Accumulated depreciation                               (23,440,200)   (20,565,244)
                                                           ------------   ------------
                                                             30,822,142     37,786,486
     Land                                                     7,223,891      8,030,158
                                                           ------------   ------------
                                                             38,046,033     45,816,644
 
OTHER ASSETS
     Other property and equipment                             7,080,303      1,902,616
     Deposits on equipment                                      303,435        485,641
     Loan costs, net of accumulated amortization of
       $32,572 in 1998 and $422,911 in 1997                     120,857        371,646
     Other                                                      199,585        321,348
                                                           ------------   ------------
                                                              7,704,180      3,081,251
                                                           ------------   ------------

                                                           $ 57,247,201   $ 60,428,410
                                                           ============   ============

</TABLE> 
The accompanying notes are an integral part of these statements.

                                      F-2
<PAGE>
 
                     LIABILITIES  AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                  January 28,    January 29,
                                                                     1998           1997
                                                                  ------------   ------------
<S>                                                              <C>             <C>
CURRENT LIABILITIES
     Current maturities of long-term obligations                  $    459,340   $    576,013
     Accounts payable - trade                                        5,849,159      5,786,855
     Workers' compensation and general
      liability insurance                                              636,395        154,630
     Accrued payroll and payroll taxes payable                         639,761        546,238
     Sales taxes payable                                                77,104         81,336
     Other accrued liabilities                                         732,706        376,402
                                                                  ------------   ------------
       Total current liabilities                                     8,394,465      7,521,474
 
LONG-TERM OBLIGATIONS, net of current maturities                    13,358,803     26,224,552
 
CONVERTIBLE DEBT                                                    13,042,403              -
 
OTHER NON-CURRENT LIABILITIES                                          489,067              -
 
REDEEMABLE PREFERRED STOCK,
     authorized 3,000,000 Series AA shares,
     issued and outstanding 1,222,221
     Series AA shares in 1998 and
     1,222,221 Series A in 1997                                     10,434,420     10,352,468
 STOCKHOLDERS' EQUITY
     Common stock:
       Class A, 22,000,000 shares authorized;
         issued and outstanding, 4,132,257 shares
         in 1998 and 4,117,873 in 1997                              34,673,512     34,622,606   
       Class B, 3,000,000 shares authorized;
         issued and outstanding, 2,050,701 in
         1998 and 1997                                               3,936,337      3,936,337
     Additional paid-in capital                                      1,527,392        513,221
     Accumulated deficit                                           (28,609,198)   (22,742,248)
                                                                  ------------   ------------
         Total stockholders' equity                                 11,528,043     16,329,916
                                                                  ------------   ------------
                                                                  $ 57,247,201   $ 60,428,410
                                                                  ============   ============
</TABLE>

                                      F-3
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  Years ended

<TABLE>
<CAPTION>


                                                                          January 28,     January 29,     January 31,
                                                                              1998            1997           1996
                                                                          ------------    ------------    ------------
<S>                                                                       <C>             <C>             <C>
Net sales                                                                 $136,998,758    $140,162,273    $145,938,219
Cost of goods sold                                                         102,320,051     104,362,838     109,844,988
                                                                          ------------    ------------    ------------
     Gross profit                                                           34,678,707      35,799,435      36,093,231
Operating expenses
     Direct store expenses                                                  23,284,118      21,644,509      23,076,763
     Selling, general and administrative expenses                           12,719,407      10,916,774      11,797,273
     Depreciation and other amortization                                     3,446,653       3,441,254       3,774,980
     Amortization of pre-opening expenses                                            -               -         427,703
     Provision for store closing                                                     -               -       4,600,000
     Impairment loss                                                         2,867,651               -               -
                                                                          ------------    ------------    ------------
                                                                            42,317,829      36,002,537      43,676,719
                                                                          ------------    ------------    ------------
       Operating loss                                                       (7,639,122)       (203,102)     (7,583,488)

Other income (expense)
     Interest expense                                                       (2,253,987)     (2,599,552)     (3,198,083)
     Loss on writedown of note receivable                                     (914,471)              -               -
     Sale of intellectual property rights                                    1,422,391               -               -
     Redemption of ownership interest
      in PFCI                                                                2,500,000               -               -
     Other income                                                            1,018,239       1,320,498         905,520
                                                                          ------------    ------------    ------------
                                                                             1,772,172      (1,279,054)     (2,292,563)
                                                                          ------------    ------------    ------------
       NET LOSS                                                             (5,866,950)     (1,482,156)     (9,876,051)

Provision for accretion of warrants                                            147,540         228,540         228,540
                                                                          ------------    ------------    ------------
    Loss applicable to common shareholders                                $ (6,014,490)   $ (1,710,696)   $(10,104,591)
                                                                          ============    ============    ============
Net loss per common share
     Basic                                                                      $(0.97)         $(0.28)         $(1.64)
                                                                          ============    ============    ============

     Diluted                                                                    $(0.97)         $(0.28)         $(1.64)
                                                                          ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

     Years ended  January 28, 1998, January 29, 1997 and January 31, 1996
<TABLE>
<CAPTION>
 
