<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                  FORM 10-K/A

(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 29, 1996

                                       OR

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

                         COMMISSION FILE NUMBER 0-21097
                         ------------------------------

                           EINSTEIN/NOAH BAGEL CORP.

             (Exact name of Registrant as specified in its charter)

               DELAWARE                             84-1294908
   (State or other jurisdiction of   (I.R.S. Employer Identification No.)
    incorporation or organization)                                   
               

                           14123 DENVER WEST PARKWAY
                             GOLDEN, CO 80401-4086
              (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (303) 215-9300

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                              TITLE OF EACH CLASS
                              -------------------

                          COMMON STOCK, $.01 PAR VALUE

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

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

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY
STOCKHOLDERS WHO WERE NOT AFFILIATES (AS DEFINED BY REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION) OF THE REGISTRANT WAS APPROXIMATELY
$341,072,810 AT MARCH 17, 1997 (BASED ON THE CLOSING SALE PRICE ON THE NASDAQ
NATIONAL MARKET ON MARCH 17, 1997, AS REPORTED BY THE WALL STREET JOURNAL
(WESTERN EDITION)).  AT MARCH 17, 1997, THE REGISTRANT HAD ISSUED AND
OUTSTANDING AN AGGREGATE OF 32,689,678 SHARES OF COMMON STOCK.

                      DOCUMENTS INCORPORATED BY REFERENCE

THOSE SECTIONS OR PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON MAY 13, 1997 DESCRIBED IN PART III HEREOF
ARE INCORPORATED BY REFERENCE IN THIS REPORT.
<PAGE>
 
                                    PART I

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  CERTAIN STATEMENTS IN THIS FORM 10-K/A UNDER "ITEM 1. BUSINESS", "ITEM 3.
LEGAL PROCEEDINGS", "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS", AND ELSEWHERE IN THIS FORM 10-K/A,
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT").  SUCH FORWARD-
LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF
EINSTEIN/NOAH BAGEL CORP. (THE "COMPANY"), ITS AREA DEVELOPERS, AND EINSTEIN
BROS.(TM) BAGELS STORES AND NOAH'S NEW YORK BAGELS(R) STORES TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.  SUCH FACTORS INCLUDE, AMONG OTHERS,
THE FOLLOWING: COMPETITION; SUCCESS OF OPERATING INITIATIVES; DEVELOPMENT AND
OPERATING COSTS; AREA DEVELOPERS' ADHERENCE TO DEVELOPMENT SCHEDULES;
ADVERTISING AND PROMOTIONAL EFFORTS; BRAND AWARENESS; THE COMPANY'S
RELATIONSHIPS WITH, AND THE CONTINUED SUCCESS OF, BOSTON CHICKEN, INC. ("BOSTON
CHICKEN"), THE COMPANY'S MAJORITY STOCKHOLDER; ADVERSE PUBLICITY; ACCEPTANCE OF
NEW PRODUCT OFFERINGS; AVAILABILITY, LOCATIONS, AND TERMS OF SITES FOR STORE
DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; AVAILABILITY AND
TERMS OF CAPITAL; FOOD, LABOR, AND EMPLOYEE BENEFITS COSTS; CHANGES IN
GOVERNMENT REGULATION; REGIONAL WEATHER CONDITIONS; AND OTHER FACTORS REFERENCED
IN THIS FORM 10-K/A.  THE SUCCESS OF THE COMPANY IS DEPENDENT ON ITS AREA
DEVELOPERS AND THE MANNER IN WHICH THEY OPERATE AND DEVELOP EINSTEIN BROS.
BAGELS STORES AND NOAH'S NEW YORK BAGELS STORES.

ITEM 1.  BUSINESS

GENERAL

  The Company franchises specialty retail stores that feature fresh-baked
bagels, proprietary cream cheeses, specialty coffees and teas, and creative
soups, salads and sandwiches, primarily under the Einstein Bros. Bagels and
Noah's New York Bagels brand names. As of April 21, 1997, there were 420 stores
in operation systemwide, all of which were operated by area developers financed
in part by the Company.  Such financing generally permits the Company in certain
circumstances to convert its loan into a majority equity interest in the area
developer at a premium over the price per unit paid by the investors in the area
developer for their equity investments.  As of April 21, 1997, the Company had
entered into area development agreements that provide for the development of
1,047 additional stores, the majority of which are scheduled to open over the
next three years.  The Company estimates that there will be between 615 and 665
stores in operation systemwide by the end of 1997.  SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ABOVE.

  The Company was incorporated in Delaware in February 1995 under the name
Progressive Bagel Concepts, Inc.  The Company's name was subsequently changed to
Einstein/Noah Bagel Corp. in June 1996.  The Company's principal executive
offices are located at 14123 Denver West Parkway, Golden, Colorado, 80401, and
its telephone number is (303) 215-9300.

