UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                   FORM 10KSB

(Mark One)

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

For the fiscal year ended        December 31, 1996
                          --------------------------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [No Fee Required]

For the transition period from               to

                         Commission file number 0-28058

                              BIG CITY BAGELS, INC.
                 (Name of small business issuer in its charter)

        New York                                          11-3137508
-------------------------------            ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

 99 Woodbury Road, Hicksville, New York                       11801
----------------------------------------                   ----------
(Address of principal executive offices)                   (Zip Code)

                                 (516) 932-5050
                ------------------------------------------------
                (Issuer's telephone number, including Area Code)

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

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

                     Common Stock, par value $.001 per share
                Class A Redeemable Common Stock Purchase Warrants


     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the Issuer was required to file such  reports),  and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ] No

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of the  Issuer's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

     The issuer's revenues for its most recent fiscal year were $2,414,976.

     As of March 14, 1997,  the  aggregate  market value of the Issuer's  Common
Stock held by  non-affiliates  of the Issuer (based on the average bid and asked
prices of such stock) was $9,084,972. At March 14, 1997, 4,932,021 shares of the
Issuer's Common Stock outstanding were outstanding.

                               Page 1 of 32 Pages
                             EXHIBIT INDEX - PAGE 31


<PAGE>



                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

General

     Big City Bagels, Inc. ("Company") is a New York corporation incorporated in
December 1992 that operates and franchises  upscale bagel bakery cafes under the
Company's  registered  trademark "Big City Bagels(R)."  These stores sell a wide
variety of oversized, fresh baked bagels, including unique specialty bagels, and
cream cheese spreads,  muffins and other bakery products for take-out and eat-in
consumption.  Big City Bagels  stores also sell  salads,  sandwiches,  specialty
coffees and other beverages.  The Company owns six stores,  which are located in
California, Arizona and Utah. The Company also sells Big City Bagels franchises.
Currently,  there are eight  franchises  open and  operating in  California  and
Minnesota.  As of March 14,  1997,  the Company had sold  franchises  to open an
additional 28 stores,  which are in various stages of  development.  The Company
also sells its  products  wholesale  to  commercial  accounts  and food  service
operators.

     In May 1996, the Company completed its initial public offering, pursuant to
which it received  approximately  $4,100,000  in net  proceeds  from the sale of
1,293,750 units, each unit consisting of one share of Common Stock and one Class
A Redeemable Common Stock Purchase Warrant.  Immediately prior to the closing of
the  initial  public  offering,   Pumpernickel  Partners,   L.P.  ("Pumpernickel
Partners"),  a Delaware limited partnership which then owned two Big City Bagels
franchises,   and  its  sole  general  partner,  Bagel  Partners,  Inc.  ("Bagel
Partners"),  each of  which  was  under  the  common  control  of the  principal
shareholders of the Company, became wholly-owned  subsidiaries of the Company in
a combination by which all of the limited partners of Pumpernickel  Partners and
each of the stockholders of Bagel Partners  exchanged their limited  partnership
interests  in  Pumpernickel  Partners  their  capital  stock of Bagel  Partners,
respectively, for shares of Common Stock of the Company.


     The Company's  objective is to become a leading national bagel store chain.
The Company  intends to achieve this  objective by (i)  expanding  its franchise
operations,  (ii)  increasing  the  number of  Company-owned  stores by  opening
additional  stores  and  acquiring  existing  bagel  stores or chains  and (iii)
increasing  revenues  from sales to  commercial  and  wholesale  accounts.  With
respect to its franchise  operations,  the Company  believes that its consistent
product  quality,  visually-appealing,  upscale store design and  well-organized
business operations will enable the Company to attract  experienced,  multi-unit
franchisees to operate its stores.  In order to attract  potential  franchisees,
the Company plans to open Company-owned  flagship stores in strategic geographic
locations  around the  country.  Such  franchises  would be serviced by regional
commissaries,  which the Company plans to use as  additional  stores are opened.
The Company also intends to expand by acquiring  existing bagel stores or chains
and possibly other retail enterprises that the Company believes will enhance its
operations.  In  determining  whether to make an  acquisition,  the Company will
consider,  among other things, the size, location and existing operations of the
acquisition candidate,  as well as such candidate's potential to maximize growth
and increase revenues.

Recent Acquisitions

     In December  1996, the Company  acquired one of its  franchises  located in
Scottsdale,  Arizona for approximately  $29,000 in cash and forgiveness of debt,
54,055  shares of Common Stock and the  assumption  of $136,000 in capital lease
obligations.  Also in December 1996, the Company  acquired one of its franchises
located in Mesa,  Arizona for  approximately  $33,000 in cash and forgiveness of
debt,  60,952  shares of Common Stock and the  assumption  of $45,000 in capital
lease obligations.  In February 1997, the Company acquired one of its franchises
located in Park City, Utah for approximately  $84,000 in cash and forgiveness of
debt and 8,264 shares of Common Stock.


                                        2

<PAGE>



Products and Distribution

     The  Company  seeks  to  provide  its  customers  with  consistent  quality
products,  primarily  bagels,  cream cheese  spreads and muffins,  and excellent
service in a  visually-appealing,  upscale environment.  The proprietary recipes
for the Company's unique products were created by Jerry Rosner, President of the
Company,  drawing upon his 20-plus years of bagel-making  experience.  Utilizing
these recipes,  the Company's  bagel dough is prepared in regional  commissaries
and then  delivered to  surrounding  Company-owned  stores and  franchises.  The
Company's  bagels  are then  baked in each store  daily in  accordance  with the
Company's  quality  control  guidelines  using  a  traditional  technique  which
requires  the bagels to be boiled  and then  baked.  Cream  cheese  spreads  and
muffins also are prepared in each store daily from  ingredients  purchased  from
independent suppliers in accordance with quality control guidelines. While bagel
and cream  cheese  sales  currently  represent a  significant  portion of retail
sales, the stores also offer a variety of breakfast and lunch bagel  sandwiches,
soups,  freshly  baked  muffins and other bakery  products,  gourmet  coffee and
espresso drinks,  juices and a variety of soft drinks. In addition,  the Company
offers innovative  products,  such as bagel pockets and three-foot party bagels,
and imaginative catering platters to service its customers.

     The  Company  believes  that  it has  developed  significant  know-how  and
technical  expertise for replicating the Company's  bagels in various  locations
and conditions to produce a high-quality  product more commonly  associated with
smaller  bakeries.  The Company  believes  this  system  enables Big City Bagels
stores to provide  its  customers  with  consistent  quality  products,  thereby
helping  to build  brand  name  awareness  and  customer  loyalty.  The  Company
currently  owns and  operates a  commissary  located in Costa Mesa,  California,
which  services  most  existing  Big City Bagels  stores.  The Company  also has
assisted one of its franchisees,  who entered into an area development agreement
with the Company to open 12 stores in the Minneapolis/St.  Paul, Minnesota area,
in  establishing  a  commissary   owned  and  operated  by  such  franchisee  in
Minneapolis  to service these stores.  This  commissary is required to adhere to
the Company's  strict quality control  guidelines.  The Company  distributes its
bagel dough and other products to its stores in California, Utah and Arizona. By
supplying the Company-owned  stores and franchises with bagel dough, the Company
is able to control the quality of its bagel products sold in the stores.

Store Design and Locations

     Big City Bagels  stores are designed to be upscale  bagel bakery cafes that
are  efficient as well as visually  appealing.  Most of the products sold in the
stores are uniquely  presented  in large,  attractive  display  cases to provide
customers with the  opportunity  to see the products they wish to purchase.  The
display cases  typically are located near the store entrance and where customers
place their orders to attract customers and promote spontaneous purchases.

     The  Company's  store  design  is  adaptable  to  various  site  locations,
including  shopping  centers,  free-standing  units,  drive-thrus and commercial
sites,  which  are  selected  on  heavily-traveled  thoroughfares.  The  Company
believes that its concept also could be applied to smaller  "satellite"  stores,
such as kiosks located in airports, commercial buildings and shopping malls. Big
City Bagels  stores are  typically  highly  visible and easily  accessible.  The
stores are  generally  located  within a  three-mile  radius of at least  30,000
residents in an area with a mix of both  residential and commercial  properties.
The average  store is  approximately  1,600 to 2,200  square feet with a seating
capacity of 20 to 60 persons. Although the stores may vary in size, store layout
and design are generally consistent and typically include, among other things, a
traditional,  bakery-style tin ceiling,  glass display cases, a menu board and a
neon sign in the form of the Company's logo.