 
                                            Common       Common      Additional
                                             stock        stock       paid-in     Accumulated      Total
                                            Class A      Class B      capital       deficit        equity
                                          -----------  ----------    ---------   ------------   -----------
<S>                                       <C>          <C>          <C>          <C>            <C>
Balance, February 1, 1995                 $34,559,693  $3,980,109    $ 600,095   $(11,384,041)  $27,755,856
 
Issuance of 2,710 shares of Class A
     stock for employee stock purchase
     plan                                      14,390           -            -              -        14,390
Conversion of 500 shares of Class B
     shares to Class A shares                   4,220      (4,220)           -              -             -
Accretion of warrant value                          -           -     (228,540)             -      (228,540)
Net loss                                            -           -            -     (9,876,051)   (9,876,051)
                                          -----------  ----------   ----------   ------------   -----------

Balance, January 31, 1996                  34,578,303   3,975,889      371,555    (21,260,092)   17,665,655
 
Issuance of  1,863 shares of Class A
     stock for employee stock purchase
     plan                                       4,751           -            -              -         4,751
Conversion of 20,600 shares of Class B
     shares to Class A shares                  39,552     (39,552)           -              -             -
Repricing of existing warrants and
     issuance of new warrants                       -           -      370,206              -       370,206
Accretion of warrant value                          -           -     (228,540)             -      (228,540)
Net loss                                            -           -            -     (1,482,156)   (1,482,156)
                                          -----------  ----------   ----------   ------------   -----------

Balance, January 29, 1997                  34,622,606   3,936,337      513,221    (22,742,248)   16,329,916

Issuance of 13,793 shares of Class A
     stock for consulting services             50,000           -            -              -        50,000
Issuance of 591 shares of Class A stock
     for employee stock purchase plan             906           -            -              -           906
Sale of 2,000,000 warrants                          -           -    1,000,000              -     1,000,000
Stock options issued for consulting services        -           -       75,000              -        75,000
Repricing of warrants                               -           -       86,711              -        86,711
Accretion of warrant value                          -           -     (147,540)             -      (147,540)
Net loss                                            -           -            -     (5,866,950)   (5,866,950)
                                          -----------  ----------   ----------   ------------   -----------

Balance, January 28, 1998                 $34,673,512  $3,936,337   $1,527,392   $(28,609,198)  $11,528,043
                                          ===========  ==========   ==========   ============   ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                      F-5
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                                  Years ended
 
<TABLE>
<CAPTION>
                                                 January 28,        January 29,        January 31,
                                                    1998               1997              1996
                                                -------------      -------------     -------------   
<S>                                             <C>                <C>               <C> 
Cash flows from operating activities:
     Cash received from customers               $ 137,143,941      $ 139,788,795     $ 145,964,426
     Cash paid for purchases and
       operating expenses                        (134,541,209)      (134,860,053)     (144,223,497)
     Interest paid, net of capitalized
       interest of $0 in 1998, $0 in 1997
       and $87,600 in 1996                         (2,090,682)        (2,913,833)       (2,956,091)
     Interest received                                 69,047              9,679            23,005
     Proceeds from consulting agreement               500,000                  -                 -
                                                -------------      -------------     -------------   
       Net cash provided by (used in)
         operating activities                       1,081,097          2,024,588        (1,192,157)
                                                -------------      -------------     -------------   

Cash flows from investing activities:
     Capital expenditures,
       including capitalized interest              (4,739,930)        (1,414,716)       (4,543,506)
     Increase in notes receivable                  (1,209,111)                 -           (11,662)
     Proceeds from sale of
       intellectual property                        1,422,391                  -                 -
     Proceeds from sale of
       interest in PFCI                             2,500,000                  -                 -
     Proceeds from sale of property and
       equipment                                       95,000          5,414,212         4,779,630
     Payments on notes receivable                     104,063              8,975            14,260
                                                -------------      -------------     -------------   
       Net cash provided by (used in)
         investing activities                      (1,827,587)         4,008,471           238,722
                                                -------------      -------------     -------------   
                
Cash flows from financing activities:
     Proceeds from issuance of
       convertible debt                            13,059,802                  -                 -
     Line of credit                                  (581,595)           510,000         4,990,000
     Principal payments on
       long-term obligations                      (12,573,000)        (6,263,871)       (5,163,706)
     Decrease in construction line of credit                -                  -          (142,241)
     Proceeds from employee stock
      purchases                                           906              4,751            14,390
     Proceeds from warrants                           994,295                  -                 -
                                                -------------      -------------     -------------   
       Net cash provided by (used in)
         financing activities                         900,408         (5,749,120)         (301,557)
                                                -------------      -------------     -------------   

Net increase (decrease) in cash                       153,918            283,939        (1,254,992)
Cash at beginning of year                           1,325,495          1,041,556         2,296,548
                                                -------------      -------------     -------------   
Cash at end of year                             $   1,479,413      $   1,325,495     $   1,041,556
                                                =============      =============     =============  
Supplemental Schedule of Noncash Investing and Financing Activities:
 
     Capital leases                             $           -      $     203,737     $   1,585,973
                                                =============      =============     =============  
</TABLE>

                                      F-6
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

               CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                                  Years ended
<TABLE>
<CAPTION>
 
