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

(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, 1997
                          --------------------------------

[ ] 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              (I.R.S. Employer Identification No.)
  of 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 $2,746,029.

     As of March 16, 1998,  the  aggregate  market value of the Issuer's  Common
Stock held by non-affiliates of the Issuer (based on the last sale price of such
stock) was  $3,834,507.  At March 16,  1998,  6,714,904  shares of the  Issuer's
Common Stock were outstanding.



<PAGE>



                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS.

General

         Big City  Bagels,  Inc.  ("Company")  operates and  franchises  upscale
bagel/deli  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 recently
expanded  its concept to include  more deli  product  offerings,  including  new
sandwich  menu items,  and has created a new store  design with a stronger  deli
emphasis. The Company owns five stores, which are located in California, Arizona
and New York.  The  Company  also sells Big City Bagels  franchises.  Currently,
there are 13 franchises  open and operating in California,  Colorado,  Idaho and
Minnesota  and the Company has sold  franchises to open an additional 16 stores,
which are in various stages of development.  The Company also sells its products
to wholesale accounts and food service operators.

Business Strategy

         The  Company's  long-term  objective  is to become a  leading  national
bagel/deli  store chain.  The Company  seeks to achieve this  objective  by: (i)
expanding  its  concept  to  include a  stronger  deli  emphasis;  (ii)  opening
additional  stores and  acquiring  existing  bagel  stores or chains;  and (iii)
increasing sales to wholesale accounts.

         Expand Concept to Include a Stronger Deli Emphasis

         The Company has added a wide  variety of  sandwiches,  breads and other
lunch items to its menu and has created a new store design. The Company believes
that  expanding  its concept to include a stronger  deli  emphasis will increase
retail  sales by  generating  more  lunch  and  afternoon  business,  both  from
increased   in-store  traffic  and  through  catering  and  office  delivery  to
commercial  accounts.  The Company also believes that this expanded concept will
enable the  Company to offer more to  prospective  franchisees  than other bagel
store chains.

         Open Additional Company-owned Stores

         The Company plans to open additional  Company-owned stores in strategic
geographic  locations and acquire  existing  bagel stores or chains and possibly
other retail  enterprises  that the Company believes will enhance its operations
and provide  entry into new markets.  In January 1998,  the Company  purchased a
bagel store located in New York City and has an exclusive  option to purchase an
additional  store in New York City until  January  1999.  The  Company  also has
leased  retail  space  in New  York  City  where  it  intends  to  open  another
Company-owned  store in June 1998. In  determining  whether to make a particular
acquisition,  the Company will consider,  among other things, the size, location
and existing operations of the acquisition candidate, as well as such candidates
potential  to  maximize  growth and  increase  revenues.  Although  the  Company
regularly evaluates possible acquisition opportunities, the Company currently is
not a party to any agreements  with respect to any  acquisition.  As part of its
expansion  strategy,  the  Company  will focus its  resources  on higher  volume
stores.  The Company's  ability to make acquisitions and open new Company- owned
stores  (other  than the second  store in New York City) is  dependent  upon the
Company's ability to obtain financing from outside sources.

         Expand Wholesale Business

         As name  recognition  and product  acceptance  continues  to grow,  the
Company  intends to  continue  to expand its  business  by  targeting  wholesale
accounts.  The Company currently is the exclusive supplier of bagels for certain
domestic flights for Northwest Airlines.


                                        2

<PAGE>



Corporate Background

         The Company and its  wholly-owned  subsidiary,  Big City NY, Inc., were
incorporated  under  the  laws of the  State of New  York in  December  1992 and
November  1997,  respectively.  The Company's  principal  executive  offices are
located at 99 Woodbury Road, Hicksville, New York 11801 and its telephone number
is (516) 932-5050.

Products and Distribution

         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 accordance with the Company's  strict quality control  guidelines,
either in  Company-  or  franchisee-  owned  commissaries  or by an  independent
supplier and then delivered to  Company-owned  stores,  franchises and wholesale
accounts (with the exception that the Company's New York City store prepares the
bagel  dough at that  location).  The bagels are then baked in each store  daily
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 in
accordance  with quality  control  guidelines  from  ingredients  purchased from
independent suppliers.  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  currently owns and operates a commissary  located in Costa
Mesa, California, which services many Big City Bagels stores. In April 1998, the
Company  will be moving  this  commissary  to a  facility  located  in  Ontario,
California, which contains cold storage space, eliminating the Company's need to
maintain a separate cold storage facility.  The Company also has assisted one of
its franchisees, who entered into an area development agreement with the Company
to open stores in the  Minneapolis/St.  Paul,  Minnesota area, in establishing a
commissary owned and operated by such franchisee in Minneapolis to service these
stores. The Company also uses an independent supplier to prepare bagel dough for
certain  Company-owned  stores,  franchises  and  wholesale  accounts,   thereby
enabling the Company to supply more stores and wholesale accounts without having
to build additional commissaries.

Store Design and Locations

         Big City Bagels stores are designed to be upscale bagel/deli cafes. The
Company's  store  design is  adaptable  to  various  site  locations,  including
shopping centers,  free-standing  units,  drive-thru and commercial sites, which
are selected on heavily-traveled thoroughfares. One of the Company's franchisees
in Idaho currently is operating a drive-thru  store and the Company  anticipates
that  one of  its  franchisees  in  Fayetteville,  North  Carolina  will  open a
drive-thru store in April 1998. 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. Such stores would be serviced by stores
where baked goods would be prepared and then delivered to the satellite  stores,
thereby  eliminating the need for baking equipment in the satellite stores.  The
Company  recently  turned  one of  its  Costa  Mesa,  California  stores  into a
satellite  store  and  intends  to  open  another  satellite  store  in  Tustin,
California  in May 1998,  both of which are or will be serviced by the Company's
other Costa Mesa,  California store. Big City Bagels stores are typically highly
visible  and  easily  accessible.  The stores  generally  are  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.


                                        3

<PAGE>



         The  following  table sets forth by  location  the number of  currently
opened  Company-owned  stores and franchises  and the number of franchises  that
have been sold but not yet opened:

<TABLE>
<CAPTION>
                                                                           Stores Not Yet Opened
Location                                              Stores Open          Under Franchises Sold
------------------                                -----------------        ---------------------
<S>                                                       <C>               <C>
Arizona.........................................          1(1)                     3
California......................................         10(2)                     2
Colorado........................................           1                       0
Idaho...........................................           1                       1
Minnesota.......................................           4                       0
Nevada..........................................           0                       1
New York........................................          1(1)                     0
North Carolina..................................           0                       7
Washington......................................           0                       2
                                                          ---                     ---
         Total..................................          18                      16
</TABLE>

-----------------------------
(1)      Includes one Company-owned store.
(2)      Includes three Company-owned stores.


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'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.


                                        4

<PAGE>



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., Chesapeake Bagel
Bakery,  Big Apple Bagels,  New York Bagel  Enterprises and Dunkin' Donuts.  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  and its  franchisees  advertise  in local  newspapers  and
through direct  mailings.  As exclusive  supplier of bagels for certain domestic
flights  for   Northwest   Airlines,   the   Company's   product  and  franchise
advertisements also are included in Northwest's in-flight magazine.  The Company
provides advertising support to franchisees relating to grand openings and local
store  marketing,  including the  preparation of a national  marketing  calendar
which provides advance notice to franchisees of special Company-wide promotions.
Franchisees are required under their  franchise  agreements to spend 2% of gross
sales on local  advertising  and to  contribute  1% of monthly  gross sales to a
national advertising cooperative. However, to date, a national fund has not been
established and the Company has not required this contribution.

Trademarks and Service Marks

         The  Company's  trademark  "Big City  Bagels(R)",  its service  mark "A
Bigger Bagel for Less  Dough!(R)" and its  distinctive  logo are registered with
the United  States  Patent and  Trademark  Office  pursuant to federal  law. The
Company  has filed  trademark  applications  with the United  States  Patent and
Trademark  Office  seeking  registration  for "Big City  Deli(TM)" and "Big City
Pickles(TM)".  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.