THE COMPANY'S BRANDS

  The Company has two principal brands.  The Einstein Bros. Bagels brand was
developed by the Company after it was formed in March 1995.  The Noah's New York
Bagels brand, which was acquired when the Company acquired Noah's New York
Bagels, Inc. ("Noah's") in February 1996, was originally introduced in 1989 in
Berkeley, California.  As of April 21, 1997, there were 283 Einstein Bros.
Bagels stores in 28 states and the District of Columbia, and 102 Noah's New York
Bagels stores in California, Washington and Oregon.

  The key component of the Company's product strategy is its offering of fresh-
baked bagels, produced utilizing proprietary processes that allow for maximum
inclusion of high quality ingredients, such as whole blueberries, raisins and
nuts.  Bagels are offered in a wide variety of both traditional and creative
flavors and are baked fresh throughout the day in each Einstein Bros. Bagels and
Noah's New York Bagels store using steamed-baking processes.

  Einstein Bros. Bagels and Noah's New York Bagels stores also offer consumers a
line of traditional and creative flavors of cream cheese and an extensive line
of beverages featuring branded coffees and teas, fruit teas, bottled sodas,
juices and waters, and a full line of fountain sodas.  The stores also include a
menu of creative soups, salads and bagel sandwiches offering customers a variety
of lunch alternatives, as well as branded retail products that support the major
menu categories, including ground and whole bean coffee, teas, bagel chips,
coffee mugs and other items.  Stores are typically in leased 

                                       2
<PAGE>
 
locations of approximately 2200 square feet with ample parking, substantial
indoor seating and when practical, additional outdoor seating.

AREA DEVELOPERS

  General.  The Company's strategy of concentrated development of local markets
is supported by area developers financed in part by the Company.  The Company
believes that having a relatively small group of area developers, each led by a
management group with substantial multi-unit retail food service experience and
short- and long-term incentives tied to performance, is a superior means of
achieving market leadership than either Company ownership of all stores or more
traditional franchising approaches utilizing a larger number of franchisees.
The Company anticipates that domestic expansion of its brands will be undertaken
by its current area developers and is not seeking additional domestic area
developers or franchisees.

  The Company believes that rapid penetration of selected designated market
areas ("DMAs") is superior to more limited penetration of many DMAs for several
reasons.  Concentration of stores allows both area developers and Company
personnel to gain greater expertise concerning the trade areas within the DMA,
thus improving their ability to locate and approve sites on a more informed and
efficient basis as part of a market-wide strategy.  In addition, store
concentration can permit more efficient operations in terms of multi-unit
management, convenient employee training, and sharing of employees, expertise
and other resources within a DMA.  Concentrated DMA penetration also permits
cost-efficient media advertising to commence sooner than would be the case with
a more scattered nationwide expansion.  The Company believes that media
advertising increases aggregate store revenue (which, in turn, can promote
certain in-store operating efficiencies) and assists the Company's area
developers in securing real estate for future sites on acceptable terms and
recruiting management and hourly employees.

  The Company's success is dependent to a significant extent upon its area
developers and the manner in which they develop and operate their stores and
manage their organizational and financial resources.  The opening and success of
stores are dependent on a number of factors, including the availability of
suitable sites, the negotiation of acceptable lease or purchase terms for such
sites, permitting and regulatory compliance, the ability to meet construction
schedules, the ability to hire and train qualified personnel, the financial and
other capabilities of the Company and its area developers, and general economic
and business conditions.  Not all of the foregoing factors are within the
control of the Company or its area developers.  The financial resources required
by the Company's area developers to comply with their area development
agreements are dependent upon, among other things, the number and cost of stores
developed and store operating results.  The cost to develop a store typically
ranges from between $240,000 and $625,000.  The area developers are expected to
finance their capital requirements through borrowings from the Company, equity,
debt and lease financing from third parties and internally generated funds.
There can be no assurance that area developers will have access to the financial
resources necessary to open the number of stores required by their development
schedules or will successfully develop or operate stores in their development
areas in a manner consistent with the Company's concepts and standards.  Because
the amount of additional financing that the Company may provide to area
developers depends on the amount of funds internally generated by the area
developers, the amount of additional equity, debt and lease financing to be
obtained by the area developers from other parties and the cost of stores
developed, the Company has not determined, nor is it able at present to
reasonably estimate, any amount of additional financing that it may commit to
such area developers.