 
                                                          January 28,   January 29,   January 31,
                                                             1998          1997          1996
                                                          ----------    ----------   -----------
<S>                                                      <C>           <C>           <C>           
Reconciliation of Net Loss to Cash
  Provided By (Used In) Operating Activities:
    Net loss                                             $(5,866,950)  $(1,482,156)  $(9,876,051)
    Adjustments to reconcile net loss to cash
      provided by (used in) operations:
        Depreciation and amortization                      4,706,471     4,862,195     5,671,322
        Loss on store closing, net of costs
          paid of $504,849 in 1996                                 -             -     4,095,151
        (Gain) loss on sale of property and equipment        (32,055)     (456,542)      (23,870)
        Impairment loss                                    2,867,643             -             -
        Decrease (increase) in trade accounts receivable     145,183      (122,390)       26,207
        Loss on writedown of notes receivable                914,471             -             -
        Increase in other receivables                       (141,359)      (90,828)     (163,700)
        Increase in pre-opening expenses                           -             -      (380,449)
        Decrease (increase) in inventories                   541,494    (1,215,227)     (423,171)
        Decrease (increase) in prepaid expenses             (112,425)      447,071       577,935
        Decrease (increase) in deposits on equipment         182,206       (31,369)       (9,352)
        Decrease (increase) in other assets                   13,475      (226,539)      132,844
        Increase in trade accounts payable                    62,304       882,935        65,271
        Increase (decrease) in accrued liabilities         1,323,030      (542,562)     (884,294)
        Increase in unearned revenue                         400,000             -             -
        Gain on sale of PFCI ownership interest           (2,500,000)            -             -
        Gain on sale of intellectual property, net of
          costs paid of $77,609                           (1,422,391)            -             -
                                                         -----------   -----------   -----------
                                                         $ 1,081,097   $ 2,024,588   $(1,192,157)
                                                         ===========   ===========   ===========
</TABLE> 
The accompanying notes are an integral part of these statements.

                                      F-7
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     January 28, 1998 and January 29, 1997



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Harry's Farmers Market, Inc. ((the Company() is a corporation formed pursuant to
the laws of the State of Georgia. The Company is a retailer in the Atlanta,
Georgia metropolitan area for fresh fruits and produce, seafood, poultry and
meat, dairy products, baked goods, beer and wine and other assorted grocery
items.

1.   Principles of Consolidation

The financial statements include the accounts of Harry's Farmers Market, Inc.,
and its three wholly-owned subsidiaries, Karalea, Inc., Marthasville Trading
Company, Inc., and Roman Properties, Inc.  All material intercompany balances
and transactions have been eliminated in consolidation.

2.  Inventories

Inventories consist primarily of grocery items and are stated at the lower of
cost or market.  Cost is determined under the first-in, first-out (FIFO)
valuation method.

3.  Property and Equipment

Property and equipment are stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on a straight-line basis. The
estimated lives used in determining depreciation are: buildings, 31-39 years;
equipment and vehicles, 3 to 10 years. The portion of depreciation expense
attributed to product cost is included with cost of goods sold in the statements
of operations. This depreciation expense amounted to $1,259,818, $1,431,501 and
$1,399,921, for the years ended January 28, 1998, January 29, 1997 and, January
31, 1996, respectively.

The Company capitalizes purchased software which is ready for service and
software development costs incurred from the time technological feasibility of
the software is established until the software is ready for use. Other computer
software maintenance costs related to software development are expensed as
incurred. Software development costs are amortized using the straight-line
method generally over three to five years after being placed in service. The
carrying value of a software and development costs at January 28, 1998 and
January 29, 1997 are $664,879 and $117,001, respectively.



                                      F-8
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

4.  Loan Costs

Costs of obtaining financing are being amortized over the term of the related
loans.

5.  Advertising Expense

All advertising costs are expensed in the period incurred.  Advertising expense
for the years ended January 28, 1998, January 29, 1997 and January 31, 1996 was
approximately $1,128,000, $1,088,000 and $881,000, respectively.

6.  Income Taxes

The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income.  The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.  A valuation allowance is provided for
deferred tax assets when it is more likely than not that the asset will not be
realized.

7.  Stock Based Compensation

The Company's stock option plans are accounted for under the intrinsic value
method in which compensation expense is recognized for the amount, if any, that
the fair value of the underlying common stock exceeds the exercise price at the
date of grant.

8.  Fiscal Year

The Company is on a 52/53 week fiscal year ending on the Wednesday nearest
January 31.  Fiscal years 1998, 1997 and 1996 included 52 weeks.

9.  Earnings Per Share

The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), Earnings Per Share.  Basic net earnings per common share is based
upon the weighted average number of common shares outstanding during the period.
Diluted net earnings per common share is based upon the weighted average number
of common shares outstanding plus dilutive potential common shares, including
options and warrants outstanding during the period.  All comparative earnings
per share date for prior periods presented has been restated.

                                      F-9
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                    January 28, 1998 and  January 29, 1997



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

10.  Use of Estimates in the Preparation of Financial Statements

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, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

11.  Reclassifications

Certain items in the prior years have been reclassified to conform with the
current year presentation.