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.

                                        5

<PAGE>



         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.

         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 16, 1998, the Company had 70 full-time employees. 24 of the
70 full-time  employees are  salaried,  while the other 46 are paid on an hourly
basis. In addition,  the Company has 23 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.



                                        6

<PAGE>



ITEM 2.           DESCRIPTION OF PROPERTY

<TABLE>
<CAPTION>
                                                                                                        Approximate
                                                         Approximate                                         Annual
                                                           Square                                            Lease
Location                  Use                              Footage      Lease Expiration                    Payments
<S>                                                        <C>                                              <C>
Hicksville, NY            Principal executive              1,500        Month-to-month                      $19,800
                          office

Newport Beach, CA         Offices                            735        December 2000                       $21,168

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

Ontario, CA               Commissary/cold plant            1,900        April 1999; renewable for           $59,400
                          storage space (opening                        one additional three-year
                          April 1998)                                   term

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

Tustin, CA                Company satellite store            500        February 1999; renewable            $14,400
                          (opening May 1998)                            for one additional one-year
                                                                        term

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

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

New York, NY              Company store                    2,000        September 2007                     $144,000

New York, NY              Company store                    2,400        September 2011                     $108,000
                          (opening June 1998)
</TABLE>


ITEM 3.           LEGAL PROCEEDINGS

         On July 29,  1997,  in the  Superior  Court of Los  Angeles  County,  a
lawsuit was commenced by Michael Schweid,  et al, against Victor Saab and George
Saab,  et al, former  franchisees  of the Company,  and the Company,  seeking an
unspecified  amount of damages for property  damage and  business  interruptions
resulting  from a fire which  partially  destroyed a shopping  mall in which the
former franchisees' store was located. Victor Saab was subsequently convicted of
arson and insurance  fraud. The Company believes the lawsuit against the Company
is without  merit.  All costs  associated  with this  litigation  are covered by
insurance.  The Company's  insurance  carrier has assumed defense of this matter
and has moved to dismiss the lawsuit.

         On  September  24,  1997,  in the  Arizona  Superior  Court,  County of
Maricopo,  a lawsuit  was  commenced  by Earl and Linda  Fraley  (dba  "Xtremely
Xpresso"),  owners  of a store in a  shopping  mall in which a Big City  Bagels'
store, formerly franchised and subsequently Company-owned,  was located, against
the landlord (the owners of the mall),  the former  franchisee  and the Company,
seeking an unspecified  amount of damages.  The landlord has filed a cross-claim
against the Company for rent owed.  Plaintiff's  claim is based upon a provision
in their lease which plaintiffs assert prohibits the owner from leasing space to
other tenants who sell substantial amounts of coffee products, and therefore,

                                        7

<PAGE>



prohibited  the owner from  leasing  space for the Big City Bagels  store.  As a
result of events that caused the  Company to be unable to  economically  operate
the store,  it was closed on October 23,  1997.  The Company  believes it has no
liability in this matter and that it is the obligation of the owner to indemnify
the  Company for these  claims.  The Company  also  believes  that the owner has
breached its obligations to the Company under its lease.  The Company intends to
move for summary  judgment  against the plaintiff  and to vigorously  defend the
cross-claim asserted by the landlord.

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

                  Not applicable.


                                     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
("Class  A  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 Class A
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>
Second Quarter (from May 7, 1996)................. 9-5/8           7-1/2             5                2-1/2
Third Quarter..................................... 10-1/2          7                 4-1/4            2-3/4
Fourth Quarter.................................... 7-3/8           2-1/2             3-1/2            1

1997
------
First Quarter..................................... 5-1/8           2-5/8             4-5/8            1
Second Quarter.................................... 5-7/8           4-1/4             5                3-1/8
Third Quarter..................................... 5-7/8           3-1/4             5-9/16           3-1/8
Fourth Quarter.................................... 4-9/16          1                 4                1/8
</TABLE>


         On March 16, 1998,  the last sale prices for the Common Stock and Class
A Warrants as reported by Nasdaq were $1.00 and $0.0625, respectively.

         As of March 16,  1998,  there were 39 and 7 holders of record of Common
Stock and Class A Warrants, respectively. The Company believes that there are in
excess of 500 beneficial holders of its Common Stock.

Dividend Policy

         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

                                        8

<PAGE>



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.

Recent Sales of Unregistered Securities

         During the quarter ended December 31, 1997 and thereafter through March
16, 1998, the Company made the following sales of unregistered securities:

<TABLE>
<CAPTION>
                                                                      Consideration
                                                                       Received and                                 If Option,
                                                                      Description of                                Warrant or
                                                                  Underwriting or Other        Exemption           Convertible
                                                                   Discounts to Market            from           Security, Terms
                                                     Number           Price Afforded          Registration        of Exercise or
Date of Sale               Title of Security          Sold            to Purchasers             Claimed             Conversion
----------------        --------------------        ---------   ----------------------      --------------    -------------------
<S>                     <C>                         <C>         <C>                           <C>              <C>
12/16/97                options to purchase          13,500     options granted - no              4(2)         exercisable for
                        Common Stock                            consideration received                         ten years from
                        granted to                              by Company until                               date of grant at
                        employees                               exercise                                       $2.00 per share
1/7/98                  Common Stock                346,497     asset purchase                    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.  Factors that could affect the  Company's
results of operations and cause its results to differ from these  statements are
discussed in the Company's  prospectus,  dated July 9, 1997.  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.



                                        9

<PAGE>



Selected Financial Data

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                            ------------------------------------------
SUMMARY OF OPERATIONS:                                                           1997                          1996
                                                                                 ----                          ----
<S>                                                                         <C>                           <C>
Total revenues.................................................               $2,746,029                    $2,414,976
Net loss.......................................................             $(3,543,066)                  $(2,537,451)
Basic and diluted loss per common share........................                   $(.67)                        $(.61)
Weighted average common shares outstanding.....................               5,326,327                     4,174,061
YEAR-END FINANCIAL POSITION:
Working capital................................................              $3,628,516                    $1,251,022
Total assets...................................................              $5,161,964                    $3,502,239
Total liabilities..............................................                $743,736                      $823,639
Stockholders' equity...........................................              $4,418,228                    $2,678,600
</TABLE>

Results of Operations

         Revenues for the year ended December 31, 1997 were $2,746,029, compared
to  $2,414,976  for the year ended  December 31, 1996,  a 13.7%  increase.  This
increase was attributable to gains in the following areas:  store and commissary
products  sales and royalty  income.  Store and  commissary  products sales were
$2,370,318 for the year ended December 31, 1997,  compared to $1,888,306 for the
year ended  December 31, 1996, a 25.5%  increase.  This  increase was due to the
maturing of Company-owned  retail operations,  the acquisition of one new retail
store in February  1997,  the growth of the  wholesale  business  and  increased
commissary  products sales to franchise  stores which opened in 1997.  Franchise
fee income was  $151,000  for the year ended  December  31,  1997,  compared  to
$309,250 for the year ended December 31, 1996, a 51.2%  decrease.  Revenue under
franchise  agreements  generally is  recognized  when the  franchise  stores are
opened.  Three stores  opened during 1997 and one  franchise  store  closed,  as
compared  to ten stores  that  opened in 1996.  $81,000 of  franchise  fees were
recognized  when the Company  terminated an area  development  agreement  during
1997. Royalty income was $162,486 for the year ended December 31, 1997, compared
to $126,820 for the year ended December 31, 1996, a 28.1% increase. This was due
to the  maturing  of  operations  of existing  franchise  stores and the initial
operations of new franchise stores that opened in 1997.  Interest income for the
year ended  December 31, 1997 was $60,112,  resulting  from the cash proceeds of
the Company's  initial public offering and the exercise of the Company's Class A
Redeemable  Common  Stock  Purchase  Warrants  ("Class  A  Warrants"),  Class  B
Redeemable  Common Stock  Purchase  Warrants  ("Class B Warrants")  and the Unit
Purchase  Option,  which were  deposited  into interest  bearing  accounts.  See
"--Liquidity and Capital Resources."