  At times, the Company or its area developers may determine that a specific
store should be closed due to operating or site-related issues specific to that
store, changes in the market or trade area, changes in store development
strategy, or failure of the store to meet desired sales or profitability levels.
The cost to close a store varies depending upon the remaining lease renewal
terms and the ability of the site to be sublet, as well as the type, quantity
and condition of the equipment installed and the cost to remove such equipment
and improvements from the site.  During fiscal 1996, the Company closed six
stores and its area developers closed five stores.  The costs incurred to close
the Company-operated stores ranged from between $60,000 and $400,000 per store.
The Company has been informed by its area developers that the costs incurred by
them to close such stores ranged from between $260,000 and $520,000 per store.
A provision to close Company-operated stores was established in 1995.  See Item
6.  Selected Consolidated Financial Data and Item 7.  Management's Discussion
and Analysis of Financial Condition and Results of Operations.

                                       3
<PAGE>
 
  The following table sets forth information as of April 21, 1997 concerning the
Company's nine area developers.  The operating principals of such area
developers listed below each have experience in the multi-unit retail industry
ranging from 10 to 30 years.  A majority of the additional stores committed are
required to be opened over the next three years.  SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 2.

<TABLE>
<CAPTION>
                                                                                                                CURRENT   ADDITIONAL
                                                                                                  OPERATING      STORES     STORES
AREA DEVELOPER                                       PRIMARY MARKETS                              PRINCIPAL       OPEN    COMMITTED
-------------------------    --------------------------------------------------------------    ----------------  -------  ----------
<S>                          <C>                                                               <C>               <C>      <C>
Einstein Bros. Bagels(1):
 
Colonial Bagels, L.P.(2)     Boston, Cleveland, Pittsburgh, Columbus, New York City            Robert Schlacter       45         217
                             metropolitan area
 
Finest Bagels, L.L.C.(2)     Kansas City, St. Louis, Minneapolis, Dallas/Ft. Worth, Houston,   Edwin Brownell         61         127
                             Austin
 
Great Lakes Bagels, L.L.C.   Milwaukee, Chicago, Detroit, Madison, Indianapolis                Joseph Hoog            53         144
 
Gulfstream Bagels, L.P.(2)   Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa,          Robert Hartnett        47         122
                             Atlanta(3), Charlotte, Norfolk
 
Mayfair Bagels, L.L.C.(2)    Washington, D.C., Baltimore, Richmond                             Steve Quamme           17          58
 
Philly Rose, L.P.(2)         Philadelphia                                                      Harry Rose             20          65
 
Sunbelt Bagels, L.L.C.(2)    San Diego, Palm Springs, Orange County, San Bernardino County,    Pearce Tucker          75         112
                             Denver, Salt Lake City, Phoenix, Tucson, Albuquerque, Las
                             Vegas, Colorado Springs
 
Noah's New York Bagels:
 
Noah's Bay Area Bagels,      Sacramento, San Francisco/Oakland/San Jose, Fresno                Jim Mizes              51          44
 L.L.C.
 
Noah's Pacific, L.L.C.       Portions of Los Angeles, Portland, Seattle/Tacoma                 Jim Mizes              51         158
                                                                                                               ---------      ------
  Total                                                                                                              420       1,047
                                                                                                               =========      ======

</TABLE>
(1) Includes 11 stores operated under the Bagel & Bagel brand, one store
    operated under the Offerdahl's Bagel Gourmet brand, seven stores operated
    under the Baltimore Bagel brand, 15 stores operated under the Bagel
    Boulevard brand and one store operated under the Bagel Street Cafe brand.
    The Company's area developers intend to convert all such stores to Einstein
    Bros. Bagels stores by early 1998.

(2) Effective April 21, 1997, Alamo Bagels, L.P. ("Alamo") merged into Finest
    Bagels, L.L.C., BCE West Bagels, L.L.C. ("BCE West") merged into Sunbelt
    Bagels, L.L.C., and Liberty Foods, L.L.C. ("Liberty") merged into Colonial
    Bagels, L.P. Prior to such mergers, Alamo, BCE West and Liberty were area
    developers of the Company. In addition, effective April 21, 1997, Gulfstream
    Bagels, L.P. acquired certain development rights, stores and other assets of
    Mayfair Bagels, L.L.C. ("Mayfair") in Atlanta, Charlotte and Norfolk. In
    each of the merger transactions, owners of equity interests in the merging
    area developer received equity interest in the surviving area developer.
    Such transactions were the result of arms' length negotiations between the
    relevant area developers and conditioned upon the consent of the Company in
    its capacity as franchisor. The Company believes that any further
    consolidation of area developers primarily will be the

                                       4
<PAGE>
 
    result of negotiations by and among such area developers, with input and
    suggestions from the Company in its capacity as franchisor. On April 1,
    1997, Mayfair and Philly Rose, L.P. ("Philly Rose") entered into a letter of
    intent pursuant to which Philly Rose and Mayfair propose to combine their
    operations in a statutory merger.

(3) Stores in the Atlanta metropolitan area will operate under the Melvyn &
    Elmo's(TM) brand because the Company does not currently have the right to
    use the Einstein Bros. Bagels brand for restaurant services in the Atlanta
    metropolitan area.