NOTE B - FINANCING AGREEMENT

On January 31, 1997, the Company entered into a series of agreements with
Progressive Food Concepts, Inc. (PFCI) pursuant to which PFCI loaned the Company
$12,000,000 which is exchangeable for shares of Series B convertible preferred
stock of the Company, convertible into 3,000,000 shares of the Company's Class A
common stock.  The agreements also contain a commitment to loan up to an
additional $5,500,000, which is exchangeable for shares of convertible preferred
stock of the Company convertible into an aggregate of 1,375,000 shares of Class
A common stock.  If not earlier paid or accelerated for payment, the outstanding
principal of both these loans become an amortized term loan on January 31, 2002.
Both loans may be prepaid at any time without penalty or premium.

In addition, PFCI paid the Company $1,500,000 for the acquisition of certain
intellectual property rights of the Company outside the States of Georgia and
Alabama, $1,000,000 for warrants to purchase 2,000,000 shares of Class A common
stock at exercise prices ranging from $4.00 to $5.50, and $500,000 for a five
year mutual consulting arrangement.  Pursuant to the sale of intellectual
property rights, the Company also received a 2.5% interest in PFCI. On November
3, 1997 the original agreement was amended and PFCI paid the company $2,500,000
to redeem this ownership interest.

The Company used approximately $13,000,000 of the proceeds from the transactions
discussed above to pay off a portion of its term loan. The terms of the
remaining portion of the term loan and line of credit were also renegotiated and
a new maturity date of January 29, 2000 was established.



                                     F-10
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                    January 28, 1998 and  January 29, 1997


NOTE B - FINANCING AGREEMENT - Continued

All of the outstanding Series A preferred shares were exchanged by the
shareholders for an equal number of the Company's newly issued Series AA
preferred stock, with a stated value of  $9 per share. The Series AA preferred
stock is mandatorily redeemable on December 1, 2001 at the stated value (total
redemption value of $11,000,000). At any time prior to redemption, each share of
the series AA preferred stock is convertible into the number of shares of Class
A common stock obtained by dividing the aggregate liquidation preference of the
Series AA preferred stock by the applicable conversion price. The initial
conversion price is $6.50 per share and is subject to adjustment in certain
circumstances. In connection with the exchange of Series A convertible preferred
shares for Series AA preferred shares, the Company reduced the strike price of
the warrants outstanding from $10 to $4.  The Company also designated 500,000
preferred shares as Series B preferred stock. This Series B preferred stock has
a stated value of $40 with no shares issued and outstanding at January 28, 1998.


NOTE C - OTHER PROPERTY AND EQUIPMENT

Other property and equipment includes the following at estimated net realizable
value:
<TABLE>
<CAPTION>
 
                                                 January 28,  January 29,
                                                    1998         1997
                                                  ----------   ---------- 
<S>                                              <C>          <C>
 
     Land held for sale                           $  806,267   $        -
     Buildings and improvements held for sale      4,774,574            -
     Equipment not in service                      1,499,462    1,902,616
                                                  ----------   ---------- 
                                                  $7,080,303   $1,902,616
                                                  ==========   ==========
</TABLE>

The land, buildings and improvements held for sale represents the Company's
bakery and warehouse facility which the Company is in the process of moving to
another location. The Company recorded a non-cash impairment loss of $2,867,651
on this facility in the third quarter. These assets were written down to their
fair value based on the estimated sales price of the facility less reasonable
estimates of additional costs to sell the facility. The recognition of this
impairment was in accordance with the provisions 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.

The equipment taken out of service was removed from a store which was closed
during fiscal 1996 (see Note J).



                                     F-11
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                    January 28, 1998 and  January 29, 1997



NOTE D - LONG-TERM OBLIGATIONS

Notes Payable

The Company has a working capital line of credit agreement with a bank providing
a maximum of $12,000,000 reduced by amounts converted to a term note and other
outstanding borrowings under the line.  At January 28 1998, the Company had
converted $5,358,000 of this credit facility to a term note.  The average
borrowings under this line for the years ended January 28, 1998 and January 29,
1997 were $3,328,000 and $4,530,000, respectively.  The weighted average
interest rate during these periods was 9.98% and 8.75%, respectively.  The
maximum borrowings outstanding at any month end during the periods totaled
$4,918,405 and $5,500,000, respectively.

In connection with restructuring of the bank credit facilities in fiscal 1995,
the Company issued its lenders 240,000 warrants to purchase 240,000 Class A
common stock at $10 per share.  The value of these warrants was recorded as a
discount on debt and is being amortized to interest expense over the term of the
loans. During fiscal 1997, the Company again restructured its bank credit
facilities. In connection with this restructuring, the Company repriced the
warrants to $3 per share and issued an additional 120,000 warrants to purchase
120,000 Class A common stock at $6 per share. The value of these warrants was
recorded as a discount on debt and is being amortized to interest expense over
the term of the loans. Pursuant to the PFCI agreement on January 31, 1997,
144,000 of the outstanding warrants were cancelled. As a result, at January 28,
1998, there are 216,000 warrants outstanding to purchase 216,000 Class A common
stock at $3 per share.