         The  Company  had  unearned  franchise  fee  income of  $278,500  as of
December  31,  1997,  compared to $263,750 as of  December  31,  1996.  Unearned
franchise  fee  income  represents  nonrefundable  franchise  fees which will be
recognized as revenue as the related  franchise stores are opened.  In 1997, the
Company entered into two new franchise  agreements and two new area  development
agreements (one seven-store  agreement and one three-store  agreement),  none of
which were opened by December 31, 1997. In September  1997, the Company  entered
into a  licensing  agreement  with  Total  Petroleum  Inc.,  pursuant  to  which
following a short trial the licensee intended to operate a minimum of seven full
service Big City Bagels  stores.  The first store opened in January  1998.  Soon
thereafter,  the  licensee was acquired by another  company  which  notified the
Company (in accordance with the terms of the license agreement) that it does not
intend to open any  additional  stores.  Also in  September  1997,  the  Company
terminated a twelve-store area development agreement that it had entered into in
1996 providing for the opening of stores in Texas because the franchisee  failed
to open  any  stores  due to  health  reasons.  In  January  1998,  the  Company
renegotiated a twelve-store area development  agreement that it had entered into
in 1996 providing for the opening of stores in Minnesota. The

                                       10

<PAGE>



franchisee  has opened  four stores and now is not  required to open  additional
stores.  The franchisee  still operates its own commissary and may elect to open
new stores in the future. Management believes that these business decisions were
in the best  interest of the Company and does not believe this  reflects a trend
within its franchise system.

         Cost of sales were $1,380,670,  representing 58.2% of net sales for the
year ended  December 31, 1997,  compared to $1,029,955,  or 54.5%,  for the year
ended  December 31, 1996. The increase in cost of sales as a percentage of sales
was  primarily  attributable  to  increased  product  sales  to  franchises  and
commercial accounts,  which are generally at lower margins than product sales by
Company-owned stores.

         The  increase  in  cost of  sales  of  $350,715  was  primarily  due to
increases in sales by Company-owned  stores, the Company's  commercial  business
and product sales to franchisees.

         Selling, general and administrative expenses (SG&A) were $4,144,526 for
the year ended December 31, 1997, a 31.0% increase from  $3,163,820 for the year
ended December 31, 1996. This increase was primarily due to: a $320,185 increase
in salaries from  $1,238,620 in 1996 to $1,558,805 in 1997,  resulting  from the
hiring of management and administrative level personnel,  increases in officers'
salaries and additional salaries  attributable to new Company- owned stores; and
increases of $50,350 in advertising,  $51,278 in insurance, $134,928 in rent and
$423,965 for various other expenses, all of which increased by less than $50,000
from the prior year. This was all mandated by a growing business.  Write-offs of
fixed  assets,  goodwill and  franchise  costs were  $723,407 for the year ended
December 31, 1997.  This write-off was 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" ("SFAS 121").  The value of
the assets led to management's decision to re-value the assets of its stores and
commissary after  considering the possible sale of certain stores and relocation
of the  commissary.  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 of debt discount in 1997.
See "--Liquidity and Capital Resources" and Notes to the Financial Statements.

         Interest  expense  decreased by $34,618  during the year ended December
31, 1997,  substantially due to the Company retiring its debt obligations to its
shareholders from proceeds raised through its initial public offering.

         The net loss for the  year  ended  December  31,  1997 was  $3,543,066,
compared to a net loss of $2,537,451 for the year ended December 31, 1996.

Liquidity and Capital Resources

         In  1996,  the  Company   funded  its  operating   losses  and  capital
expenditures primarily through its initial public offering in May 1996, 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.

         In July 1997,  in order to induce  holders to  exercise  the  Company's
Class A Warrants and Class B Warrants, the Company reduced the exercise price of
such  warrants.  In October 1997, the exercise price of the Class B Warrants was
further  reduced.  The Company  derived  net  proceeds  of  $2,370,272  from the
exercise  of  these  warrants.  The  exercise  price  of the  Class  A  Warrants
subsequently  was permanently  reduced to $2.50 per share.  See Note J[2] to the
Financial Statements.  In addition,  proceeds of $540,000 were received when the
underwriter of the Company's initial public offering exercised its Unit Purchase
Option.  On December 31, 1997,  the Company  completed a private  placement from
which the  Company  received  net  proceeds  of  $2,334,158  through the sale of
265,000  shares of Class A Preferred  Stock  ("Preferred  Stock") to  accredited
investors. See Note J[3] and Note K to the Financial Statements.

         Cash and  United  States  Treasury  Bills at  December  31,  1997  were
$4,118,031,  compared to  $1,661,026  at December  31, 1996.  This  increase was
primarily attributable to the Company's receipt of proceeds from the exercise of
warrants  and the  Unit  Purchase  Option  and  from the  private  placement  of
Preferred Stock.

         Accounts receivable decreased  to $104,190 at December 31,  1997,  from
$110,063 at December 31, 1996.  This decrease was primarily due to the Company's
establishing a $35,000 allowance for doubtful accounts. Inventory

                                       11

<PAGE>



decreased to $43,868 at December  31,  1997,  from $74,272 at December 31, 1996.
This decrease was primarily due to the Company improving its inventory controls.

         Prepaid  expenses  and other  current  assets  decreased  to $41,133 at
December 31, 1997,  from $77,131 at December 31, 1996.  This  decrease  resulted
from the  reclassification  of a $40,000 promissory note receivable from prepaid
expenses and other current assets to security deposits and other assets.

         Fixed assets, net of accumulated depreciation, decreased to $611,095 at
December 31, 1997, from  $1,239,478 at December 31, 1996 and intangible  assets,
net of accumulated amortization, decreased to $23,267 at December 31, 1997, from
$300,699 at December 31, 1996.  This decrease was primarily due to  management's
analysis  of asset  value in  accordance  with  SFAS 121 after  considering  the
possible sale of certain stores and the relocation of the commissary.

         Security  deposits and other  assets  increased to $220,380 at December
31,  1997,   from  $39,570  at  December  31,  1996.   This  increase   resulted
predominantly from deposits the Company placed during the year for equipment and
leasehold  improvements for the new commissary.  It also includes  approximately
$45,000 of promissory notes.

         Shareholder  and  partners'  loans of $87,468 at December 31, 1996 were
entirely  repaid as of December 31, 1997.  The current  portion of notes payable
and capital lease  obligations  decreased to $38,862 at December 31, 1997,  from
$51,918 at December 31, 1996, due to the regular  payments of these  obligations
throughout the year.

         The combination of accounts payable and accrued  expenses  increased to
$361,344 at December  31,  1997,  from  $268,334 at December 31, 1996 due to the
increase in purchases resulting from an increase in sales.

         The  non-current  portion of capital  lease  obligations  decreased  to
$57,235 at December  31,  1997,  from  $132,926 at December  31, 1996 due to the
regular payments of these obligations throughout the year. At December 31, 1997,
the Company had  $3,628,516 of working  capital and a current ratio of 6.3 to 1,
principally  due to the proceeds  received from the exercise of warrants and the
Unit Purchase Option and from the private placement of Preferred Stock.

         The Company's  operating  activities used net cash of $2,493,789 during
the year ended  December 31, 1997, as compared to net cash used in operations of
$1,960,103 for the year ended December 31, 1996. This increase was primarily due
to the increase of the Company's net loss, which was funded from the proceeds of
the  exercise  of  warrants  and the Unit  Purchase  Option and from the private
placement of Preferred Stock.