                                        3

<PAGE>


     The  following  table sets forth by location the number of  currently  open
Company-owned  stores and franchises and the number of franchises that have been
sold but not yet opened:
<TABLE>
<CAPTION>
                                             Franchises Sold           Total
Location                 Stores Open        But Not Yet Opened        Stores
-------------------      -----------        ------------------        -------
<S>                       <C>                   <C>                    <C>
Arizona ............        2(1)                    0                    2(1)
California .........        8(2)                    4                   12(2)
Idaho ..............        0                       3                    3
Minnesota ..........        3                       9                   12
Texas ..............        0                      12                   12
Utah ...............        1(3)                    0                    1(3)
                            ---                    ---                 ---
         Total .....       14                      28                   42

-----------------------------
<FN>
(1)      Includes two Company-owned stores.
(2)      Includes three Company-owned stores.
(3)      Includes one Company-owned store.
</FN>
</TABLE>

Franchising

     The Company  offers single unit and  multi-unit  franchises  throughout the
United  States.  The  Company  currently  is  permitted  to  offer  and sell its
franchises  in  over  40  states.  The  Company  attempts  to  attract  suitable
franchisees who are committed to the Company's high standards of product quality
and customer  service.  All  franchisees are required to operate their stores in
accordance  with the  guidelines  set forth in the Company's  franchise and area
development  agreements and the standards  detailed in the Company's  operations
and  administration  manuals.  The Company conducts  regular  inspections of its
franchised stores to determine whether the stores meet applicable  standards and
works with franchisees to improve performance.

     The Company  assists  franchisees  in site  selection by  reviewing  market
demographics,  visiting the sites and giving final  approval.  During the design
phase,  all  blueprints  are reviewed and approved by the Company and  discussed
with the  franchisee.  A franchisee is required to purchase bagel dough,  muffin
mixes, cream cheese spreads and "Big City Bagels" branded products only from the
Company or suppliers  designated by the Company.  A franchisee  may purchase the
equipment  necessary  to operate a Big City Bagels  store from any vendor of its
choice, provided that such vendor has been approved by the Company and meets the
Company's  equipment  specifications.  However,  all  franchises are required to
purchase  and use a cash  register  system  designed to furnish the Company with
reports and to provide  franchisees  with optimal cash  controls and ensure that
they  have  access  to  information   that  the  Company  believes  will  assist
franchisees in operating their business.

     Prior to opening a new store,  the Company offers to all of its franchisees
an extensive  training  program run by the  Company,  which  includes  classroom
training  in  administrative  record  keeping,  marketing  and  advertising  and
inventory  control,   and  training  in  baking,   food  preparation  and  store
operations. The Company also provides on-site personnel immediately prior to and
during  each  store's  opening.  After  a  store  opens,  the  Company  monitors
operational results,  visits stores for on-site consultation and provides advice
based on the experience of other franchisees.  Management of the Company reviews
franchise store sales monthly and provides operational assistance as necessary.

     The Company provides extensive field support services to its franchisees in
an  effort to help  franchisees  maximize  business  and  financial  management,
acquire local market area  penetration,  maintain  quality  control and customer
service  excellence,   stay  abreast  of  new  product   developments,   provide
advertising  services and to allow the  franchisees the opportunity to share new
business ideas with the Company.


                                        4

<PAGE>


     The Company's current franchise  agreements require payments to the Company
of a $30,000  initial  franchise fee per store and a monthly 4% royalty on gross
sales (exclusive of sales taxes). In addition, franchisees are required to spend
2% of gross sales on local  advertising  and at least  $5,000 to  advertise  and
promote grand openings.  Franchise  agreements  provide each franchisee with the
exclusive  right to open the franchise  within a defined  geographic  area. Each
franchise  agreement is for a term of ten years,  with the right to renew for an
additional ten years at no additional fee. The franchise agreement also requires
a franchisee to find a suitable  store  location  within 180 days of signing the
agreement.  The Company  estimates that a  franchisee's  cost to open a Big City
Bagels store, including the initial franchise fee, cost of construction, leasing
of space and other start-up  expenses,  is  approximately  between  $285,000 and
$330,000.  A period  of  approximately  six to eight  months  generally  elapses
between the signing of a franchise agreement and the opening of the store.

     The Company  also offers  franchisees  the  opportunity  to enter into area
development  agreements,  which  provide that a  franchisee  may open a specific
number of stores within a specific area of exclusivity.  The area of exclusivity
is negotiated prior to the signing of the area development  agreement and varies
by  agreement  as to size of the area,  the  number of stores  required  and the
schedule for store  development and opening.  Upon signing the area  development
agreement,  fees are paid to the  Company  in the  following  manner:  a $30,000
franchise fee is paid for the first store, as well as a $12,750 area development
fee for each  additional  store to be  developed.  A  reduced  franchise  fee of
$25,500 per store is payable when the franchise  agreement  for each  additional
location  is  executed,  with a  credit  given  for the  previous  $12,750  area
development fee paid.

Competition

     The  food  service  industry,  in  general,  and  the  bagel  industry,  in
particular,  are intensely  competitive  with respect to food quality,  concept,
location,  service and price.  As a bagel retailer and  franchisor,  the Company
competes  in  a  number  of  different   markets  with  a  number  of  different
competitors,  including  well-established  food service  companies  with greater
product and name  recognition and larger  financial,  marketing and distribution
capabilities  than  those of the  Company,  as well as  innumerable  local  food
establishments  that offer similar products.  In addition,  the Company believes
that the start-up  costs  associated  with  opening a retail food  establishment
offering  products  similar to those  offered by the Company,  on a  stand-alone
basis,  are  competitive  with the start-up costs  associated with opening a Big
City  Bagels  store  and,  accordingly,  are  not  an  impediment  to  entry  of
competitors into the retail bagel business.

     The  Company  faces  competition  in the bagel  industry  from  independent
stores,   larger  chain  stores  and  franchisors  such  as  Bruegger's   Corp.,
Einstein/Noah  Bagel  Corporation,  Manhattan  Bagel  Company,  Inc.,  Big Apple
Bagels,  Chesapeake  Bagels,  New York Bagel  Enterprises and All American Bagel
Company. The Company's bagel stores also compete with take-out restaurants, fast
food  restaurants,  delicatessens  and  prepared  food  stores,  as well as with
supermarket bakeries and convenience stores.

     As a franchisor, the Company competes for qualified franchisees with a wide
variety of investment opportunities both in the restaurant business and in other
industries.  In this respect,  the Company believes that its consistent  product
quality,  visually-appealing,  upscale store design and well- organized business
operations  help the  Company to compete  favorably,  especially  against  bagel
franchisors,  although it should be noted that the Company is a relatively minor
newcomer in the industry and its competitors are well-established,  have greater
name  recognition  and  financial  resources  and command a greater share of the
market than the Company.

Advertising

     The Company  currently  advertises  and plans to continue  advertising  its
franchises in its retail stores,  newspapers and business opportunity magazines.

                                                         5

<PAGE>



The  Company  and  its  franchisees  also  advertise  in local  newspapers  and
through direct mailings.  Franchisees are required to spend 2% of gross sales on
local  advertising  and to  contribute  1% of monthly  gross sales to a national
advertising cooperative. However, as of the date of this Report, a national fund
has not been established.


Trademarks and Service Marks

     The Company's trademark "Big City Bagels(R)" and its service mark "A Bigger
Bagel for Less  Dough!(R)"  are  registered  with the United  States  Patent and
Trademark   Office  pursuant  to  federal  law.  The  Company  has  applied  for
registration of its distinctive logo. The Company's franchise agreements provide
all of its  franchisees  with  the  nonexclusive  right  to  use  the  Company's
registered  trademark  and service mark.  The Company  considers its marks to be
material  to its  business  in that  the  Company  seeks  to  develop  a  strong
association between such marks and the Company's high quality food and stores in
the  minds of  consumers.  The  Company  has been  advised  that an  entity  has
registered  the name Big City  Bagels in Benelux and the Company may not be able
to use its name in Belgium, Luxemborg and the Netherlands.

Government Regulation

     The Company and its franchisees are required to comply with federal,  state
and local government  regulations applicable to consumer food service businesses
generally, including those relating to the preparation and sale of food, minimum
wage  requirements,  overtime,  working and safety  conditions  and  citizenship
requirements,  as well as regulations relating to zoning, construction,  health,
business  licensing and employment.  The Company believes that it is in material
compliance with these provisions.  Continued compliance with this broad federal,
state and local regulatory  network is essential and costly,  and the failure to
comply with such  regulations  may have an adverse effect on the Company and its
franchisees.