Notes payable at year end consisted of:
<TABLE> 
<CAPTION> 
                                                             January 28,  January 29,
                                                                1998         1997
                                                             -----------  ----------- 
<S>                                                          <C>          <C> 
  Term note payable to a bank, bearing interest at
    LIBOR rate plus 3.5% or prime rate plus 1.50%
    (effective rate of 9.375% at January 28, 1998),
    due and  payable January 29, 2000.  This term note is
    collateralized by substantially all of the assets of 
    the Company.                                             $ 5,358,000  $17,378,513
</TABLE> 



                                     F-12
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997


NOTE D - LONG-TERM OBLIGATIONS - Continued

Notes Payable - Continued
<TABLE> 
<CAPTION> 
                                                             January 28,  January 29,
                                                                1998         1997
                                                             -----------  ----------- 
<S>                                                          <C>           <C> 
   Line of credit agreement with a bank bearing interest
     at prime plus 1.5% maturing January 29, 2000.
     The weighted average interest rate during the period
     was  9.98.  The line of credit is collateralized by
     substantially all assets of the Company.                  4,918,405    5,500,000
 
   Mortgage note payable, bearing interest at
     8.5%; interest and principal paid monthly with
     full payment due January 10, 2012, collateralized
     by land, buildings and improvements with a net
     book value of $5,580,841.                                 2,606,872    2,700,000
 
   Note payable to a bank, bearing interest at a
     variable rate not to exceed 11.9%, payable in
     360 monthly installments of principal plus
     interest with a final payment due in October,
     2022.  The note payable is collateralized by
     certain real estate held by the Company with
     a net book value of $112,438.                                67,304       68,067
 
   Note payable to a bank, bearing interest at 9.25%,
     payable in monthly principal and interest installments
     of $28,096 commencing July 15, 1994, with the final
     payment made in June, 1997.                                       -      137,286
 
   Other                                                          82,264       74,197
                                                             -----------  ----------- 
                                                              13,032,845   25,858,063
 
</TABLE>
<PAGE>
 
                                     F-13

                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                    January 28, 1998 and  January 29, 1997



NOTE D - LONG-TERM OBLIGATIONS - Continued
 
Notes Payable - Continued
 
                                            January 28,  January 29,
                                                1998       1997
                                            ----------- ----------- 
     Capital lease obligations                  999,969   1,329,346

     Discount on debt                          (214,671)   (386,844)
                                            ----------- ----------- 
                                             13,818,143  26,800,565
     Less current maturities                   (459,340)   (576,013)
                                            ----------- ----------- 
                                            $13,358,803 $26,224,552
                                            =========== =========== 

Future maturities of notes payable as of January 28, 1998, are as follows:
 
 Years ending:
     1999                                    $   102,221
     2000                                     10,387,661
     2001                                        121,090
     2002                                        131,794
     2003                                        143,443
     Thereafter                                2,146,636
                                             ----------- 
                                              13,032,845     
 Capital lease obligations                       999,969
 Discount on debt                               (214,671)
                                             -----------  
                                             $13,818,143
                                             ===========

The bank loan agreements include covenants requiring a specified minimum
interest coverage and a minimum tangible net worth. As of January 28, 1998, the
Company was in compliance with all covenants.

                                     F-14
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997


NOTE D - LONG-TERM OBLIGATIONS - Continued

Capital Lease Obligations

The Company leases certain equipment under agreements which are classified as
capital leases.    Most equipment leases have purchase options at the end of the
original lease term.  The effective interest rate on these leases range from
9.5% to 12.7%.  Property and equipment includes the following amounts for leases
that have been capitalized:

                                          January 28,   January 29,
                                              1998          1997
                                          -----------   -----------
     Equipment                             $1,813,664    $1,813,664
     Accumulated depreciation                (847,075)     (552,723)
                                           ----------    ----------
                                           $  966,589    $1,260,941
                                           ==========    ========== 

Future minimum payments of capital leases as of January 28, 1998, are as 
follows:
 
     Years ending                          
     1999                                         $  437,854
     2000                                            352,896
     2001                                            187,300
     2002                                            249,259
                                                  ----------    
     Total minimum lease payments                  1,227,309
     Less amount representing interest              (227,340)
                                                  ----------  
     Present value of net minimum lease payments  $  999,969
                                                  ========== 


                                     F-15
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE E - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain facilities and equipment under agreements classified
as operating leases.  Total rental expense under all operating lease
arrangements was approximately $3,265,000, $3,027,000 and $2,927,000 for the
years ended January 28, 1998, January 29, 1997 and January 31, 1996,
respectively. Terms of the equipment leases range from four to five years and
include an option to terminate at the end of two or three years.  At the end of
the maximum term, the Company has the option to continue renting the equipment
or purchase the equipment at fair market value. Following is a summary of
approximate future minimum lease payments due under operating lease agreements
as of January 28, 1998:
 
  Fiscal year ending
     1999                  $ 3,013,000
     2000                    1,899,000
     2001                    1,643,000
     2002                    1,459,000
     2003                    1,368,000
     Thereafter              4,404,000
                           ----------- 
                           $13,786,000
                           ===========

Claims and Litigation

The Company is involved in various claims and litigation which arise in the
ordinary course of business.  In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.