         Although the Company has no present need to raise additional capital to
support its existing  operations  through 1998, the Company does believe it will
need to obtain  financing from outside  sources to fund its plans for growth and
to support its operations beyond 1998, including for potential  acquisitions and
the  establishment  of new  Company-  owned  stores.  The Company  currently  is
exploring its ability to obtain such financing.

         The Company's  plans to increase  revenues,  reduce costs and implement
its expansion strategy are as follows:

         Increase Revenues

          o    The Company  recently  expanded  its concept to include more deli
               product  offerings,  including new sandwich  menu items,  and has
               created a new store  design with a stronger  deli  emphasis.  The
               Company  believes that this expanded concept will increase retail
               sales by generating more lunch and afternoon business,  both from
               increased  in-store  traffic  and  through  catering  and  office
               delivery to commercial  accounts.  The Company's  revenues  would
               increase  as a  result  of  increases  in:  (i)  retail  sales in
               Company-owned  stores, (ii) royalty payments from franchises with
               increased  retail sales and (iii) commissary sales to franchises.
               However,  there can be no assurance  that the Company's  expanded
               concept will be accepted or successful.

          o    The  Company  also  intends to increase  revenues  by  attracting
               wholesale  business.  The Company has entered  into an  agreement
               with Northwest Airlines to be the exclusive supplier

                                       12

<PAGE>



               of bagels on certain domestic Northwest flights. The agreement is
               for a three-year  term,  although  either party may terminate the
               agreement  after the second year.  The Company  anticipates  that
               this  arrangement  will  generate  approximately   $2,200,000  in
               revenues  over  a  three-year   period  based  upon   Northwest's
               currently  anticipated  requirements.  There can be no  assurance
               that the  Company  will be able to  obtain  additional  wholesale
               business   or  that   it   will  be  able  to  meet   Northwest's
               requirements. If the Company is unable to service Northwest, then
               Northwest  may  terminate  the agreement and the Company will not
               generate revenues as anticipated.

          o    In order to increase  revenues  generated by commissary sales, in
               March 1998 the Company  increased  its prices for prepared  bagel
               dough sold to franchises.  In addition, in April 1998 the Company
               intends to increase retail prices in its Company-owned stores and
               has encouraged its franchisees to do the same.

          o    The Company will make increased  efforts to promote its franchise
               sales  by  the   Company's   visibility  in  trade  and  business
               publications.  Two new  franchise  stores have opened in 1998 and
               two  additional  franchise  stores are  expected to open in April
               1998.

         Reduce Costs

          o    The Company will be moving its Costa Mesa,  California commissary
               to a new location in Ontario,  California,  which contains a cold
               storage  facility,  thereby  eliminating  the  need  for a second
               facility for storage.  The Company also  recently  moved its west
               coast corporate offices to a smaller, less expensive facility.

          o    The  Company  believes  that it can  maintain  the quality of its
               products  without having to prepare the dough  exclusively in its
               own commissaries. The Company has now arranged for an independent
               supplier to supply bagel dough to certain  Company-owned  stores,
               franchises and wholesale accounts. The Company believes that this
               will  enable it to supply  more  stores  and  wholesale  accounts
               without  having to build  additional  commissaries.  Although the
               Company is confident  that  independent  suppliers  can serve the
               Company well,  there can be no assurance that the Company will be
               able to maintain product quality or engage and retain  acceptable
               suppliers.  In  addition,  since the Company  will not be able to
               exercise  direct  day-to-day  control  over  the  preparation  or
               delivery of its  products,  it could  suffer from  variations  in
               product  quality and delays in  shipments.  In the event that the
               independent  supplier  is unable to service the  Company's  needs
               sufficiently, the Company's California commissary will be able to
               adequately  supply  the  Company-owned  stores,   franchises  and
               wholesale accounts.

          o    The Company has been evaluating the desirability of discontinuing
               the  operations  of  the  lower  volume  stores  that  drain  the
               Company's  resources.  As part of this process,  in October 1997,
               the Company closed its Mesa, Arizona stores and in February 1998,
               the  Company  sold its store  located  in Park  City,  Utah to an
               unaffiliated entity for $50,000.

          o    The  Company's  area  development   agreements  all  provide  for
               territory  exclusivity.   The  Company  intends  to  continue  to
               evaluate  its  area  developers  and to  renegotiate  with  those
               developers  who are not  opening  stores in a timely  fashion  in
               order to open up the restricted  territories to other prospective
               franchisees.  In 1997, the Company  terminated  its  relationship
               with its Texas area developer and renegotiated its agreement with
               its Minnesota area developer.


                                       13

<PAGE>



         Expansion

          o    The Company  plans to open  additional  Company-owned  stores and
               acquire other bagel stores or  complementary  retail food outlets
               which will enhance existing  operations or provide entry into new
               markets.  In January  1998,  the Company  purchased a bagel store
               located in New York City and has an exclusive  option to purchase
               an  additional  store in New York City until  January  1999.  The
               Company  entered into  consulting  agreements with the two former
               owners of this bagel  store,  pursuant  to which  they  agreed to
               assist  the  Company  to  operate   this  store  and  in  opening
               additional  stores in New York City. The Company  recently leased
               retail  space in New York City where it  intends to open  another
               Company- owned store in June 1998. The Company's  ability to make
               acquisitions  and open new  Company-owned  stores (other than the
               second  New York City  store) is  dependent  upon its  ability to
               obtain  financing  from  outside  sources.  While the  Company is
               exploring its ability to obtain such  financing,  there can be no
               assurance that it will be able to do so.

          o    The Company intends to open smaller satellite stores. Such stores
               would be serviced  by stores  where baked goods would be prepared
               and then delivered to the satellite stores,  thereby  eliminating
               the  need for  baking  equipment  in the  satellite  stores.  The
               satellite  stores  would  sell  these  baked  goods  as  well  as
               sandwiches and other non-baked items which can be prepared at the
               satellite  stores.  The Company  recently turned one of its Costa
               Mesa,  California  stores into a  satellite  store and intends to
               open another  satellite store in Tustin,  California in May 1998,
               both of which  are or will be  serviced  by the  Company's  other
               Costa Mesa, California store.

         Chief Financial Officer

         In  February  1998,  the  Company  hired a  part-time  Chief  Financial
Officer. The Company believes that the increased  day-to-day  involvement of its
Chief Financial Officer,  who has provided the Company with consulting  services
in the past,  will  provide  it with a greater  degree of  financial  acumen and
oversight relating to its operations and strategic planning.

Year 2000 Compliance

         The  Company  has  evaluated  the  potential  impact  of the  situation
commonly referred to as the "Year 2000 Issue" ("Y2K").  The Y2K problem concerns
the inability of information systems,  primarily computer software programs,  to
properly recognize and process date sensitive  information  relating to the year
2000 and beyond.  Many of the world's computer systems currently record years in
a two-digit format.  Such computer systems will be unable to properly  interpret
dates  beyond the year 1999,  which  could lead to business  disruptions  in the
United  States  and  internationally.  The  potential  costs  and  uncertainties
associated  with Y2K will  depend on a number of  factors,  including  software,
hardware and the nature of the industry in which a company operates.

         To ensure that the Company's  computer  systems are Y2K compliant,  the
Company has been  reviewing each of its systems and programs over the past year.
The Company also is working with all of its major external vendors and suppliers
to assess  their  compliance  efforts and the  Company's  exposure to them.  Any
entities with which the Company interacts electronically,  such as its creditors
and banks,  can affect its  ability  to address  the Y2K  problem.  Based on the
foregoing,  the Company has determined that additional costs associated with the
Y2K issue should not have a material  adverse effect on the Company's  operating
results or financial condition.