    Area Developer Ownership.  No officer or director of the Company owns a
controlling equity interest in any area developer.  Lawrence Beck, Scott Beck's
father,  is a minority investor in Sunbelt Bagels, L.L.C. and Colonial Bagels,
L.P.  The Company does not believe Lawrence Beck is an affiliate of the Company.
In addition, Messrs. Scott Beck, Jeffrey L. Butler, President of Einstein Bros.
Bagels Concept, W. Eric Carlborg, Chief Financial Officer, David G. Stanchak,
Chief Development Officer, and John H. Muhlstein, Jr. and Lloyd D. Ruth,
directors of the Company, each own a direct equity interest in Bagel Store
Development Funding, L.L.C. ("Bagel Funding"), which has invested approximately
$89.5 million in the Company's area developers.  All of such individuals'
interests aggregate approximately 8.2% of the outstanding equity interests in
Bagel Funding.

DEVELOPMENT AGREEMENTS

  The Company's form of area development agreement currently provides for the
development of a specified number of bagel stores of a specified brand within a
defined geographic territory in accordance with a schedule of store opening
dates.  As of April 21, 1997, the Company had entered into area development
agreements that provide for the development of 1,047 additional stores.  The
development schedule generally covers two to five years and contains benchmarks
for the number of stores to be opened and in operation at quarterly or semi-
annual intervals.  An area developer's development schedule typically requires
concurrent store development by the area developer in multiple DMAs.  Area
developers generally pay an initial non-refundable development fee of $5,000 per
store to be developed and a non-refundable real estate services fee of $5,000
per store to be developed.  Such fees are not recognized as income by the
Company until the store for which such fees have been paid is opened.  The area
development agreements generally provide that the area developer has the right
to open a specified number of stores within each DMA during the term of the
development schedule applicable to that DMA and generally preclude the Company
from operating or franchising bagel stores of the brand for which rights have
been granted within such territory, except that, subject to certain area
developer rights of first refusal, the Company reserves the right to engage in
certain limited special distribution arrangements and to develop target sites
and conversion sites within the specified territory.  Target sites are sites
which the Company believes should be developed for competitive or market reasons
regardless of the applicable development schedule or the location of pre-
existing sites.  Conversion sites are sites obtained from other companies which
are suitable for conversion to bagel stores.

  Breaches of the area development agreement, including failure to meet
development schedules, may lead to termination of the limited exclusivity
provided by the agreement, renegotiation of development and franchise provisions
or termination of the right to build future stores, although such termination
will not generally affect existing franchise agreements for developed locations
unless such breaches independently constitute defaults of the franchise
agreements.  Any such termination could be contested by the area developer.

FRANCHISE AGREEMENTS

  Once an acceptable lease for an approved store site has been executed or real
estate for a new site has been acquired, the Company and the area developer
enter into a franchise agreement under which the area developer becomes the
franchisee for the specific store to be developed at the site.  Franchise
agreements typically provide for a non-refundable franchise fee of $35,000 per
store, a 5% royalty on "Royalty Base Revenue" (defined as gross revenue less
customer refunds and coupons, the portion of employee meals not charged to the
employee and monies received by the store from other stores directly
attributable to an approved commissary operated in the store), a national
advertising fund contribution of 2% on Royalty Base Revenue, a local advertising
fund contribution of 4% on Royalty Base Revenue and a $10,000 minimum grand
opening expenditure.  The national and local advertising fund contributions may
each be increased by .25% per calendar year over the prior year at the
discretion of the Company.  The Company's franchise and area development
agreements, with respect to markets where the Company had previously commenced
store development, generally provide for 6% royalties.

  The Company's form of franchise agreement provides that the Company may
specify computer hardware and software for use in stores, including licensed
software designated or created by or for Boston Chicken and used by the Company
and its area developers.  The cost of designated computer hardware is
approximately $15,000 to $40,000 per store.  The 

                                       5
<PAGE>
 
Company currently specifies off-the-shelf computer hardware for use in stores
and charges fees aggregating $16,000 for licensed software for store systems,
$15,000 of which is paid to Boston Chicken and $1,000 of which is paid to a
third-party for certain proprietary software which the area developer is
required to use under an existing computer and communications systems services
agreement. The Company's form of franchise agreement also provides for a
periodic maintenance and support fee for modifications and enhancements made to
the licensed software and certain other maintenance and support services. The
Company's area developers pay $323 to Boston Chicken and the Company's area
developers pay an additional $77 to the Company per four-week accounting period
per store for these services. The Company believes that the integrated hardware
and licensed software systems used by its area developers facilitate the
movement of knowledge, including financial, customer and employee performance
data, allowing the Company and its area developers to react quickly in a
competitive environment.