NOTE F - CONVERTIBLE DEBT

Pursuant to the agreement entered into with Progressive Food Concepts, Inc.
(PFCI), PFCI loaned the Company $12,000,000 which is exchangeable for 300,000
shares of Series B convertible preferred stock with a stated value of $40. The
Company authorized 500,000 shares of the Series B convertible preferred stock
and there were no shares outstanding at January 28, 1998 and January 29, 1997.
The Series B shares are convertible into the number of the Company's Class A
common stock calculated by dividing the aggregate liquidation preference of the
shares to be converted by a conversion price of $4.


                                     F-16
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997


NOTE F - CONVERTIBLE DEBT - Continued

PFCI also committed  to an additional $5,500,000 development loan which will be
exchangeable for 137,500 shares of  Series B convertible preferred stock with a
stated value of $40. The Series B shares are convertible into the number of the
Company's Class A common stock calculated by dividing the aggregate liquidation
preference of the shares to be converted by a conversion price of $4. At January
28, 1998, there was $1,500,000 outstanding on this loan.

Interest accrues on the convertible debt at 5% per annum and is payable on the
first day of each quarter. No principal is due on the debt until January 29,
2002 at which time the outstanding principal becomes an amortized term loan
payable in 20 equal quarterly installments.

Costs associated with obtaining the debt are recorded as discount on convertible
debt and are being amortized to interest expense over the term of the loans. At
January 28, 1998, the unamortized discount on convertible debt is $457,597.


NOTE G - REDEEMABLE PREFERRED STOCK

During fiscal 1995, the Company issued 1,222,221 shares of Series A redeemable,
convertible preferred stock with a stated value of $9 per share.  The preferred
stock was mandatorily redeemable on December 1, 1999 at its stated value (total
redemption value of $11,000,000).  In January 1997, pursuant to the PFCI
agreement, the Series A preferred shares were exchanged by the shareholders for
an equal number of the Company's newly issued Series AA redeemable, convertible
preferred stock.

The Series AA redeemable, convertible preferred stock has a stated value of $9
per share and is mandatorily redeemable on December 1, 2001. At any time prior
to redemption, each share of Series AA preferred stock is convertible into the
number of Class A common stock calculated by dividing the aggregate redemption
value by $6.50.

In connection with the original issuance of the Series A preferred stock, the
Company issued 412,500 transferable warrants to purchase 412,500 shares of Class
A common stock at $10 per share.  In January 1997, these warrants were repriced
at $4 per share. These warrants expire in December 2001.

The Company also issued transferable warrants to purchase an additional 61,111
shares of Class A common stock.  These warrants are not exercisable until June
15, 1998 and expire in December 2001.  These warrants are subject to repurchase
by the Company for a nominal purchase price prior to the exercise date upon the
occurrence of certain events.


                                     F-17
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE G - REDEEMABLE PREFERRED STOCK - Continued

The preferred stock and warrants are recorded at their relative fair
values, net of issuance costs.  The excess of redemption value over the carrying
value of the preferred stock is being accreted by periodic charges to paid-in
capital over the life of the issue.


NOTE H - CONCENTRATION OF CREDIT RISK

The Company operates retail grocery stores in the metropolitan Atlanta area.
The Company also sells to a limited number of commercial entities and carries
trade accounts receivable for these customers.  Management continually monitors
these receivables to minimize the risk of loss.


NOTE I  NET LOSS PER COMMON SHARE

The following table sets forth the computation of basic and diluted loss
per share.
<TABLE>
<CAPTION>
 
                                                     January 28,   January 29,    January 31,
                                                         1998          1997          1996
                                                     -----------   -----------   ------------
<S>                                                  <C>           <C>           <C>
 
     Numerator for basic and diluted net loss per
     common share  loss attributable to
     common stockholders                             $(6,014,490)  $(1,710,696)  $(10,104,591)
                                                     ===========   ===========   ============
 
     Denominator for basic net loss per common
     share  weighted average shares outstanding        6,182,788     6,168,264      6,166,711
 
     Effect of dilutive options and warrants                   -             -              -
                                                     -----------   -----------   ------------
     Denominator for diluted net loss per common
     share  adjusted weighted average shares
     outstanding                                       6,182,788     6,168,264      6,166,711
                                                     ===========   ===========   ============

     Basic net loss per share                        $     (0.97)  $     (0.28)  $      (1.64)
                                                     ===========   ===========   ============
 
     Diluted net loss per share                      $     (0.97)  $     (0.28)  $      (1.64)
                                                     ===========   ===========   ============
 
</TABLE>



                                     F-18
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE J - EMPLOYEE BENEFIT PLANS

Stock Option Plans

The Company's board of directors has approved stock option plans which cover up
to 675,000 shares of common stock.  The plans provide for the expiration of
options five to ten years from the date of grant and require the exercise price
of the options granted to be at least equal to 100% of market value on the date
granted.  Stock option transactions for each of the three years in the period
ended January 28, 1998 are summarized below:

<TABLE>
<CAPTION>
                                             January 28, 1998          January 29, 1997         January 31, 1996
                                           --------------------     ---------------------     ---------------------
                                                       Weighted                  Weighted                  Weighted
                                                       Average                   Average                   Average
                                                       Exercise                  Exercise                  Exercise
                                            Shares       Price       Shares       Price        Shares       Price
                                           -------     --------     --------     --------     --------     --------
<S>                                        <C>         <C>          <C>          <C>          <C>          <C>
     Outstanding, beginning of year        384,200      $5.30        170,500     $13.64        262,750       $14.53
     Granted                               314,700       4.67        400,500       5.33        135,500         8.69
     Exercised                                   -          -              -          -              -            -
     Forfeited                            (115,425)      5.74       (186,800)     12.97       (227,750)       11.74
                                          --------      -----       --------     ------       --------       ------
     Outstanding, end of year              583,475      $4.87        384,200     $ 5.30        170,500       $13.64
                                          ========      =====       ========     ======       ========       ======
</TABLE>

Subsequent to year end the Company lowered the exercise price of approximately
396,000 of the options above to $2.50.