                                       14

<PAGE>



ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements

                                                                          Page

Independent Auditors' Report ............................................ F-1

Consolidated Balance Sheets as of
  December 31, 1997 and 1996 ............................................ F-2

Consolidated Statements of Operations for
  the years ended December 31, 1997 and 1996..............................F-3

Consolidated Statements of Stockholders'
  Equity (Capital Deficiency) for the years
  ended December 31, 1997 and 1996........................................F-4

Consolidated Statements of Cash Flows for the
  years ended December 31, 1997 and 1996..................................F-5

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


                                       15



<PAGE>

INDEPENDENT AUDITORS' REPORT

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


We have audited the accompanying consolidated balance sheets of Big City Bagels,
Inc.  and  subsidiary  as of  December  31,  1997  and  1996,  and  the  related
consolidated statements of operations, stockholders' equity (capital deficiency)
and cash flows for the years then ended. These consolidated 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 consolidated  financial statements  enumerated above present
fairly, in all material  respects,  the consolidated  financial  position of Big
City Bagels,  Inc.  and  subsidiary  as of December  31, 1997 and 1996,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.





New York, New York
February 24, 1998




<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                            ----------------------------------
                                                                                                  1997               1996
                                                                                            ----------------   ---------------
<S>                                                                                         <C>                <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                                $     4,118,031    $       654,856
   Investments in United States Treasury bills                                                                       1,006,170
   Accounts receivable                                                                              104,190            110,063
   Inventory                                                                                         43,868             74,272
   Prepaid expenses and other current assets                                                         41,133             77,131
                                                                                            ---------------     --------------

      Total current assets                                                                        4,307,222          1,922,492

   Fixed assets, net of accumulated depreciation                                                    611,095          1,239,478
   Intangible assets, net of accumulated amortization                                                23,267            300,699
   Security deposits and other assets                                                               220,380             39,570
                                                                                            ---------------   ----------------

                                                                                            $     5,161,964    $     3,502,239
                                                                                            ===============   ================

LIABILITIES
Current liabilities:
   Stockholder loans                                                                                           $        87,468
   Capital lease obligations                                                                $        38,862             51,918
   Unearned franchise fee income                                                                    278,500            263,750
   Accounts payable                                                                                 287,138            208,011
   Accrued expenses                                                                                  74,206             60,323
                                                                                            ---------------   ----------------

      Total current liabilities                                                                     678,706            671,470

Deferred rent payable                                                                                 7,795             19,243
Capital lease obligations, noncurrent                                                                57,235            132,926
                                                                                            ---------------   ----------------

                                                                                                    743,736            823,639
                                                                                            ---------------   ----------------

Commitments

STOCKHOLDERS' EQUITY
Convertible  (redeemable)  preferred  stock;  $.001 par value;  1,000,000 shares
   authorized; 265,000 shares issued and outstanding (liquidation value
   $3,312,500)                                                                                          265
Common stock; $.001 par value; 25,000,000 shares authorized; 6,343,466 and
   4,923,757 shares issued and outstanding at December 31, 1997 and
   December 31, 1996, respectively                                                                    6,344              4,924
Additional paid-in capital                                                                        9,677,189          4,340,180
Accumulated deficit                                                                              (5,258,070)        (1,629,004)
Unearned portion of compensatory stock                                                               (7,500)           (37,500)
                                                                                            ----------------  -----------------

                                                                                                  4,418,228          2,678,600
                                                                                            ----------------  ----------------

                                                                                            $     5,161,964    $     3,502,239
                                                                                            ===============   ================

</TABLE>

See notes to financial statements                                          F-2

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                                                 Year Ended December 31,
                                                                                            ---------------------------------
                                                                                                 1997                1996
                                                                                            -------------     ---------------
<S>                                                                                       <C>                  <C>
Revenues:
   Product sales by company owned stores                                                   $    1,657,271      $    1,483,493
   Product sales to franchisees and others                                                        713,047             404,813
   Franchise fees                                                                                 151,000             309,250
   Royalty income                                                                                 162,486             126,820
   Interest income                                                                                 60,112              75,634
   Other income                                                                                     2,113              14,966
                                                                                           --------------     ---------------

                                                                                                2,746,029           2,414,976
                                                                                           --------------     ---------------

Costs and expenses:
   Cost of sales                                                                               1,380,670           1,029,955
   Selling, general and administrative expenses                                                4,144,526           3,163,820
   Write-off of fixed assets and franchise costs                                                 723,407
   Amortization of debt discount                                                                                     683,542
   Interest expense                                                                               40,492              75,110
                                                                                           --------------     --------------

                                                                                               6,289,095          4,952,427
                                                                                           --------------     --------------

Net loss                                                                                   $  (3,543,066)     $  (2,537,451)
                                                                                           ==============     ==============


Basic and diluted loss per common share                                                         $(.67)             $(.61)
                                                                                                =====              =====

Weighted-average common shares outstanding                                                    5,326,327           4,174,061
                                                                                              =========           =========
</TABLE>


See notes to financial statements                                       F-3

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity (Capital Deficiency)
<TABLE>
<CAPTION>

                                                                                                          Unearned Portion
                                                                      Additional                          of Compensatory
                                   Preferred Stock   Common Stock       Paid-in    Partners' Accumulated       Stock
                                   ---------------   ---------------                         -----------  --------------  ---------
                                   Shares   Amount   Shares   Amount    Capital     Capital     Deficit   Shares  Amount   Total
                                   ------   ------  --------- ------- --------- ----------- ------------  ------  ------  ---------
<S>                                <C>      <C>     <C>       <C>     <C>       <C>         <C>           <C>     <C>     <C>
Balance - January 1, 1996                           2,818,750 $ 2,819 $ 972,181 $  255,456  $(1,303,610)                  $(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) (2,493,194)                 (2,537,451)
                                                   ---------   ------  --------   --------- ----------- ------- ------- -----------

Balance - December 31, 1996                        4,923,757    4,924 4,340,180          0 (1,629,004)  15,000  (37,500) 2,678,600
Issuance of common stock for
   acquisition of franchise stores                     8,264        8     8,256                                              8,264
Exercise of Class A warrants                         798,945      799 1,869,473                                          1,870,272
Exercise of Class B warrants                         500,000      500   499,500                                            500,000
Exercise of unit purchase option                     112,500      113   539,887                                            540,000
Private placement                265,000  $ 265                       2,333,893                                          2,334,158
Beneficial conversion feature of
   preferred stock                                                       86,000              (86,000)                            0
Amortization of compensatory
   stock                                                                                                        30,000      30,000
Net loss                                                                                  (3,543,066)                   (3,543,066)
                               ---------  ------  ---------- ------  ---------   ------- ----------   -------- -------  ----------
Balance - December 31, 1997      265,000  $ 265  $6,343,466  $6,344  $9,677,189  $     0 $(5,258,070)  15,000  $(7,500) $4,418,228
                               =========  ====== =========== ======  ==========  ======= ============ ======== ======== ==========

</TABLE>


See notes to financial statements                                        F-4

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                     Year Ended December 31,
                                                                                                    --------------------------
                                                                                                       1997             1996
                                                                                                    -------------  -----------
<S>                                                                                              <C>               <C>
Cash flows from operating activities:
   Net loss                                                                                       $  (3,543,066)  $  (2,537,451)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                                     232,092         155,166
      Write-off of fixed assets and franchise costs                                                     723,407
      Amortization of debt discount                                                                                     683,542
      Amortization of common stock issued for compensation                                               30,000          22,500
      Issuance of compensatory stock options                                                                             40,000
      Provision for bad debt                                                                             35,000
      Loss on abandonment of leasehold improvements                                                      84,797
      Changes in:
        Interest receivable on United States Treasury bills                                                             (21,135)
        Accounts receivable                                                                             (83,801)       (102,970)
        Inventory                                                                                        30,404         (26,339)
        Prepaid expenses and other current assets                                                        35,998         (67,559)
        Security deposits and other assets                                                             (134,932)         (7,623)
        Accounts payable                                                                                 79,127         (70,379)
        Accrued expenses                                                                                 13,883          24,663
        Unearned franchise fee income                                                                    14,750         (45,500)
        Deferred rent payable                                                                           (11,448)         (7,018)
                                                                                                     ----------      -----------
           Net cash used in operating activities                                                     (2,493,789)     (1,960,103)
                                                                                                     ----------      -----------