  The Company's form of franchise agreement provides for an area of limited
exclusivity surrounding the bagel store in which the Company may neither develop
nor grant to others the right to develop additional bagel stores (generally
limited to bagel stores of the brand that has been licensed to the franchisee),
except that the Company reserves the right to engage in certain limited special
distribution arrangements and, in the event that the franchisee chooses not to
develop them, to develop conversion sites within the franchisee's designated
territory.  Designated territories in suburban locations are generally a one-
mile radius surrounding the store, while urban locations occasionally have a
smaller (e.g., one-half mile) radius or a trade-area-specific designated
territory.

  The Company's form of franchise agreement requires that each store be operated
in accordance with the operating procedures and menu, and meet the applicable
quality, service and cleanliness standards, established by the Company.  The
Company may work with a franchisee to improve substandard performance or any
items of non-compliance and may terminate any franchise agreement if the
franchisee does not comply.  The Company is specifically authorized to take
accelerated action in the event that the operations of any franchise store
present a health risk.  The Company believes that maintaining superior food
quality, a clean and pleasing environment and excellent customer service are
critical to the reputation and success of the Company's brands and, therefore,
intends to strictly enforce applicable contractual requirements.  Upon any
termination of a franchise agreement, the Company has the right to purchase the
assets of the franchisee at the net tangible book value of such assets.

AREA DEVELOPER FINANCING

  Secured Loan Agreements.  Each of the Company's area developers is funded in
part by a senior secured loan made by the Company that is typically convertible
into a majority equity interest in the area developer.  The Company believes
that the development and operation of stores in a DMA is improved when
management is permitted to focus primarily on store development and operations,
rather than on raising capital.  Accordingly, to facilitate the development of
its brands, the Company has made, and currently intends to make, loans to area
developers to provide partial financing for store development and working
capital.  The Company's loan agreements with its area developers generally
require the area developer to expend at least 75% of its equity capital on
developing stores prior to drawing on its revolving loan, with advances
permitted during a two- or three-year draw period in a pre-determined maximum
amount generally equal to four times the amount of the area developer's
contributed capital.  The loans are convertible into a majority equity interest
in the area developer at a conversion price set forth in the loan agreement,
which is at a premium over the per unit price paid by investors in the area
developers for their equity investments, after the expiration of a moratorium
period, provided that the area developer has completed not less than 80% of its
store development commitment, or in the event of certain defaults.  See Note 11
of Notes to Consolidated Financial Statements. Upon conversion, the Company
would typically become the majority equity owner of the area developer,
resulting in the Company consolidating the area developer's operations in its
financial statements.  Consequently, the franchise and related fees earned by
the Company (including interest, royalties, real estate-related fees, software
fees, and other fees) from such area developer would be eliminated in
consolidation.  The operating results of the area developer (primarily store
revenue, less expenses) would be included in the Company's financial results.
Such results would be adjusted for any remaining minority interest in the area
developer not acquired by the Company.

  Each area developer loan agreement contains customary secured loan agreement
representations, warranties, terms and covenants.  The Company's loans to its
area developers subject the Company to the risks of being a secured lender.  The
Company considers each area developer's use of loan proceeds, adherence to its
store development schedule, store performance trends, type and amount of
collateral securing the loan, prevailing economic conditions and other factors
it deems relevant at the time in evaluating whether to establish an allowance
for potential loan losses.  See Note 11 of Notes to Consolidated Financial
Statements.

                                       6
<PAGE>
 
  As a result of executing the rapid expansion strategy required by the Company,
the Company's area developers have incurred aggregate net losses of $1.3 million
in 1995 (during which period most stores were operated by the Company) and $40.6
million in 1996, which amounts included (a) approximately $10.5 million of
depreciation and amortization charges, (b) approximately $26.0 million
attributable to investment overhead, scale inefficiencies in operating overhead,
and other start-up costs which the Company believes are necessary to establish
the Einstein Bros. Bagels and Noah's New York Bagels brands in new territories
and open stores at a rate sufficient to gain a competitive advantage over
similar concepts, and (c) royalties, interest, and other franchise-related fees
that would no longer be incurred in the event the Company acquired, or converted
its convertible secured loans to its area developers.  As a result of the
foregoing factors, as well as ongoing improvements to store operating
performance and increases in scale efficiencies, the Company does not consider
these start-up losses to be a meaningful financial measure during this rapid
expansion phase (i.e., that period during which new stores constitute a
significant percentage of the store base).  The Company believes the rapid
expansion phase for most of its area developers should last approximately three
to four years from the time significant development commences in an area
developer's DMA.  As the rapid expansion phase ends, the size of an area
developer's store base should enable the area developer to gradually reduce and
eventually recover start-up losses.  The reduction in and recovery of losses are
expected to be driven primarily by lower investment overhead, increased
operational and advertising efficiencies, greater economies of scale, and
increases in store revenue through continued product and service enhancements.
The point at which losses may be recovered will vary by area developer depending
primarily upon the size and timing of the area developer's store development
schedule, the achievement of advertising efficiency, the level of debt and
interest charges, the intensity of competition and the quality of management;
however, there can be no assurance that such losses will be recovered.  Because
a majority of the Company's area developers are less than one year into
significant store development in their respective DMAs, the Company believes
they will remain in the rapid expansion phase during 1997.  Subsequent to the
completion of the rapid expansion phase, the Company expects area developer
profitability to be a more meaningful factor in assessing loan recoverability
and any future loan commitments.  Although the Company believes its current area
developers will achieve profitability, in the event the foregoing strategy does
not come to fruition or an area developer otherwise fails to achieve a
sufficient level of profitability subsequent to the completion of its rapid
expansion phase, such event could have a material adverse impact on the
Company's financial position and results of operations.  SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" ON PAGE 2.