     The Company's operations are subject to regulation by the FTC in compliance
with the FTC's rule entitled Disclosure Requirements and Prohibitions Concerning
Franchising  and Business  Opportunity  Ventures,  which  requires,  among other
things,  that the  Company  prepare  and  update  periodically  a  comprehensive
disclosure document,  known as the Uniform Franchise Offering Circular ("UFOC"),
in connection with the sale and operation of its franchises.  In addition,  some
states  require a franchisor to register its franchise  with the state before it
may offer the franchise.  The Company believes that its UFOC,  together with any
applicable state versions or supplements,  complies with both the FTC guidelines
and all applicable state laws regulating franchising in those states in which it
has offered  franchises.  The Company has revised its  offering  circular and is
substantially  in compliance with the UFOC guidelines  which became effective on
January 1, 1995. The UFOC document has been written in plain english and certain
of the  current  disclosure  items have been  expanded  and/or  eliminated.  The
revisions have not had an effect upon the Company's operations.

     In addition to the rules  governing the offer and sale of  franchises,  the
Company  also is  subject to a number of state  laws that  regulate  substantive
aspects of the  franchisor-franchisee  relationship,  including, but not limited
to,  those  concerning  termination  and  non-renewal.  These  laws  govern  the
termination  and/or  non-renewal  of the franchise  agreement and, by and large,
require the  franchisor  to have good cause,  reasonable  cause or just cause in
order to terminate or not renew the franchise  agreement.  In addition,  some of
these laws  provide for longer cure periods  than which  currently  exist in the
Company's franchise agreement.

     Each store is subject to  regulation  by federal  agencies and to licensing
and  regulation by state and local health,  sanitation,  safety,  fire and other
departments.  Difficulties  or failures in obtaining  the  required  licenses or
approvals  could  delay or  prevent  the  opening of a new  store.  The  Company
believes  that it is in  substantial  compliance  with the  applicable  laws and
regulations governing its operations.

                                        6

<PAGE>



     While the  Company  intends to comply  with all  federal and state laws and
regulations,  there  can be no  assurance  that it  will  continue  to meet  the
requirements of such laws and  regulations,  which,  in turn,  could result in a
withdrawal of approval to franchise in one or more jurisdictions.  Any such loss
of approval would have a material  adverse effect upon the Company's  ability to
successfully market its franchises.  Violations of franchising laws and/or state
laws and  regulations  regulating  substantive  aspects of doing  business  in a
particular  state could  subject the Company and its  affiliates  to  rescission
offers, monetary damages, penalties, imprisonment and/or injunctive proceedings.
The  state  laws and  regulations  concerning  termination  and  non-renewal  of
franchisees  are  not  expected  to  have a  material  impact  on the  Company's
operations.  In  addition,  under court  decisions in certain  states,  absolute
vicarious  liability  may be imposed  upon  franchisors  based upon  claims made
against  franchisees.  Even if the Company is able to obtain  coverage  for such
claims,  there can be no assurance  that such  insurance  will be  sufficient to
cover potential claims against the Company.  Further,  there can be no assurance
that existing or future franchise regulations will not have an adverse effect on
the Company's ability to expand its franchise program.

Employees

     As of March 14, 1997, the Company had 48 full-time employees.  18 of the 48
full-time  employees  are  salaried,  while  the  other 30 are paid on an hourly
basis. In addition,  the Company has 44 part-time employees,  who are paid on an
hourly basis.  None of the Company's  employees is  represented  by a collective
bargaining  agreement nor has the Company  experienced  any work  stoppage.  The
Company believes its relationship with its employees is satisfactory.



                                                         7

<PAGE>



ITEM 2.  DESCRIPTION OF PROPERTY

<TABLE>
<CAPTION>
                                                     Approximate                                 Approximate
                                                       Square                                  Annual Lease
Location                Use                            Footage       Lease Expiration            Payments
--------                ---                            -------       ----------------           -----------
<S>                     <C>                            <C>           <C>                        <C>
Hicksville, NY          Principal executive office      1,500        Month-to-month              $16,200

Costa Mesa, CA          Offices                         2,400        December 1997               $32,640

Costa Mesa, CA          Commissary/Company              4,400        November 1998;              $53,250
                        store                                        renewable for two
                                                                     successive five-
                                                                     year terms

Costa Mesa, CA          Storage space                     900        July 1997;                  $ 7,800
                                                                     renewable for two
                                                                     successive one-
                                                                     year terms

Costa Mesa, CA          Company store                   1,750        March 1998;                 $54,700
                                                                     renewable for two
                                                                     successive five-
                                                                     year terms

Laguna Niguel,          Company store                   1,600        March 1999;                 $44,800
CA                                                                   renewable for one
                                                                     additional five-
                                                                     year term

Scottsdale, AZ          Company store                   1,960        December 2005;              $31,400
                                                                     renewable for one
                                                                     additional five-year
                                                                     term

Mesa, AZ                Company store                   2,200        January 2006;               $27,600
                                                                     renewable for two
                                                                     successive five-
                                                                     year terms

Park City, Utah         Company store                   2,335        October 2005;               $57,800
                                                                     renewable for two
                                                                     successive five-
                                                                     year terms
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any material litigation.

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

     Not applicable.





                                        8

<PAGE>



                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Prior to the Company's  initial public  offering,  there was no established
trading  market for the  Company's  securities.  On May 7, 1996,  the  Company's
Common Stock and Class A Redeemable  Common Stock  Purchase  Warrants  commenced
quotation on the Nasdaq SmallCap Market  ("Nasdaq") under the symbols "BIGC" and
"BIGCW,"  respectively.  The  following  table  sets  forth the high and low bid
prices for the Common  Stock and  Warrants as reported by Nasdaq for the periods
indicated.  The prices represent inter-dealer  quotations,  which do not include
retail  mark-ups,  mark-downs or commissions and may not  necessarily  represent
actual transactions.

<TABLE>
<CAPTION>

      Period                  Common Stock($)            Warrants($)
-------------------        ---------------------     --------------------
   1996                      High        Low           High         Low
   ----                      ----        ---           ----         ---

  <S>                      <C>          <C>            <C>          <C>
   Fourth Quarter           7-3/8       2-1/2          3-1/2        1
   Third Quarter           10-1/2       7              4-1/4        2-3/4
   Second Quarter           9-5/8       7-1/2          5            2-1/2
   (from May 7, 1996)
</TABLE>


     On March 14, 1997,  the last sales prices for the Common Stock and Warrants
as reported by Nasdaq were $4-1/2 and $3-1/4, respectively.

     As of  March  14,  1997,  there  were 33 and 9  holders  of  record  of the
Company's  Common Stock and Warrants,  respectively.  The Company  believes that
there are in excess of 500 beneficial holders of its Common Stock.

Dividends

     The Company has never paid any cash dividends on its Common Stock and it is
currently the  intention of the Company not to pay cash  dividends on its Common
Stock in the foreseeable  future.  Management intends to reinvest  earnings,  if
any, in the  development  and  expansion of the Company's  business.  Any future
declaration  of  cash  dividends  will  be at the  discretion  of the  Board  of
Directors and will depend upon the earnings,  capital requirements and financial
position  of the  Company,  general  economic  conditions  and  other  pertinent
factors.



                                        9

<PAGE>



Recent Sales of Unregistered Securities

     During the year ended  December 31, 1996 and through  March 14,  1997,  the
Company made the following sales of unregistered securities:

<TABLE>
<CAPTION>

                                                             Consideration
                                                              Received and                               If Option,
                                                             Description of                              Warrant or
                                                            Underwriting or                             Convertible
                                                            Other Discounts           Exemption          Security,
                                                            to Market Price              from            Terms of
                                                 Number       Afforded to            Registration       Exercise or
Date of Sale           Title of Security          Sold        Purchasers              Claimed           Conversion
------------           -----------------          ----         ----------              -------          ----------
<S>                    <C>                       <C>        <C>                         <C>           <C>

1/96 - 12/96            options to               32,000     options granted - no         4(2)         exercisable for
                        purchase                            consideration                             ten years from
                        Common Stock                        received by                               date of grant
                        granted to                          Company until                             at exercise
                        employees                           exercise                                  prices ranging
                                                                                                      from $3.25 to
                                                                                                      $8.50

3/31/96                 Common Stock             15,000     restricted stock             4(2)         N/A
                                                            issued to employee

5/13/96                 Common Stock            181,250     assets of two                4(2)         N/A
                                                            franchises

12/19/96                Common Stock             54,055     assets of franchise          4(2)         N/A

12/31/96                Common Stock             60,952     assets of franchise          4(2)         N/A

2/1/97                  Common Stock              8,264     assets of franchise          4(2)         N/A
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following  discussion and analysis  should be read in conjunction  with
the  Company's  financial  statements  and the notes hereto.  The  discussion of
results,  causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.