The following table summarizes information about stock options outstanding
at January 28, 1998:
<TABLE> 
<CAPTION> 
 
                                     Options Outstanding                Options Exercisable
                           ---------------------------------------  ---------------------------
                                             Weighted
                                              Average     Weighted                     Weighted
                               Number        Remaining    Average        Number        Average
       Exercise            Outstanding at   Contractual   Exercise   Exercisable at    Exercise
        Price             January 28, 1998  Life (Years)   Price    January  28, 1998   Price
       --------           ----------------  ------------  --------  -----------------  --------
<S>                       <C>               <C>           <C>       <C>                <C>
      $3.00 - 3.25              180,000         6.16       $3.03         150,000        $3.00
       3.63 - 4.00               60,000         6.01        3.94          10,000         3.63
       6.00                     343,475         8.42        6.00         109,261         6.00
                                -------         ----       -----         -------        ----- 
                                583,475         7.48       $4.87         269,261        $4.24
                                =======         ====       =====         =======        ===== 
</TABLE>



                                     F-19
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE J - EMPLOYEE BENEFIT PLANS - Continued

Stock Option Plans - Continued

The Company uses the intrinsic value method in accounting for its stock option
plans.  In applying this method, no compensation cost has been recognized in the
accompanying financial statements.  Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans, the Company's net loss and loss per share would
have resulted in the pro forma amounts indicated below:
 
                                           January 28, 1998  January 29,1997
                                           ----------------  ---------------
 
   Net loss                  As reported      (6,014,490)     (1,710,696)
                             Pro forma        (6,506,805)     (2,051,799)
 
   Basic net loss per
     common share            As reported           (0.97)          (0.28)
                             Pro forma             (1.05)          (0.33)
 
   Diluted net loss per      As reported           (0.97)          (0.28)
     common share            Pro forma             (1.05)          (0.33)

For purposes of the pro forma amounts above, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants in the year
ended January 28, 1998; expected volatility of 83%, risk-free interest rates of
6.3%-6.9%; and expected lives of  5 - 10 years.


Health Care Plan

The Company established a partially self-insured plan in November 1993 to
provide health, life and dental benefits to employees who elect participation.
The plan was terminated during fiscal 1995 and replaced by a fully insured plan.
Expenses for these plans charged to operations for the years ended January 28,
1998, January 29, 1997 and January 31, 1996, totaled $946,953, $1,014,329 and
$958,825, respectively.

Qualified Retirement Plan

The Company has a qualified retirement plan whereby all employees meeting
eligibility requirements based on number of hours worked and length of service
may elect to make tax-deferred contributions under Internal Revenue Section
401(k).  The Company's contribution is determined at the discretion of the board
of directors.  There was no contribution by the Company during the years ended
January 28, 1998, January 29, 1997 and January 31, 1996.

                                     F-20
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE J - EMPLOYEE BENEFIT PLANS - Continued

Stock Purchase Plan

The Company has an employee stock purchase plan which covers up to 300,000
shares of common stock whereby all employees meeting eligibility requirements
based on number of hours worked and length of service may elect to make tax-
deferred contributions which are used to purchase shares of the Company's common
stock.  The purchase price for shares is 85% of the fair market value of common
stock at the end of the purchasing cycle.  Employees purchased 591 and 1,863
shares under this plan during fiscal 1998 and 1997, respectively.


NOTE K - PROVISION FOR STORE CLOSING

In November 1995, the Company closed its Clayton County megastore resulting in a
charge of $4,600,000 at January 31, 1996.  The charge included the following:
 
     Adjustment of property and equipment to
     net realizable value                         $4,170,000

     Labor and other costs to transfer equipment
     to storage and close down the store             430,000
                                                  ----------
                                                  $4,600,000
                                                  ==========


                                     F-21
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE L - INCOME TAXES

The Company's temporary differences result in a net deferred income tax asset
which is reduced to zero by a related valuation allowance summarized as follows:
<TABLE>
<CAPTION>
                                                            Estimated deferred
                                                             income tax effect
                                                        --------------------------
                                                         January 28,    January 29,
                                                            1998           1997
                                                        ------------   -----------
<S>                                                     <C>            <C> 
  Deferred income tax assets
     Net operating loss carryforward                    $  9,033,000   $ 8,604,000
     Inventories                                              87,000        92,000
     Notes receivable allowance                              352,000             -
     Allowance for decrease in market value of asset         300,000       300,000
     Impairment loss                                       1,104,000             -
     Charitable contributions carryforward                    93,000        62,000
     Accrued liabilities not deductible until paid           205,000        60,000
     Other                                                    23,000        20,000
                                                        ------------   -----------
     Gross deferred tax assets                            11,197,000     9,138,000
 