  Conversion or Acquisition Criteria.  As of April 21, 1997, the Company had not
converted (nor did it have the right to convert) any loan to any area developer
or otherwise acquired any equity interest in any area developer.  Any
determination to convert any area developer loan or otherwise acquire an equity
interest in any developer would involve a variety of economic and operational
considerations, including the projected financial impact of converting the loan,
the status of the area developer's market penetration, the performance of the
area developer's stores, the Company's desire to own such stores and the
willingness of the Company to incur the risk of owning such stores versus
receiving income as a franchisor, lender, and service provider, the Company's
ability to manage stores if necessary, the future capital requirements of the
area developer and its ability to raise a portion of such capital, and the
demand on Company resources.  However, factors or circumstances unique to a
specific transaction may also impact the Company's decision.  In addition, any
loan conversion or other acquisition of an equity interest in an area developer
by the Company would not be indicative of whether the Company intended to, or
would, convert or otherwise acquire an equity interest in any other area
developer.  There can be no assurance that the Company will exercise its future
rights to acquire an equity interest in any area developer to which it provides
financing or that such exercise will result in control of the area developer.

  Area Developer Equity.  Members of management of each of the Company's area
developers generally make an equity investment in the area developer entity.
The amount of such investments varies among area developers.  Future investments
by management or others could include contributions of assets.  In addition to
direct equity investments provided by area developer management, equity
investments in the Company's area developers are made by Bagel Funding, formed
in December 1995 to invest in area developers of the Company.  Bagel Funding has
received total capital contributions from its members aggregating $89.5 million,
all of which has been invested by Bagel Funding in the Company's area
developers.  The Company is currently  the manager of Bagel Funding, but has no
equity interest in Bagel Funding.  See Notes 10 and 13 of Notes to Consolidated
Financial Statements.

  Bagel Funding has the right to require an area developer to redeem Bagel
Funding's equity interest in such area developer at a pre-determined formula
purchase price based on store level cash flow of the area developer in the event
(i) the Company acquires a majority equity interest in the area developer
pursuant to the exercise of its conversion or option rights under the area
developer's secured loan agreement, (ii) the Company's conversion and option
rights expire unexercised and the Company has not consented to the area
developer's request to undertake a firm commitment underwritten public offering
of area developer's equity, or (iii) the Company does not acquire a majority
interest in the area developer pursuant to the exercise of the Company's
conversion or option rights, such rights have expired under the secured 

                                       7

<PAGE>
 
loan agreement and the Company has not consented to a request by the area
developer to terminate its area development and franchise agreements with the
Company. In the event the area developer does not redeem Bagel Funding's equity
interest when required to do so, the Company will be obligated to purchase from
Bagel Funding its equity interest in the area developer at the same price
applicable to the area developer.

MARKETING AND COMPETITION

  The Company believes that a key component in developing both the Einstein
Bros. Bagels and Noah's New York Bagels brands is a strong local and community-
based effort that encourages a close relationship between each store and its
community.  The Company's area developers utilize community involvement as a
means of providing charitable service, as well as building brand awareness and
loyalty.  The Company's area developers also utilize the traditional marketing
and advertising methods of television, radio, newspapers and other print media
(including use of free-standing inserts and promotional coupons), signage,
direct mail and in-store point-of-purchase displays to promote its brands.  The
Company's area developers are currently testing a combination of multi-media and
consumer promotions designed to launch the Company's brands in local markets and
to build strong brand awareness in a short time. Area developer stores are
generally required to contribute to a national advertising fund and a local
advertising fund to pay for the development of advertising material and for
advertising in their respective DMAs.  See "-- Franchise Agreements" and Note 9
of Notes to Consolidated Financial Statements.