Cash flows from investing activities:
   Acquisition of franchises                                                                            (75,000)        (50,000)
   Purchases of fixed assets                                                                            (32,421)        (81,864)
   Payment for trademark                                                                                (10,000)
   Purchase of United States Treasury bills                                                                          (1,231,842)
   Sales of United States Treasury bills                                                              1,006,170         246,807
                                                                                                      ---------      -----------
           Net cash provided by (used in) investing activities                                          888,749      (1,116,899)
                                                                                                      ---------      -----------

Cash flows from financing activities:
   Proceeds from public offering                                                                                      4,163,609
   Repayment of stockholder loans                                                                       (87,468)       (375,000)
   Proceeds from exercise of warrants                                                                 2,370,272
   Repayment of notes payable                                                                           (88,747)        (94,742)
   Proceeds form exercise of unit purchase option                                                       540,000
   Proceeds from private placement                                                                    2,334,158
   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                                                  5,068,215       3,693,867
                                                                                                      ---------      -----------

Net increase in cash and cash equivalents                                                             3,463,175         616,865
Cash and cash equivalents - beginning of year                                                           654,856          37,991
                                                                                                      ---------      ----------

Cash and cash equivalents - end of year                                                             $ 4,118,031     $   654,856
                                                                                                    ===========     ===========
</TABLE>



See notes to financial statements                                       F-5

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

<TABLE>

<S>                                                                                             <C>               <C>
Supplemental disclosure of cash flow information:
      Cash paid during the year for:
      Interest                                                                                    $      75,596   $      49,006
      Income taxes                                                                                $       3,500   $       1,925

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, LP 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
                                                                                                                  =============

   In February 1997, the Company acquired all of the assets of one franchise for the following:
      Forgiveness of outstanding accounts receivable                                               $      8,796
      Issuance of 8,264 shares of common stock                                                            8,264
                                                                                                   ------------
                                                                                                         17,060
      Cash paid                                                                                          75,000
                                                                                                   ------------
           Total amount attributed to fixed assets                                                $      92,060
                                                                                                  =============

</TABLE>


See notes to financial statements

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY


NOTE A - THE COMPANY AND BASIS OF PRESENTATION

Big City Bagels,  Inc. and subsidiary  (the  "Company")  operates and franchises
retail bagel/deli 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. See Note B[6]. 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.

During November 1997, the Company formed a wholly-owned subsidiary, Big City NY,
Inc.  (BCNY).  BCNY  was  formed  to  acquire  the  assets  of two  unaffiliated
bagel/deli stores located in New York City (Note M).

The Company  has  incurred  recurring  losses from  operations  since  inception
resulting in an accumulated  deficit of $5,258,070.  The Company is implementing
plans to reduce its  operating  losses and  negative  cash  flows.  Those  plans
include  evaluating  the  desirability  of  discontinuing  the operations of low
volume stores that drain the Company's resources. There is no assurance, however
that the Company's efforts will ultimately be successful.


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.

       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 stores.



                                                                           F-6

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

  [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.  During the year ended
       December 31, 1997, a loss of $464,431 was charged to  operations  for the
       write-off of machinery,  equipment and leasehold  improvements and a loss
       of $258,976  was charged to  operations  for the  write-off  of franchise
       costs recorded upon the  acquisition  of two  affiliated  entities in May
       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.

   [8] Fair value of financial instruments:

       The carrying amounts of cash and cash equivalents,  accounts  receivable,
       accounts  payable,  accrued  expenses and capitalized  lease  obligations
       approximate fair value due to their short-term nature or their underlying
       terms.

   [9] 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 SFAS 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).


                                                                           F-7
<PAGE>

BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:  (CONTINUED)

  [10] Loss per common share:

       In 1997, the Financial  Accounting  Standards Board issued  Statement No.
       128 "Earnings Per Share".  Statement No. 128 replaced the  calculation of
       primary  and fully  diluted  earnings  per share with  basic and  diluted
       earnings per share. Unlike primary earnings per share, basic earnings per
       share excludes any dilutive effects of options,  warrants and convertible
       securities. Dilutive earnings per share is very similar to the previously
       reported fully diluted  earnings per share.  In accordance with Statement
       No.  128,  which was  adopted by the  Company  in 1997 and  retroactively
       applied to 1996,  basic and diluted net loss per common share is based on
       the net loss  divided by the  weighted  average  number of common  shares
       outstanding  during  the years.  No effect has been given to  outstanding
       options,   warrants  or  convertible   preferred  stock  in  the  diluted
       computation as their effect would be antidilutive.

  [11] Recent accounting pronouncements:

       In June 1997, the Financial  Accounting Standards Board issued Statements
       of  Financial  Accounting  Standards  No. 130,  "Reporting  Comprehensive
       Income",  and No. 131,  "Disclosure  about  Segments of an Enterprise and
       Related  Information",  which are  effective  for years  beginning  after
       December 15, 1997. The Company  believes that these  pronouncements  will
       not  have a  significant  effect  on  the  information  presented  in the
       financial statements.


NOTE C - FIXED ASSETS

Fixed assets consist of the following:

                                      December 31,
                              ----------------------
                                 1997         1996               Life
                              ---------   ----------      ---------------
Furniture and fixtures       $  400,592   $  297,518       7 to 15 years
Machinery and equipment         687,974      660,905       5 to 15 years
Leasehold improvements          487,192      577,651       Life of leases
                             ----------   ----------

                              1,575,758    1,536,074
Less accumulated depreciation
 and amortization               964,663      296,596
                              ---------    ---------

                            $   611,095   $1,239,478
                            ===========   ==========

NOTE D - INTANGIBLE ASSETS

Intangible  assets at cost,  are amortized  using the  straight-line  method and
consist of the following:
                                    December 31,
                               --------------------------
                                  1997            1996            Life
                              -----------     -----------       --------
Franchise costs                               $   289,547       15 years
Organization cost              $   48,099          48,099       5 years
Trademark costs                    13,000           3,000       15 years
                               ----------     ------------

                                  61,099          340,646
Less accumulated amortization     37,832           39,947
                               ---------      ------------

                              $   23,267     $    300,699
                              ==========     =============

                                                                          F-8
<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE E - CAPITAL LEASE OBLIGATIONS

Capital lease obligations consist of the following:

                                                          December 31,
                                                   --------------------------
                                                        1997          1996
                                                    -----------    ----------
    Equipment leases collateralized by
     certain equipment, bearing interest at
     14.63% and requiring monthly payments
     of $4,198 through March 15, 2000               $    96,097    $   184,844
   Less current portion                                  38,862         51,918
                                                    -----------    -----------

   Long-term portion                                $    57,235    $   132,926
                                                    ===========    ===========

Future maturities at December 31, 1997 are as follows:

               Year Ending
               December 31,              Amount
               ------------            ---------

                1998                   $ 38,862
                1999                     44,941
                2000                     12,294
                                       --------

                                       $ 96,097
                                       ========

NOTE F - STOCKHOLDER LOANS

Stockholder loans were fully paid during 1997.

NOTE G - COMMITMENTS

[1]  Operating leases:

     The Company leases its commissary space and store locations under various
     operating  leases which expire between  November 1998 and September 2011.
     Future minimum rental payments as of December 31, 1997 are as follows:

          Year Ending
          December 31,               Amount
          ------------             ----------

           1998                    $ 551,016
           1999                      451,601
           2000                      431,818
           2001                      351,255
           2002                      370,060
           Thereafter              2,413,401
                                   ---------

                                 $ 4,569,151
                                 ===========
                                                                 F-9
<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE G - COMMITMENTS  (CONTINUED)

  [1]  Operating leases:  (continued)

       Rent expense for the years ended  December 31, 1997 and December 31, 1996
       was $333,070 and $198,142, 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 an  agreement  with an employee,  which
       provides for an annual salary of $105,000 through December 31, 1998.