     Deferred tax asset valuation allowance              (10,214,000)   (8,055,000)
                                                        ------------   -----------
     Net deferred tax asset                                  983,000     1,083,000
                                                        ------------   -----------
     Deferred income tax liabilities
     Property and equipment                                 (983,000)   (1,083,000)
                                                        ------------   -----------
     Net deferred income tax                            $          -   $         -
                                                        ============   ===========

</TABLE> 
 
                                     F-22
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE L - INCOME TAXES - Continued
 
At January 28, 1998, the Company had net operating loss carryforwards of
approximately $23,461,000 available to reduce future taxable income which expire
as follows:
 
                            Net
           Fiscal        Operating
            Year            Loss
           ------       -----------
            2009        $ 5,829,000
            2010          6,002,000
            2011          8,648,000
            2012          1,639,000
            2013          1,343,000
                        ----------- 
                        $23,461,000
                        ===========

Reconciliations of statutory Federal tax rates to the effective tax rate for the
years ended January 28, 1998, January 29, 1997 and January 31, 1996 are as
follows:
<TABLE>
<CAPTION>
                                                          January 28,   January 29,   January 31,
                                                             1998          1997          1996
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
     Income tax benefit at 34%                               (34)%         (34)%         (34)%
     State taxes, net of Federal income tax effect            (4)           (4)           (4)
     Tax benefit of losses not recognized                     38            38            38
                                                             ---           ---           --- 
     Effective tax rate                                        -%            -%            -%
                                                             ===           ===           === 
</TABLE>

                                     F-23
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE M - FINANCIAL INSTRUMENTS

The Company's financial instruments recorded on the balance sheet include cash,
accounts receivable, accounts payable, debt and redeemable preferred stock.
Because of their short maturities, the carrying amount of cash, accounts
receivable and accounts payable approximates fair market value.  The fair value
of the Company's long-term debt approximates carrying value based on quoted
market prices of similar issues or on the current rates offered to the Company
for debt of similar terms.

The Company believes that it is not practical to estimate a fair value different
from the redeemable preferred stock's carrying value as this security has
numerous unique features as described in Note G.


NOTE N - PLANS FOR FUTURE OPERATIONS AND FINANCING

Management believes that internally generated funds and its available
credit facilities will provide the Company with sufficient sources of funds to
satisfy its anticipated cash requirements in the upcoming fiscal year.  The
Company is taking steps to reduce its losses. For the upcoming fiscal year, the
Company will continue to implement its plans for new merchandising initiatives,
new prepared food products, strengthened controls on product waste, improvements
in manufacturing and distribution efficiencies, and reductions in selling,
general and administrative costs.  The Company also intends to rigorously pursue
its expansion efforts.


                                     F-24
<PAGE>
 
                 Harry's Farmers Market, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                     January 28, 1998 and January 29, 1997



NOTE O - NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):

SFAS 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997.  SFAS 130 requires companies to include
details about comprehensive income that arise during a reporting period.
Comprehensive income includes revenue, expenses, gains and losses that bypass
the income statement and are reported directly in a separate component of
equity.

SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
which is effective for financial statements for periods beginning after December
15, 1997.  SFAS 131 requires companies to report information about an entity's
different types of business activities and the different economic environments
in which it operates, referred to as operating segments.

Additionally, the AICPA Accounting Standards Executive Committee has issued
Statement of Position (SOP) 98-1, Costs of Software for Internal Use and Related
Reengineering Costs, which is effective for fiscal years beginning after
December 15, 1998.  SOP 98-1 segments an internal use software project into
stages and the accounting is based on the stage in which the cost is incurred.

Management does not expect the adoption of the Statements of Financial
Accounting Standards and SOP 98-1, referred to above, to have a material impact
on the Company's results of operations or financial condition.
 



                                     F-25
<PAGE>
 
                 HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
                                  SCHEDULE II
          CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE> 
<CAPTION> 
 
                                                Balance at                               Balance
                                                Beginning                                 End of
For the year ended   Description                of Period    Additions    Deductions      Period
-------------------------------------------------------------------------------------------------
<S>                  <C>                        <C>          <C>          <C>          <C>  
January 28, 1998     Allowance for doubtful
                     accounts receivable        $  25,000       35,000        -            60,000

                     Valuation allowance -
                     Deferred tax asset          8,055,000    2,159,000       -        10,214,000
                                                ================================================= 

January 29, 1997     Allowance for doubtful
                     accounts receivable        $   25,000   $        -      $-       $    25,000
 
                     Valuation allowance -
                     Deferred tax asset         $7,834,000   $  221,000      $-       $ 8,055,000
                                                ================================================= 
 
January 31, 1996     Allowance for doubtful
                     accounts receivable        $   25,000   $        -      $-       $    25,000
 
                     Valuation allowance -
                     Deferred tax asset         $3,546,000   $4,288,000      $-       $ 7,834,000
                                                =================================================   
</TABLE>

                                     F-26