  The food service industry is intensely competitive with respect to food
quality, concept, location, service and price.  In addition, there are many
well-established food service competitors with substantially greater financial
and other resources than the Company and with substantially longer operating
histories.  Many of such competitors are less dependent than the Company on a
single, primary product.  The Company believes that it competes with other bagel
retailers and bakeries (including Bruegger's Bagel Bakery), specialty coffee
retailers, doughnut shops, fast-food restaurants, delicatessens, take-out food
service companies, supermarkets and convenience stores.  In addition, the
Company believes that the start-up costs associated with retail bagel and
similar food service establishments are not a significant impediment to entry
into the retail bagel business.  The Company believes that its Einstein Bros.
Bagels and Noah's New York Bagels brands compete favorably in the important
factors of food quality, convenience, service and price.

  Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
product, and the type, number and location of competing restaurants.  Multi-unit
food service chains such as the Company can also be substantially adversely
affected by publicity resulting from food quality, illness, injury or other
health concerns (including food-borne illness claims) or operating issues
stemming from one store or a limited number of stores, whether or not the
Company is liable.  Claims relating to foreign objects, food-borne illness or
operating issues are common in the food service industry and a number of such
claims may exist at any given time.  In addition, factors such as increased cost
of goods, labor and employee benefits costs, regional weather conditions and
potential scarcity of experienced management and hourly employees may also
adversely affect the food service industry in general and the results of
operations and financial condition of the Company and its area developers in
particular.  The Company attempts to manage or adapt to these factors, but some
or all of these factors could adversely affect the Company and some or all of
its area developers.

VENDORS

  In May 1996, the Company entered into a project and approved supplier
agreement (the "Harlan Supply Agreement") with Harlan Bagel Supply Company,
L.L.C. ("Harlan") and the equity owners of Harlan.  Under the Harlan Supply
Agreement, Harlan has agreed to sell to the Company, its area developers and
their food service distributors frozen bagel dough, for which such purchasers
will be charged a price equal to the cost of ingredients and packaging, will
absorb an agreed upon allowance for product losses and will pay a fixed toll
charge (which is subject to adjustment for inflation, changes in formulations,
specifications or procedures required by the Company or failure of the Company,
its area developers and their food service distributors to purchase certain
minimum numbers of bagels).  Harlan has granted to the Company an option,
exercisable at any time from December 15, 1999 through June 1, 2002, to acquire
all of the assets of Harlan at a formula price equal to a multiple of Harlan's
profits from sales of products under the Harlan Supply Agreement.  The Company
owns certain equipment used in the Harlan Facility which is leased to Harlan
pursuant to an operating lease.

  The Company also expects to enter into an approved supplier agreement with
Noah's Pacific, L.L.C. ("Noah's Pacific"), an area developer of the Company to
whom the Company currently subleases a dough production facility in Whittier,
California (the "Whittier Facility"), or with a third party bagel producer to
whom the Whittier Facility would be transferred (Noah's Pacific or such third
party producer being referred to herein as the "Whittier Supplier").  Under such
an agreement, 

                                       8
<PAGE>
 
the Whittier Supplier would agree to sell bagels to the Company, its area
developers and their food service distributors for sale in Einstein Bros. Bagels
stores. Noah's Pacific has recently completed the installation of a frozen bagel
dough production line in the Whittier Facility. The Company owns certain
equipment in the Whittier Facility which is leased to Noah's Pacific pursuant to
an operating lease.

  The Company is a party to a cream cheese supply agreement and certain related
agreements (the "Doc's Agreements") with Doc's Cheese Company, L.L.C. ("Doc's").
Under the Doc's Agreements, Doc's has agreed to supply the Company, its area
developers and other authorized purchasers with up to 160,000 pounds of cream
cheese per week through October 2, 2000, and the Company has agreed, subject to
certain exceptions and limitations, that it, its area developers and other
authorized purchasers will purchase the lesser of such amount or 60% of their
requirements for cream cheese.  The Company has provided certain debt financing
to Doc's, primarily to fund the purchase of cream cheese production equipment
and for Doc's working capital needs.  The Doc's Agreements also grant the
Company an option, exercisable at any time on or before October 2, 2000, to
acquire all of the assets of Doc's at a formula price based on cream cheese
production volumes and production cost.  The Company has recently approved
another vendor for sale of cream cheese to its area developers but does not have
a long-term supply agreement with such new vendor.

  The Company has a long-term distribution agreement with Marriott Distribution
Services, Inc. ("Marriott"), which provides for distribution of food, beverages
and supplies to stores operated by the Company and its area developers at a
negotiated fixed mark-up above cost.  The Company and its area developers
currently purchase in excess of 10% of their products and supplies from
Marriott.  Certain vendors have provided funds to the national advertising fund
to be used by such fund for advertising and promotions.

  The Company and its area developers may be subject to shortages or
interruptions in supply caused by transportation strikes, adverse weather or
other conditions which could adversely affect the quality, availability and cost
of ingredients.