Forward-Looking Statements

     When used in the Form 10-KSB and in future  filings by the Company with the
Securities and Exchange  Commission,  the words or phrases "will likely result,"
"management   expects"  or  "the  Company   expects,"   "will   continue,"   "is
anticipated,"  "estimated"  or similar  expressions  are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance
on any such forward-looking  statements, each of which speak only as of the date
made. Such statements are subject to certain risks and uncertainties  that could
cause actual results to differ  materially  from  historical  earnings and those
presently  anticipated  or projected.  The Company has no obligation to publicly
release  the result of any  revisions  which may be made to any  forward-looking
statements  to reflect  anticipated  or  unanticipated  events or  circumstances
occurring after the date of such statements.

                                       10

<PAGE>


Selected Financial Data
<TABLE>
<CAPTION>
                                             Years Ended December 31,
                                         -------------------------------
SUMMARY OF OPERATIONS:                   1996                    1995
                                         ----                    ----
<S>                                  <C>                        <C>
Total revenues                       $2,414,976                 $1,550,255

Net income (loss)                    $(2,537,451)               $(826,849)

Net income (loss) per common share   $(.61)                     $(.28)

Weighted average common
  shares outstanding                  4,174,061                  3,000,000

YEAR-END FINANCIAL POSITION:

Working capital (deficit)           $1,251,022                 $(795,936)

Total assets                        $3,502,239                 $1,137,631

Total liabilities                   $823,639                   $1,210,785

Stockholders' equity (deficit)      $2,678,600                 $(73,154)


</TABLE>

Results of Operations

     Revenues for the year ended December 31, 1996 were $2,414,976,  compared to
$1,550,255 for the year ended December 31, 1995, a 55.8% increase. This increase
was attributable to gains in the following areas: store and commissary  products
sales, franchise fees, royalty income, and interest income. Store and commissary
products sales were $1,888,306 for the year ended December 31, 1996, compared to
$1,486,054 for the year ended December 31, 1995, a 27.1% increase. This increase
was due to the maturing of Company-owned  retail operations,  the acquisition of
two new retail  stores in the latter part of 1996,  the growth of the  wholesale
business and  increased  commissary  sales to  franchise  stores which opened in
1996.  Franchise  fee income was $309,250 for the year ended  December 31, 1996,
compared to $40,000 for the year ended  December 31,  1995,  a 673.1%  increase.
Revenue under  franchise  agreements  generally is recognized when the franchise
stores  are  opened.  Eleven  stores  opened  during  1996 (one  store  left the
franchise  system).  Royalty income was $126,820 for the year ended December 31,
1996,  compared  to  $22,147  for the year ended  December  31,  1995,  a 472.6%
increase.  This was due to the  maturing of  operations  of  existing  franchise
stores and the initial  operations of new franchise  stores that opened in 1996.
Interest income for the year ended December 31, 1996 was $75,634, resulting from
the cash proceeds of the initial  public  offering,  which were  deposited  into
interest bearing accounts.

     The Company had  unearned  franchise  fee income of $263,750 as of December
31, 1996,  compared to $309,250 as of December 31, 1995.  Unearned franchise fee
income  represents  non-refundable  franchise  fees which will be  recognized as
revenue as the related franchise stores are opened. In 1996, the Company entered
into four new franchise agreements and two new area development  agreements (one
twelve store agreement and one three store agreement), none of which stores were

                                       11

<PAGE>



opened by December  1996.  During  1995,  the Company  signed  three  individual
franchise  agreements and entered into three area  development  agreements (each
having  three store  territories).  One of these  three  store area  development
agreements was terminated in 1996.

     Cost of sales were $1,029,955, representing 54.5% of net sales for the year
ended  December  31,  1996,  compared  to  $667,394  or 44.9% for the year ended
December  31, 1995.  The increase in cost of sales as a percentage  of sales was
primarily  attributable  to an  increase  in sales  from the  commissary  to the
franchisees  and increased  sales from the wholesale  business  which  generally
represent  a lower gross  profit  percentage.  The  increase in cost of sales of
$362,561  was  primarily  due to increased  store  revenues  resulting  from the
additional stores acquired,  increased wholesale business and increased sales to
franchisees.

     Selling, general and administrative expenses (SG&A) were $3,163,820 for the
year ended  December 31, 1996, an 88.1%  increase from  $1,681,892  for the year
ended December 31, 1995. This increase was primarily due to: a $564,177 increase
in salaries  from $674,443 in 1995 to  $1,238,620  in 1996,  resulting  from the
hiring of  management  and  administrative  level  personnel  and  increases  in
officers'  salaries;  and  increases  of  $172,104  in  advertising,  $90,761 in
insurance,  $209,123 in  professional  fees and $46,057 in travel  expenses that
were mandated by a growing business.

     Amortization  of debt discount on the  promissory  notes  ("Bridge  Notes")
issued in January  1996 in  connection  with the  Company's  $1,000,000  private
financing  ("Bridge  Financing")  for the  year  ended  December  31,  1996  was
$683,542.  There was no such  amortization for the prior year (see Liquidity and
Capital Resources and Notes to Financial Statements).

     Interest  expense  increased by $47,292  during the year ended December 31,
1996 due to the interest on the  $1,000,000  of Bridge  Financing,  shareholders
loans and capital lease obligations.

     The net loss for the year ended December 31, 1996 was $2,537,451,  compared
to a net loss of $826,849  for the year ended  December  31,  1995.  The primary
reasons for the current  year loss were due to the  amortization  expense of the
Bridge Financing,  and increases in officers and operating  salaries,  interest,
advertising,  professional  fees,  insurance,  travel,  storage and distribution
expenses.


Liquidity and Capital Resources

     Prior to May 1996,  the  Company  funded its  operating  losses and capital
expenditures primarily through capital contributions,  shareholder loans and the
Bridge  Financing.  In May  1996,  the  Company  completed  its  initial  public
offering,  at which time it received net proceeds of  approximately  $4,100,000,
$1,000,000 of which was used to repay the Bridge Notes and $375,000 of which was
used to repay a portion of shareholder loans.

     Cash and United States Treasury Bills at December 31, 1996 were $1,661,026,
compared to $37,991 at December 31, 1995. This increase was  attributable to the
Company's receipt of proceeds from the initial public offering.

     Accounts  receivable  increased  to  $110,063 at December  31,  1996,  from
$19,580 at December  31,1995.  This  increase was  primarily due to increases in
commissary sales and the Company-owned stores' wholesale business.

     Inventory  increased  to $74,272 at  December  31,  1996,  from  $47,933 at
December 31, 1995. This increase was primarily due to more Company-owned  stores
and  increases  in  commissary  sales  which  require the Company to keep higher
levels of inventory.


                                       12

<PAGE>



     Prepaid  expenses and other current assets increased to $77,131 at December
31, 1996,  from $9,572 at December 31, 1995.  This increase was primarily due to
increases in payments made on various insurance policies.

     The current portion of stockholder and partners' loans decreased to $87,468
at December 31, 1996,  from  $200,000 at December  31, 1995.  This  decrease was
attributable  to the partial  repayment of such loans from  proceeds the Company
received from the initial public offering.

     The  current  portion  of  notes  payable  and  capital  lease  obligations
decreased to $51,918 at December  31,  1996,  from $87,712 at December 31, 1995.
The  Company  paid a portion of these  notes from the  proceeds  of the  initial
public offering.

     The noncurrent  portion of capital lease obligations  increased to $132,926
at December 31, 1996, from $11,044 at December 31, 1995 due to the assumption of
lease obligations upon the acquisition of two additional stores.

     The  combination  of accounts  payable and accrued  expenses  decreased  to
$268,334 at December 31, 1996, from $314,050 at December 31, 1995. This decrease
was primarily due to the Company  making  payments to suppliers on a more timely
basis due to the availability of the proceeds from the initial public offering.