NOTE H - INCOME TAXES

At December 31, 1997, the Company has approximately  $4,463,000 of net operating
loss carryforwards expiring through 2012.

At December  31,  1997,  the Company has a deferred  tax asset of  approximately
$1,965,000  representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible.  The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain.  The  difference  between  the  statutory  tax  rate  of 34%  and the
Company's  effective tax rate of 0% is substantially  due to the increase in the
valuation  allowance of  $1,465,000  (1997) and $500,000  (1996).  The Company's
ability to utilize its net  operating  loss  carryforwards  may be subject to an
annual  limitation  in future  periods  pursuant to Section 382 of the  Internal
Revenue Code of 1986, as amended.

Prior to May 7, 1996, the Company  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 1997 the Company  entered into  franchise  agreements  for twelve stores,
none of which were  opened as of  December  31,  1997.  During  1996 the Company
entered into franchise  agreements for nineteen stores, of which two were opened
in 1997. At December 31, 1997 there were ten franchised  stores and five Company
owned  stores in  operation.  Deferred  franchise  fees at December 31, 1997 and
December 31, 1996 represent fees received in advance of store openings.

Effective  February  1997, the Company  repurchased a previously  sold franchise
store for an aggregate of $75,000  cash,  8,264 shares of the  Company's  common
stock valued at $8,264 and  forgiveness  of outstanding  accounts  receivable of
$8,796.  Assets  acquired  consisted of machinery  and  equipment  and leasehold
improvements.  The results of  operations  include the  activities of this store
from the acquisition date.

                                                                    F-10

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE I - FRANCHISES  (CONTINUED)

The following  unaudited pro forma data gives effect to the above acquisition as
though it had  occurred  upon the opening of the  franchise  store  during March
1996.

<TABLE>
<CAPTION>
                                                                              Year Ended
                                                                              December 31,
                                                                     -------------------------------
                                                                          1997              1996
                                                                    -------------     --------------
<S>                                                                 <C>               <C>
Total revenues                                                      $   2,766,988     $   2,621,214
Net loss                                                               (3,552,618)       (2,632,968)
Basic and diluted loss per common share                                  $(.67)            $(.63)
</TABLE>

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


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 1997 and 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
       (2) the 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 1997  and  1996  would  have  been  approximately
       $3,736,197   and   $2,582,000   or  $0.70  and  $0.62  per   share.   The
       weighted-average  fair value of the options  granted during 1997 and 1996
       are estimated as $2.86 and $2.65 per share on the date of grant using the
       Black-Scholes option-pricing model with the following assumptions:

                                                 1997            1996
                                            -------------        -----
Risk free rates                             5.74% - 6.66%        6.18%
Expected option life in years                     5              6
Expected stock price volatily                    70%             70%
Expected dividend yield                           0%              0%

       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, 1997 the Company has reserved 335,000 shares of common stock
       for issuance under the Plan.


                                                                      F-11

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE J - COMMON STOCK  (CONTINUED)

Additional  information  with respect to the Plan's  activity is  summarized  as
follows:
<TABLE>
<CAPTION>


                                                            1997                         1996
                                                  --------------------------    ---------------------------

                                                                 Weighted-                     Weighted-
                                                                  Average                       Average
                                                                  Exercise                     Exercise
                                                   Shares          Price         Shares          Price
                                                  ----------     ---------      --------       -----------
<S>                                             <C>              <C>            <C>            <C>
Outstanding at January 1                           32,000           $3.93
Granted                                            67,500            4.31        32,000           $3.93
Cancelled                                         (15,000)           3.25
                                                 -----------     --------       ---------      -----------

Outstanding at December 31                         84,500            4.36        32,000           3.93
                                                ============     =========      =========      ==========

Shares exercisable                                 67,000           $4.97         2,000           $8.50
                                                ============     =========      =========      ==========
</TABLE>

       The  following   table   summarizes   information   about  stock  options
       outstanding and exercisable at December 31, 1997:

<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
----------------      -----------       ----------        ---------        -----------      --------

<S>                     <C>             <C>               <C>              <C>               <C>
$2.00 to $4.00           32,500            9.67             $2.92             15,000          $4.00
$5.13 to $8.50           52,000            9.22              5.25             52,000           5.25
                         ------           ------            ------         ----------         -----

                         84,500            9.40             $4.36             67,000          $4.97
                         ======           =====             ======         =========          =====
</TABLE>

       At December  31,  1997,  options for 250,500  shares of common stock were
       available for future grant under the Plan.

  [2]  Warrants:

       As at December 31, 1997, the following warrants were outstanding:

                          Shares Reserved        Exercise       Expiration
                            for Issuance           Price           Date
                          ---------------        --------     -----------------
Class A Warrants              2,406,250           $2.50       May 7, 2000
Placement agent Warrants         75,000            5.00       December 30, 2002
Placement agent Warrants        125,000            1.3125     December 30, 2002

Effective July 11, 1997, the Company reduced the exercise price of its 1,793,750
Class A Warrants and its 250,000 Class B Warrants.  The Class A Warrants,  which
were previously  exercisable at $4.50 per share,  were revised to be exercisable
at $2.50 per share until October 8, 1997. Holders of Class A Warrants who


                                                                    F-12

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

NOTE J - COMMON STOCK  (CONTINUED)

  [2]  Warrants:  (continued)

       exercised prior to the expiration of the special  exercise  period,  were
       issued a new Class A Warrant upon the expiration of the special  exercise
       period. The Company agreed that if an aggregate of at least $2,000,000 of
       gross  proceeds  were  derived  from the exercise of the Class A Warrants
       during this special exercise period, then the exercise price of the Class
       A Warrants  which were not exercised  and the new Class A Warrants  would
       remain at $2.50 per share until their  expiration on May 7, 2000. If less
       than  $2,000,000 of gross  proceeds were derived from the exercise of the
       Class A Warrants during this special exercise  period,  then the exercise
       price of the Class A Warrants  which were not exercised and the new Class
       A Warrants  was to revert to $4.50  after the  expiration  of the special
       exercise period.

       During the special  exercise  period,  an  aggregate  of 798,945  Class A
       Warrants were exercised, from which the Company derived gross proceeds of
       $1,997,363. Although $2,000,000 of gross proceeds was not received by the
       Company, the Company determined on October 14, 1997 to permanently reduce
       the  exercise  price of the Class A  Warrants  to $2.50 per share , which
       price will remain in effect  until the Class A Warrants  expire on May 7,
       2000. This exercise price reduction also applies to the additional  Class
       A Warrants  issued to holders  of Class A  Warrants  that were  exercised
       during the special exercise period.

       During this special  exercise  period,  each Class B Warrant entitled the
       holder to purchase  one share of common stock for $2.50 per share and, if
       so  exercised,  the holder would be issued a new Class A Warrant upon the
       expiration  of the special  exercise  period.  On  November 5, 1997,  the
       Company  further  reduced the  exercise  price of the  Company's  Class B
       Redeemable Common Stock Purchase Warrants ("Class B Warrants"),  to $1.00
       per share.  On  November  12,  1997 all  500,000  Class B  Warrants  were
       exercised  at the  reduced  exercise  price,  from which the  Company has
       received gross proceeds of $500,000 and the holder was issued 500,000 new
       Class A Warrants.

  [3]  Private placement:

       In connection with the Private  Placement (Note K) the Company issued the
       Placement  Agent and its designee  Placement Agent Warrants which entitle
       the holders to purchase  125,000  shares of common  stock for $1.3125 per
       share and  75,000  shares of common  stock for $5.00 per  share,  in both
       cases exercisable until December 30, 2002.