     At December 31, 1996, the Company had  $1,251,022 of working  capital and a
current  ratio of 2.9 to 1,  principally  due to the proceeds  received from the
initial public offering.

     The Company's  operating  activities used net cash of $1,960,103 during the
year ended  December 31,  1996,  as compared to net cash used in  operations  of
$280,646 for the year ended  December 31, 1995.  This increase was primarily due
to the increase of the Company's net loss, which was funded from the proceeds of
the Bridge Financing and the initial public offering.

     Although  the Company has no present  need to raise  additional  capital to
support its existing operations, the Company does believe it will need to obtain
financing from outside  sources to support its plans for growth.  The Company is
exploring its ability to obtain  financing for  potential  acquisitions  and the
establishment of new Company-owned stores.

     The  Company   anticipates   increasing  revenues  and  thereby  generating
operating cash flow in the future by taking the following actions:

         Increasing Product Sales. The Company intends to open new Company-owned
         retail  stores  and  expects  increased  sales from its  commissary  in
         California to new franchise  stores.  The Company has  centralized  its
         wholesale business activity for its California Company-owned stores and
         expects this  business to grow due to an increase in name  recognition,
         product acceptance and additional sales efforts.

         Expanding  Franchise  Operations.  The Company will continue to utilize
         capital to increase  franchise sales by (i) advertising in national and
         regional publications and business magazines,  (ii) creating additional
         sales  material  such as a video and direct mail piece and (iii) hiring
         additional sales  personnel.  In January 1997, the Company hired a Vice
         President of  Franchising  who is responsible  for expanding  franchise
         operations in the middle and western United States. The Company expects
         to increase  its  franchise  sales by opening or  acquiring  additional
         Company- owned flagship stores in markets that would generate  interest
         for experienced  multi-store  developers to enter into area development
         agreements.

         Store Operations.  The  Company has  hired experienced multi-unit food
         service operation personnel and intends to improve store operations
         and management.

                                       13

<PAGE>



         Making Acquisitions. The Company has completed the acquisition of three
         previously  franchised  stores in Scottsdale  and Mesa,  Arizona and in
         Park City,  Utah. The Company  intends to acquire other bagel stores or
         complementary  types of retail  outlets  which  provide  entry into new
         markets.


ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          Index to Financial Statements

                                                                          Page

Report of Independent Auditors............................................ F-1

Balance Sheets as of December 31, 1996 and 1995........................... F-2

Statements of Operations for the years ended
 December 31, 1996 and 1995................................................F-3

Statements of Stockholders' Equity (Capital Deficiency) for the years
 ended December 31, 1996 and 1995..........................................F-4

Statements of Cash Flows for the years ended
 December 31, 1996 and 1995................................................F-5

Notes to Financial Statements..............................................F-6


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.


                                       14

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
Big City Bagels, Inc.
Hicksville, New York


         We have  audited the  accompanying  balance  sheets of Big City Bagels,
Inc. as at December 31, 1996 and December 31, 1995,  and the related  statements
of operations,  changes in  stockholders'  equity (capital  deficiency) and cash
flows  for  the  years  then  ended.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards. Those standards require that we plan and perform the audits 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  enumerated  above  present
fairly,  in all material  respects,  the financial  position of Big City Bagels,
Inc.  at  December  31,  1996  and  December  31,  1995 and the  results  of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
generally accepted accounting principles.



/s/ Richard A. Eisner & Company, LLP
------------------------------------
Richard A. Eisner & Company, LLP

New York, New York
February 26, 1997

                                       F-1

<PAGE>

                              BIG CITY BAGELS, INC.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                            December 31,
                                                    -------------------------
         A S S E T S                                    1996            1995
                                                    -----------   ------------
<S>                                                 <C>           <C>
Current assets:
   Cash and cash equivalents .....................  $   654,856   $    37,991
   Investments in United States Treasury bills ...    1,006,170
   Accounts receivable ...........................      110,063        19,580
   Inventory .....................................       74,272        47,933
   Prepaid expenses and other current assets .....       77,131         9,572
                                                    -----------   -----------
          Total current assets ...................    1,922,492       115,076

Fixed assets, net of accumulated
   depreciation ..................................    1,239,478       934,378
Intangible assets, net of accumulated
   amortization ..................................      300,699        31,230
Deferred registration costs ......................       25,000
Security deposits ................................       39,570        31,947
                                                    -----------   -----------
          T O T A L ..............................  $ 3,502,239   $ 1,137,631
                                                    ===========   ===========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
                                (CAPITAL DEFICIENCY)

Current liabilities:
   Stockholder loans ............................  $    87,468   $   200,000
   Notes payable ................................       68,947
   Capital lease obligations ....................       51,918        18,765
   Unearned franchise fee income ................      263,750       309,250
   Accounts payable .............................      208,011       278,390
   Accrued expenses .............................       60,323        35,660
                                                   -----------   -----------
          Total current liabilities .............      671,470       911,012

Deferred rent payable ...........................       19,243        26,261
Capital lease obligations, noncurrent ...........      132,926        11,044
Stockholder loans, noncurrent ...................      262,468
                                                   -----------   -----------
          Total liabilities .....................      823,639     1,210,785
                                                   -----------   -----------
Commitments

Stockholders' equity (capital deficiency):
   Preferred stock; $.001 par value;
     1,000,000 shares authorized; no
     shares outstanding
   Common stock; $.001 par value;  10,000,000
    shares  authorized;  4,923,757 and
    2,818,750   shares issued and  outstanding at
    December 31, 1996 and December 31, 1995,
    respectively ...............................        4,924         2,819
   Additional paid-in capital ..................    4,340,180       972,181
   Partners' capital ...........................      255,456
   Accumulated deficit .........................   (1,629,004)   (1,303,610)
   Unearned portion of compensatory stock ......      (37,500)
                                                   -----------   -----------
          Total stockholders' equity
            (capital deficiency) ...............    2,678,600       (73,154)
                                                  ------------   -----------
          T O T A L ............................  $ 3,502,239   $ 1,137,631
                                                  ============  ============
</TABLE>

   The accompanying notes to financial statements are an integral part hereof.

                                       F-2

<PAGE>

                              BIG CITY BAGELS, INC.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         Year Ended
                                                         December 31,
                                                  ----------------------------
                                                     1996            1995
                                                  -----------      -----------
<S>                                              <C>               <C>
Revenues:
   Product sales by company owned stores. . . .  $ 1,483,493       $1,313,297

   Product sales to franchisees and others. . .      404,813          172,757

   Franchise fees . . . . . . . . . . . . . . .      309,250           40,000

   Royalty income . . . . . . . . . . . . . . .      126,820           22,147

   Interest income. . . . . . . . . . . . . . .       75,634

   Other income . . . . . . . . . . . . . . . .       14,966            2,054
                                                 -----------       ----------
          Total revenues. . . . . . . . . . . .    2,414,976        1,550,255


Costs and expenses:
   Cost of sales. . . . . . . . . . . . . . . .    1,029,955          667,394

   Selling, general and administrative expenses    3,163,820        1,681,892

   Amortization of debt discount. . . . . . . .      683,542

   Interest expense . . . . . . . . . . . . . .       75,110           27,818
                                                 -----------      -----------
          Total costs and expenses. . . . . . .    4,952,427        2,377,104
                                                 -----------      -----------

NET (LOSS). . . . . . . . . . . . . . . . . . .  $(2,537,451)      $ (826,849)
                                                 ============    =============

Net (loss) per common share . . . . . . . . . .     $(.61)          $(.28)
                                                   =======         =======

Weighted-average common shares
   outstanding. . . . . . . . . . . . . . . . .   4,174,061        3,000,000
                                                  =========        =========
</TABLE>



   The accompanying notes to financial statements are an integral part hereof.

                                       F-3

<PAGE>

                              BIG CITY BAGELS, INC.

             STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
                                                                                                   Unearned Portion of
                                      Common Stock     Additional                                   Compensatory Stock
                                  ------------------    Paid-in    Partners' Accumulated   Treasury  -----------------
                                    Shares   Amount     Capital    Capital     Deficit      Stock    Shares    Amount       Total
                                  --------   ------   ----------  ---------  ------------ ---------  ------    ------    -----------
<S>                              <C>         <C>      <C>         <C>        <C>          <C>        <C>       <C>       <C>

Balance - January 1, 1995. . . .  2,593,250  $2,819   $  978,181  $ 408,515  $  (629,820) $ (24,000)                     $  735,695

Purchase of treasury stock . . .    (56,375)                                                 (6,000)                         (6,000)

Reissuance of treasury stock . .    281,875              (6,000)                             30,000                          24,000

Net (loss) . . . . . . . . . . .                                   (153,059)    (673,790)                                  (826,849)
                                 ----------  ------    ---------  ----------  -----------   --------  ------  --------  ------------
Balance - December 31, 1995. . .  2,818,750   2,819      972,181    255,456   (1,303,610)    - 0 -                          (73,154)

Issuance of Bridge units and
   warrants. . . . . . . . . . .    500,000     500      683,042                                                            683,542

Exchange of partnership interests
   for common stock. . . . . . .    181,250     181      500,565  (211,199)                                                 289,547

Termination of S corporation
   status. . . . . . . . . . . .                      (2,167,800)              2,167,800                                     - 0 -

Shares issued through public
   offering. . . . . . . . . . .  1,293,750   1,294    4,137,315                                                          4,138,609

Shares issued as compensation. .     15,000      15       59,985                                      15,000   $(60,000)     - 0 -

Options issued as compensation .                          40,000                                                             40,000

Issuance of common stock for
   acquisition of franchise
   stores . . . . . . . . . . .    115,007      115      114,892                                                            115,007

Amortization of compensatory
   stock  . . . . . . . . . . .                                                                                 22,500       22,500

Net (loss) . . . . . . . . . .                                    (44,257)    (2,493,195)                                (2,537,451)

                                 ---------   ------ -----------  ---------   ------------  -------- -------   --------- ------------
BALANCE - DECEMBER 31, 1996. .   4,923,757   $4,924 $ 4,340,180  $  - 0 -    $(1,629,004)  $ - 0 -   15,000   $(37,500) $ 2,678,600
                                 =========   ====== ===========  =========   ============  ======== =======   ========= ============
</TABLE>





   The accompanying notes to financial statements are an integral part hereof.

                                       F-4

<PAGE>
                              BIG CITY BAGELS, INC.
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                             Year Ended
                                                             December 31,
                                                      ------------------------
                                                         1996          1995
                                                      ----------    ----------
<S>                                                   <C>          <C>
Cash flows from operating activities:
   Net (loss)  .....................................  $(537,451)    $(826,849)
   Adjustments to reconcile net (loss) to net
    cash (used in) operating activities:
     Depreciation and amortization .................    155,166       115,862
     Amortization of debt discount .................    683,542
     Issuance of common stock for compensation .....     22,500
     Issuance of compensatory stock options ........     40,000
     (Increase) decrease in:
       Interest receivable on United States
        Treasury bills .............................    (21,135)
       Accounts receivable .........................   (102,970)       (5,607)
       Inventory ...................................    (26,339)         (753)
     Prepaid expenses and other current assets .....    (67,559)         (238)
       Security deposits ...........................     (7,623)       (1,922)
     Increase (decrease) in:
       Accounts payable ............................    (70,379)      170,855
       Accrued expenses ............................     24,663        18,788
       Unearned franchise fee income ...............    (45,500)      244,250
       Deferred rent payable .......................     (7,018)        4,968
                                                     -----------    ----------
          Net cash (used in) operating activities .. (1,960,103)     (280,646)
                                                     -----------    ----------
Cash flows from investing activities:
   Acquisition of franchises ......................     (50,000)
   Purchases of fixed assets ......................     (81,864)      (54,181)
   Purchase of United States Treasury bills .......  (1,231,842)
   Sales of United States Treasury bills ..........     246,807
                                                    ------------    ----------
          Net cash (used in) investing activities .  (1,116,899)      (54,181)
                                                    ------------    ----------
Cash flows from financing activities:
   Proceeds from public offering ..................   4,163,609
   Proceeds from (repayment of) stockholder loans .    (375,000)      253,468
   Proceeds from notes payable ....................     101,648
   Repayment of notes payable .....................     (94,742)       (2,892)
   Purchase of treasury stock .....................      (6,000)
   Deferred registration costs ....................     (25,000)
   Proceeds from Bridge loan and rights to
    receive bridge units ..........................   1,000,000
   Repayment of Bridge loan .......................  (1,000,000)
                                                    ------------   ----------
         Net cash provided by financing activities.   3,693,867       321,224
                                                    ------------   ----------
NET INREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     616,865       (13,603)

Cash and cash equivalents - beginning of year .....      37,991        51,594
                                                    -----------    ----------
CASH AND CASH EQUIVALENTS - END OF YEAR ........... $   654,856    $   37,991
                                                    ===========    ==========
Supplemental disclosure of cash flow
 information: Cash paid during the year for:
     Interest ..................................... $    49,006    $    2,795
     Income taxes .................................       1,925         3,578
Supplemental schedule of noncash activities:
   Franchise costs acquired by the issuance of
    181,250 shares of common stock for the
    partnership interest of Pumpernickel Partners,
    L.P. and the capital stock of Bagel Partners, Inc.  289,547
   Compensatory issuance of common stock ..........      60,000
   In October 1996, the Company  acquired
    all of the assets of two franchises for the following:
      Forgiveness of outstanding accounts
       receivable ................................  $    12,487
      Issuance of 115,007 shares of common stock .      115,007
      Assumption of capital lease obligations ....      180,830
                                                    -----------
                                                        308,324
       Cash paid ..................................      50,000
                                                    -----------
         Total amount attributed to fixed assets .. $   358,324
                                                    ===========
</TABLE>
   The accompanying notes to financial statements are an integral part hereof.
                                       F-5

<PAGE>
                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE A) - The Company and Basis of Presentation:

     The Company  operates  and  franchises  retail  bagel  stores and sells its
products  wholesale to commercial  accounts and food service  operators.  In May
1996,  the Company  effected a 28,187.5 for 1 stock split of its common stock in
the form of a stock dividend payable to shareholders of record on April 1, 1996.
The accompanying financial statements reflect the stock split retroactively.

     The accompanying  financial statements for the periods through May 13, 1996
include the combined accounts of the Company and two affiliated  companies which
were under  common  control.  On May 13,  1996,  the  Company  acquired  the two
affiliated  entities for 181,250 shares of its common stock. The transaction was
accounted  for as purchase of the  interests of the  unaffiliated  owners of the
acquired entities resulting in an excess of the fair value of shares issued over
the fair value of the unaffiliated  parties interests of $289,547,  which amount
was assigned to franchise  costs.  The shares issued to affiliated  parties were
valued  at the book  amount of their  interests.  All  significant  intercompany
balances and transactions were eliminated in combination.


(NOTE B) - Summary of Significant Accounting Policies:

         [1]      Inventory:

                  Inventory is stated at the lower of cost (first-in, first-out)
or market.

         [2]      Depreciation:

                  Fixed   assets   are   stated   at  cost,   less   accumulated
depreciation.  Depreciation is provided using the straight-line  method over the
estimated useful lives of the respective assets.

         [3]      Franchise fees:

                  Franchise  fees  include  fees  earned  from area  development
agreements and franchise agreements.

                  Under an area development agreement, a developer purchases the
right to develop a specified area for future  franchises.  Area development fees
are  recognized  as  revenue  on a pro rata  basis as each  store in the area is
opened.

(continued)


                                   F-6

<PAGE>
                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE B) - Summary of Significant Accounting Policies:  (continued)

         [3]      Franchise fees:  (continued)

                  Generally, franchise agreements provide for a franchise fee of
$30,000 for a  franchisee's  first store and $25,500 for  subsequent  stores.  A
deposit is required at the signing of the franchise agreement and the balance is
payable  when the  franchisee  obtains  a lease  commitment  for the  site.  The
Company's  initial  obligations  under the  franchise  agreement  are to provide
operational  guidelines and manuals,  to assist in and approve the proposed site
selection and to provide  training to the  franchisee.  Revenues are  recognized
when  substantially  all material  obligations have been provided,  historically
upon opening of the respective store.

         [4]      Royalty income:

                  Franchise  agreements  provide  for  royalties  of 4% of gross
sales, which are recognized as income when earned.

         [5]      Cash and cash equivalents:

                  The Company considers all cash accounts, which are not subject
to  withdrawal  restrictions  or penalties,  and all highly  liquid  instruments
purchased with a maturity of three months or less to be cash equivalents.