NOTE K - PREFERRED STOCK

On December  31,  1997,  the Company  completed a private  placement in which it
received net proceeds of $2,334,158  through the sale of 265,000 shares of Class
A preferred stock.  The preferred stock accrues  dividends at the rate of 8% per
annum,  payable  in cash or in  shares of common  stock at the  election  of the
Company  on the date the  preferred  stock is  converted  into  shares of common
stock. The preferred stock and dividends accrued are convertible at the election
of the holder into shares of common stock at a  conversion  rate per share equal
to the greater of (i) 75% of the average  closing bid price of the common  stock
for  the  five  consecutive  trading  days  immediately  prior  to the  date  of
conversion  (subject to  reduction,  in 1%  increments,  between May 1, 1998 and
August  29,  1998 to 70% if the  Registration  Statement  has not been  declared
effective  by the  Securities  and Exchange  Commission  and not approved by the
National  Association  of Securities  Dealers) or (ii) $0.2585.  On December 31,
2000, the shares of preferred stock then outstanding  automatically convert into
shares of common stock.

                                                                     F-13

<PAGE>


BIG CITY BAGELS, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
December 31, 1997 and 1996


NOTE K - PREFERRED STOCK   (CONTINUED)

The  Company  may  redeem  the  preferred  stock  in whole as a class at a price
payable in cash  equal to the sum of (i) 125% of the stated  value of the shares
being redeemed plus (ii) the dividends accrued through the redemption date.

Due to the  beneficial  conversion  feature of the  preferred  stock the Company
recorded a charge of $86,000  to  retained  earnings  (accumulated  deficit)  on
December 31, 1997, with a credit of like amount to additional paid-in capital.


NOTE L - 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  bore  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  consisted  of one share of common  stock and one
Class A warrant. Two Class B warrants, together, entitled 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.


NOTE M - SUBSEQUENT EVENTS

During  January  1998 BCNY a wholly  owned  subsidiary  of the Company  (Note A)
acquired all the assets of an unaffiliated bagel store located in New York City.
The purchase  price was $700,000 for which the Company paid the seller  $275,000
in cash and $425,000 by the issuance of 346,497  shares of the Company's  common
stock at fair value ($425,000).

During February 1998, BCNY acquired  certain  equipment and was assigned a lease
of an unaffiliated  restaurant  located in New York City. The purchase price was
$80,000  for  which  approximately  $50,000  is  attributable  to the  equipment
purchased.  The Company paid $60,000 in cash and the  remaining  $20,000 will be
paid by the issuance of shares of the  Company's  common stock to be  calculated
based on the  average  of the  closing  sale  prices for the five  trading  days
immediately preceding the date of the lease assignment.

During  February 1998 the Company sold the franchise  store  repurchased  during
1997  (Note I) for  $50,000  in cash plus an  additional  amount  for  inventory
located in the store at the closing date.


                                                                       F-14

<PAGE>




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

                  None.


                                    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 30, 1998.

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 30, 1998.

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 30, 1998.

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 30, 1998.


                                     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 Form 8-K.

                  None.



                                       30

<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 30, 1998                  BIG CITY BAGELS, INC.



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


         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.


<TABLE>

<S>                                                  <C>                                             <C>
         /s/ Mark Weinreb                                                                             March 30, 1998
------------------------------------         Chairman of the Board, Chief
Mark Weinreb                                 Executive Officer and Secretary



         /s/ Jerry Rosner                                                                            March 30, 1998
------------------------------------         President, Chief Operating Officer
Jerry Rosner                                 and Director



         /s/ Stanley Weinreb                                                                        March 30, 1998
------------------------------------         Director
Stanley Weinreb



         /s/ Stanley Raphael                                                                        March 30, 1998
------------------------------------         Director
Stanley Raphael



         /s/ Howard J. Fein                                                                        March 30, 1998
-----------------------------------         Chief Financial Officer (and
Howard J. Fein                              principal accounting officer)
</TABLE>

                                       31

<PAGE>



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
                                                                                       Incorporated
                                                                                       by Reference          No. in
Exhibit No.      Description                                                           from Document        Document
-----------      -----------                                                           -------------        --------
<S>              <C>                                                                      <C>               <C>
2.1              Form of Agreement and Plan of Contribution among the                        A                2.1
                 Company and the partners of Pumpernickel Partners, L.P.

3.1              Restated Certificate of Incorporation                                       A                3.1

3.1.2            Amendment to Restated Certificate of Incorporation                          B               3.1.2

3.1.3            Amendment to Certificate of Incorporation, as corrected                     C               3.1.3

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 between Continental Stock                 A                4.3
                 Transfer & Trust Company and the Company

4.3.1            Form of Amendment to Form of Class A Warrant Agreement                      B               4.3.1
                 between Continental Stock Transfer & Trust Company and the
                 Company

4.4              Form of Class A Preferred Stock Certificate                                 C                4.4

4.5              Form of Subscription Agreement between the Company and                      C                4.5
                 purchasers of Class A Preferred Stock

4.6              Form of warrant to purchase 125,000 shares of Common Stock                  C                4.6
                 at an exercise price of $1.3125 per share issued to Perrin, Holden
                 & Davenport Capital Corp. and its designee, dated December 31,
                 1997

4.7              Form of warrant to purchase 75,000 shares of Common Stock at                C                4.7
                 an exercise price of $5.00 per share issued to Perrin, Holden &
                 Davenport Capital Corp. and its designee, dated December 31,
                 1997

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

10.2             Employment Agreement between the Company and Mark                           A                10.2
                 Weinreb

10.2.1           Amendment to Employment Agreement between the Company                       B               10.2.1
                 and Mark Weinreb

10.3             Employment Agreement between the Company and Jerry Rosner                   A                10.3

10.3.1           Amendment to Employment Agreement between the Company                       B               10.3.1
                 and Jerry Rosner

10.4             1996 Performance Equity Plan                                                A                10.4


</TABLE>
                                       32
<PAGE>


<TABLE>
<CAPTION>

                                                                                       Incorporated
                                                                                       by Reference          No. in
Exhibit No.      Description                                                           from Document        Document
----------       -----------                                                          --------------        --------
<S>              <C>                                                                     <C>                <C>
10.5             Master Distribution Agreement, dated January 1, 1996, between               A                10.5
                 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

10.8             Form of Founders' Shareholder Agreement                                     A                10.8

10.9.1           Consolidation Agreement and Promissory Note, dated April 30,                A               10.9.1
                 1996, between the Company and Mark Weinreb

10.9.1(a)        Agreement  to Loan  Funds  and  Amendment  to  Consolidation  B
                 10.9.1(a)  Agreement and Promissory Note, dated April 30, 1996,
                 between the Company and Mark Weinreb, dated June 11, 1997

10.9.2           Consolidation Agreement and Promissory Note, dated April 30,                A               10.9.2
                 1996, between the Company and Stanley Weinreb

10.9.2(a)        Agreement  to Loan  Funds  and  Amendment  to  Consolidation  B
                 10.9.2(a)  Agreement and Promissory Note, dated April 30, 1996,
                 between the Company and Stanley Weinreb, dated June 11, 1997

10.9.3           Consolidation Agreement and Promissory Note, dated April 30,                A               10.9.3
                 1996, between the Company and Stanley Raphael

10.9.3(a)        Agreement  to Loan  Funds  and  Amendment  to  Consolidation  B
                 10.9.3(a)  Agreement and Promissory Note, dated April 30, 1996,
                 between the Company and Stanley Raphael, dated June 11, 1997

21               Subsidiaries of the Company                                                 *

23               Consent of Richard A. Eisner & Company LLP                                  *

27               Financial Data Schedule                                                     *

99.1             Notice to Holders of Class A Warrants                                       B                99.1
</TABLE>

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

*                 Filed herewith.

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

B                 The  Company's   Registration  Statement  on  Form  SB-2  (No.
                  333-29297)  declared  effective by the  Commission  on July 9,
                  1997.

C                 The  Company's   Registration   Statement  on  Form  S-3  (No.
                  333-44773) declared effective by the Commission on February 9,
                  1998.

                                       33

<PAGE>