         [6]      Long-lived assets:

                  In accordance with 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 Company records  impairment  losses on long-lived
assets  used  in  operations,  including  intangible  assets,  when  events  and
circumstances  indicate  that the assets might be impaired and the  undiscounted
cash flows  estimated to be generated by those assets are less than the carrying
amounts of those assets.  No such losses have been recorded through December 31,
1996.

         [7]  Use of estimates:

                  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 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.


(continued)


                                       F-7

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE B) - Summary of Significant Accounting Policies:  (continued)

         [8]      Stock-based compensation:

                  During  1996,  the  Company  adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
No. 123").  The provisions of SAS No. 123 allow  companies to either expense the
estimated  fair value of stock  options or to continue  to follow the  intrinsic
value  method  set forth in  Accounting  Principles  Bulletin  Opinion  No.  25,
"Accounting  for Stock Issued to Employees"  ("APB No. 25") but disclose the pro
forma  effects on net  income  (loss)  had the fair  value of the  options  been
expensed.  The Company has elected to continue to apply APB No. 25 in accounting
for its stock option incentive plans (see Note J).

         [9]      Net loss per share:

                  Net loss per share is  calculated  using the  weighted-average
number of shares of common stock  outstanding  during each period  retroactively
adjusted  for the  28,187.5  to 1 split and the  shares  issued  for  affiliated
entities  described in Note A. Common stock  issuable upon the exercise of stock
options and warrants is not included in the  calculation  as the effect would be
antidilutive.


(NOTE C) - Fixed Assets:

         Fixed assets consist of the following:
<TABLE>
<CAPTION>
                                      December 31,
                                 ---------------------
                                     1996        1995         Life
                                 ----------- ---------    --------------
<S>                              <C>         <C>          <C>

Furniture and fixtures. . . .    $  297,518  $  284,482   7 to 15 years
Machinery and equipment . . .       660,905     413,004   5 to 15 years
Leasehold improvements. . . .       577,651     398,988   Life of leases
                                 ----------  ----------
          T o t a l . . . . .     1,536,074   1,096,474

Less accumulated depreciation       296,596     162,096
                                -----------  ----------
          B a l a n c e . . .    $1,239,478  $  934,378
                                ===========  ==========
</TABLE>

(continued)

                                       F-8

<PAGE>
                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE D) - Intangible Assets:

         Intangible assets at cost, are amortized using the straight-line method
and consist of the following:
<TABLE>
<CAPTION>
                                            December 31,
                                        -------------------
                                           1996      1995      Life
                                        --------   --------  ---------
<S>                                     <C>                  <C>
         Franchise costs . . . . . . .  $289,547             15 years
         Organization cost . . . . . .    48,099   $48,099    5 years
         Trademark costs . . . . . . .     3,000     3,000   15 years
                                        --------   -------   ---------
                   T o t a l . . . . .   340,646    51,099

         Less accumulated amortization    39,947    19,869
                                        --------   -------
                   B a l a n c e . . .  $300,699   $31,230
                                        ========   =======
</TABLE>

(NOTE E) - Capital Lease Obligations:

Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
                                                          December 31,
                                                  ------------------------
                                                    1996             1995
                                                  ---------        -------
<S>                                               <C>              <C>
Equipment leases collateralized
by certain equipment,  bearing interest
at rates from 11% to 22% and requiring
aggregate monthly payments of $7,435
through April 2001  . . . . . . . . . .           $184,844         $29,809

Less current portion. . . . . . . . . .             51,918          18,765
                                                  --------         -------
Long-term portion .. . . . . . . . . . .          $132,926         $11,044
                                                  ========         =======
</TABLE>

Future maturities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                           Year Ending
                           December 31,                  Amount
                          -------------                ---------
<S>                           <C>                       <C>
                              1997 . . . . . . . . . .  $ 51,918
                              1998 . . . . . . . . . .    47,754
                              1999 . . . . . . . . . .    55,816
                              2000 . . . . . . . . . .    25,592
                              2001 . . . . . . . . . .     3,764
                                                       ---------
                                     T o t a l . . . .  $184,844
                                                       =========
</TABLE>

(continued)


                                                            F-9

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Stockholder Loans:

     Stockholder loans are payable in monthly  installments  aggregating $12,000
including interest at 10% commencing January 1, 1997.


(NOTE G) - Commitments:

         [1]      Operating leases:

                  The Company  leases its commissary  space and store  locations
under various  operating  leases which expire between  December 1997 and January
2006.  Future minimum rental payments as of December 31, 1996 are  approximately
as follows:
<TABLE>
<CAPTION>
                  Year Ending
                  December 31,                         Amount
                  ------------                      ----------
<S>                  <C>                            <C>
                     1997. . . . . . . . . . . . .  $  265,955
                     1998. . . . . . . . . . . . .     228,377
                     1999. . . . . . . . . . . . .      99,427
                     2000. . . . . . . . . . . . .      74,549
                     2001. . . . . . . . . . . . .      74,549
                     Thereafter. . . . . . . . . .     301,000
                                                    ----------
                             T o t a l . . . . . .  $1,043,857
                                                    ==========
</TABLE>
                  Rent  expense  for the  years  ended  December  31,  1996  and
December 31, 1995 was $198,142 and  $170,526,  respectively.  Rent expense under
the  Company's  lease for its  commissary  and one  store,  which  provides  for
scheduled rent increases, is recognized on a
straight-line basis over the term of the lease.

         [2]      Employment agreements:

                  The Company has entered into three year employment agreements,
effective as of January 1, 1996 with two officers providing for aggregate annual
salaries of $330,000 with annual increments of 10%.

                  The  Company  has  also  entered  into   agreements  with  two
employees,  one of which  provides  for an  annual  salary of  $105,000  through
December  31,  1998 and the  other of which  provides  for an  annual  salary of
$100,000 through May 15, 1997.

(continued)


                                      F-10

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE H) - Income Taxes:

         The  Company  has a deferred  tax asset of  approximately  $500,000  at
December  31,  1996 which is  attributable  principally  to net  operating  loss
carryforward.  The deferred tax asset is fully reserved  because the realization
of such  benefit  could  not be  established.  Prior  to May 7,  1996,  Big City
qualified as an S  corporation  for federal and state income tax purposes and an
affiliated entity (Note A) was taxed as a partnership.  Accordingly,  all losses
incurred  by  the  companies  prior  to  May  7,  1996  were  reportable  by the
stockholders and partners and are not available as carryforwards to the Company.


(NOTE I) - Franchises:

         During 1996 the Company entered into franchise  agreements for nineteen
stores,  none of which were  opened as of  December  31,  1996.  During 1995 the
Company entered into franchise  agreements for twelve stores, of which nine were
opened in 1996. At December 31, 1996 there were eight franchised  stores and six
Company owned stores in operation.  Deferred franchise fees at December 31, 1996
and December 31, 1995 represent fees received in advance of store openings.

         Effective  October 1996, the Company  repurchased  two previously  sold
franchise  stores  for an  aggregate  of  $50,000  cash,  115,007  shares of the
Company's  common stock valued at $115,007 and the  assumption  of capital lease
obligations  aggregating  $181,000.  Assets acquired  consisted of machinery and
equipment and  leasehold  improvements.  The results of  operations  include the
activities of these stores from the acquisition date.

         The  following  unaudited  pro  forma  data  gives  effect to the above
acquisitions  as though  they had  occurred  upon the  opening of the  franchise
stores (March and April 1996).

                                            Year Ended
                                           December 31,
                                               1996
                                          -------------
         Total revenues. . . . . . . . . .  $ 2,627,180

         Net loss. . . . . . . . . . . . .   (2,749,763)

         Net loss per common share . . . .     $(.65)

         The unaudited pro forma  information is not  necessarily  indicative of
results of operations  that would have occurred had the  acquisitions  been made
upon the  opening  of the  stores,  or of future  results of  operations  of the
Company.

(continued)


                                      F-11

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE J) - Common Stock:

         [1]      Stock options:

                  The  Company  applies APB No. 25 in  accounting  for its stock
option incentive plan and, accordingly,  recognizes compensation expense for the
difference  between the fair value of the underlying  common stock and the grant
price of the option at the date of grant. The effect of applying SFAS No. 123 on
1996 pro forma net loss is not  necessarily  representative  of the  effects  on
reported net loss for future years due to, among other  things,  (1) the vesting
period of the stock options and the (2) fair value of  additional  stock options
in future years. Had compensation cost for the Company's stock option plans been
determined  based upon the fair  value at the grant  date for  awards  under the
plans  consistent  with the  methodology  prescribed  under  SFAS No.  123,  the
Company's net loss in 1996 would have been approximately $2,582,000 or $0.62 per
share.  The  weighted-average  fair value of the options granted during 1996 are
estimated  as $2.65  per  share on the date of  grant  using  the  Black-Scholes
option-pricing  model  with  the  following  assumptions:   dividend  yield  0%,
volatility  of 70%,  risk-free  interest  rate of 6.18% and expected life of six
years.

                  The  Company  adopted  its 1996  Performance  Equity Plan (the
"Plan")  which  provides for the  issuance of awards of up to 350,000  shares of
common stock to  employees,  officers,  directors and  consultants.  The awards,
which  generally vest over four years,  may consist of incentive  stock options,
nonqualified  options,  restricted  stock awards,  deferred stock awards,  stock
appreciation  rights and other awards as  described in the Plan.  In March 1996,
the Company  granted a restricted  stock award of 15,000  shares of common stock
vesting in March 1998,  to an  employee.  At  December  31, 1996 the Company has
reserved 335,000 shares of common stock for issuance under the Plan.

                  Additional  information with respect to the Plan's activity is
summarized as follows:

                                                           Weighted-
                                                            Average
                                                            Exercise
                                                 Shares     Price
                                                 -------    --------
         Options granted during 1996 and
            outstanding at December 31, 1996. .  32,000     $3.93
                                                 =======
         Options exercisable at December 31,
            1996. . . . . . . . . . . . . . . .   2,000     $8.50
                                                 =======
(continued)


                                      F-12

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE J) - Common Stock:  (continued)

         [1]      Stock options:  (continued)

                  The following table summarizes information about stock options
outstanding and exercisable at December 31, 1996:

<TABLE>
<CAPTION>
                       Options Outstanding
                 ---------------------------------
                              Weighted-               Options Exercisable
                               Average              ------------------------
                              Remaining  Weighted-                Weighted-
                             Contractual Average                  Average
Range of         Number          Life    Exercise    Number       Exercise
Exercise Price  Outstanding   (in Years)  Price    Exercisable     Price
--------------  -----------  ----------- --------  -----------   -----------
<C>               <C>          <C>        <C>       <C>           <C>
$3.25 to $4.00    30,000        10.2      $3.63

    $8.50          2,000         9.5       8.50       2,000        $8.50
                --------                           --------
                  32,000        10.1      $3.93       2,000        $8.50
                ========                           ========
</TABLE>
                  At December  31,  1996,  options for 303,000  shares of common
stock were available for future grant under the Plan.

         [2]      Warrants and unit purchase options:

                  As at  December  31,  1996,  the  Company  has  the  following
warrants and unit purchase options outstanding:
<TABLE>
<CAPTION>

                           Shares Reserved  Exercise   Expiration
                             for Issuance     Price       Date
                           ---------------  --------  ------------
<S>                          <C>             <C>      <C>
Class A warrants (i) (ii).   1,793,750       $4.50    May 7, 2000
Class B warrants (ii). . .     250,000        8.00    May 7, 2000
Unit purchase option (iii)     225,000       (iii)    May 7, 2001
</TABLE>

          (i)  Consists of  1,293,750  warrants  included in the units issued in
               connection with the initial public offering and 500,000  warrants
               included in the bridge units (Note K).

          (ii) Redeemable at $.05 per warrant  providing the market value of the
               Company common stock reaches certain levels.

          (iii)The underwriters were issued a purchase option for 112,500 units,
               each  unit  consisting  of one  share  of  common  stock  and one
               warrant.  The unit purchase  option is  exercisable at a price of
               $4.80 per unit.  The warrant  included in the unit is exercisable
               for one share of common stock at a price of $4.50 per share. Both
               the unit purchase option and the underlying warrant expire May 7,
               2001. (continued)


                                      F-13

<PAGE>

                              BIG CITY BAGELS, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE K) - Bridge Financing:

         In January 1996, the Company completed a bridge financing,  pursuant to
which it issued (i) an aggregate of  $1,000,000  principal  amount of promissory
notes,  which  bear  interest  at the rate of 8% per annum and (ii) the right to
receive  upon the  completion  of the public  offering an  aggregate  of 500,000
bridge units and 500,000  Class B  redeemable  common  stock  purchase  warrants
("Class B warrants"). Each bridge unit consists of one share of common stock and
one Class A warrant. Two Class B warrants,  together, will entitle the holder to
purchase one share of common stock for $8.00 through May 7, 2000.  The units and
warrants were valued at $684,000 and were accounted for as a debt discount which
was  fully  amortized  as of  the  consummation  of  the  public  offering.  The
promissory notes were repaid with the proceeds of the public offering.













                                      F-14

<PAGE>



                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                  The  information  required  by this  item is  incorporated  by
reference  to  the  information  included  in  the  Company's  definitive  proxy
statement in connection  with the Annual Meeting of  Shareholders  to be held on
June 10, 1997.

ITEM 10.  EXECUTIVE COMPENSATION

                  The  information  required  by this  item is  incorporated  by
reference  to  the  information  included  in  the  Company's  definitive  proxy
statement in connection  with the Annual Meeting of  Shareholders  to be held on
June 10, 1997.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                  The  information  required  by this  item is  incorporated  by
reference  to  the  information  included  in  the  Company's  definitive  proxy
statement in connection  with the Annual Meeting of  Shareholders  to be held on
June 10, 1997.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                  The  information  required  by this  item is  incorporated  by
reference  to  the  information  included  in  the  Company's  definitive  proxy
statement in connection  with the Annual Meeting of  Shareholders  to be held on
June 10, 1997.


                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits Filed.

                  See Exhibit Index appearing later in this Report.

         (b)      Reports on 8-K.

                  None.



                                       29

<PAGE>


                                   SIGNATURES

                  In  accordance  with Section 13 or 15(d) of the Exchange  Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


Dated: March 28, 1997                      BIG CITY BAGELS, INC.


                                           By:  /s/ Mark Weinreb
                                           -----------------------------------
                                           Mark Weinreb, Chairman of the Board
                                           and Chief Executive Officer


                  In  accordance  with Section 13 or 15(d) of the Exchange  Act,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.



/s/ Mark Weinreb          Chairman of the Board, Chief          March 28, 1997
---------------------     Executive Officer and Chief
Mark Weinreb              Financial Officer (and principal
                          accounting officer)


/s/ Jerry Rosner          President and Director               March 28, 1997
---------------------
Jerry Rosner


/s/ Stanley Weinreb       Vice President and Director          March 28, 1997
---------------------
Stanley Weinreb


/s/ Stanley Raphael       Secretary and Director               March 28, 1997
---------------------
Stanley Raphael


/s/ Stephen J. Drescher   Director                             March 28, 1997
-----------------------
Stephen J. Drescher



                                       30

<PAGE>



                                  EXHIBIT INDEX


                                               Incorporated
                                               By Reference    No. in
Exhibit No.      Description                   from Document  Document  Page
-----------      -----------                   -------------  --------  ----

 2.1     Form of Agreement and Plan of ........      A
         Contribution among the Company and
         the partners of Pumpernickel Partners,
         L.P.

 3.1     Restated Certificate of Incorporation       A          3.1

 3.2     Restated By-laws ......................     A          3.2

 4.1     Form of Common Stock Certificate ......     A          4.1

 4.2     Form of Class A Warrant Certificate ...     A          4.2

 4.3     Form of Class A Warrant Agreement .....     A          4.3
         between Continental Stock Transfer &
         Trust Company and the Company

 4.4     Form of Class B Warrant ...............     A          4.4

10.1     Form of Financial Consulting ..........     A         10.1
         Agreement between the Company and
         the Underwriter

10.2     Employment Agreement between the ......     A         10.2
         Company and Mark Weinreb

10.3     Employment Agreement between the ......     A         10.3
         company and Jerry Rosner

10.4     1996 Performance Equity Plan ..........     A         10.4

10.5     Master Distribution Agreement, dated ..     A         10.5
         January 1, 1996, between the
         Company and Sysco Food Services of
         Los Angeles, Inc.

10.6     Form of Franchise Agreement ..........      A         10.6

10.7     Form of Area Development Agreement ...      A         10.7

27       Financial Data Schedule ..............      *         27          32


-------------------
*  Filed herewith.

A  The Company's Registration Statement on Form SB-2 (No. 333-2154) declared
   effective by the Commission on May 7, 1996.

                                       31


<PAGE>