TRADEMARKS AND OTHER PROPRIETARY RIGHTS

  The Company owns a number of trademarks and service marks that have been
registered with the United States Patent and Trademark Office, including Noah's
New York Bagels(R), Noah's Bagels(R), A Taste of Old New York(R), Noah's
Shmears(R), Shmear 'Em(R), Protect Your Bagels, Put Lox on Them(R), The Veg
Out(R) and Veggie Confetti(R).  In addition, the Company has federal trademark
applications pending for a number of trademarks and service marks, including
Just Say Noah's(TM), Einstein Bros.(TM), Melvyn & Elmo's(TM) and Man Cannot Live
on Great Bagels Alone(TM), as well as the Einstein Bros. logo and certain other
logos used by the Company. The Company has applied to register Noah's New York
Bagels(R) in more than 30 foreign countries and Einstein Bros. Bagels(TM) in
approximately 70 foreign countries. Most of such pending applications in the
United States and foreign countries were filed in 1995 and 1996. The Company has
not yet obtained federal registrations for the principal trademarks and service
marks used in connection with the Einstein Bros. Bagels stores and products and
there can be no assurance that such registrations will be obtained.

  The Company is aware of the use by other persons or entities in certain
geographic areas of names and marks which may be deemed to be similar to certain
of the Company's marks.  Some of these persons or entities may have prior rights
to such marks in their respective localities.  While the Company is not aware of
any prior uses that would prevent the use of any of the Company's marks in any
DMA for which it has granted development rights for such marks, there can be no
assurance that the Company's marks will be available for use by the Company and
its area developers in all locations.

  The Company considers its intellectual property rights to be important to its
business and actively defends and enforces such rights.

GOVERNMENT REGULATION

  Stores, commissaries and other production facilities operated by the Company
and its area developers are required to comply with federal, state and local
government laws and regulations applicable to food production and 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.  An increase in
employee benefits costs or other costs associated with employees, such as
minimum wage requirements, could adversely affect the Company.

  Certain states and the Federal Trade Commission require a franchisor to
transmit specified disclosure statements to potential franchisees before
granting a franchise.  Additionally, some states require the franchisor to
register its franchise 

                                       9
<PAGE>
 
with the state or qualify for certain statutory or discretionary exemptions from
registration before it may offer a franchise. The Company believes that its
Uniform Franchise Offering Circular (together with any applicable state versions
or supplements) complies with both the Federal Trade Commission guidelines and
all applicable state laws regulating franchising in those states in which it has
offered franchises.

RELATIONSHIP WITH BOSTON CHICKEN

  The Company's rapid growth has been fostered in part by its relationship with
Boston Chicken.  Boston Chicken has provided (i) significant capital financing,
(ii) multi-unit retail infrastructure and systems, including accounting,
administration, real estate, and computer and communications services and
systems, and (iii) assistance in recruiting experienced area developer
candidates.  The Company believes that the multi-unit retail infrastructure and
services provided by Boston Chicken, pursuant to fee service agreements, allow
the Company to focus its energy and resources on brand and store development.

  The Company has granted to Boston Chicken  an option (the "BCI Option") to
maintain ownership of shares of common stock of the Company having up to 52% of
the voting power of all of the outstanding shares of capital stock of the
Company having the power generally to vote in the election of directors.  The
BCI Option is exercisable at a per share exercise price equal to (i) the
weighted average price per share at which the Company's common stock is issued
or sold in a transaction pursuant to which the BCI Option becomes exercisable,
in the case of a transaction in which such price per share is readily
ascertainable, or (ii) in all other cases, the average of the closing sale
prices for the common stock on the Nasdaq National Market (or such other
principal exchange or market on which the common stock may then be trading) for
the five trading days ending on the fifth trading day prior to the date of the
transaction pursuant to which the BCI Option becomes exercisable.  The BCI
Option terminates if (i) Boston Chicken sells or transfers shares of the
Company's common stock and as a result owns less than a majority of the then
outstanding shares of the Company's voting stock or (ii) the percentage of
outstanding shares of voting stock of the Company owned by Boston Chicken is
reduced below 50% other than as a result of Boston Chicken's voluntary sale or
transfer of shares of the Company's common stock and Boston Chicken fails to
acquire a sufficient number of shares of common stock so that it owns at least a
majority of the then outstanding shares of voting stock of the Company by July
31 of the calendar year next following the calendar year in which such reduction
occurs.  In addition, the percentage ownership level of 52% is subject to
reduction to the extent voluntary sales or transfers by Boston Chicken reduce
its ownership of the outstanding shares of voting stock of the Company to less
than 52% but do not otherwise result in termination of the BCI Option.  In
determining the percentage ownership of the voting stock of the Company owned by
Boston Chicken for purposes of the BCI Option, the following shares are
excluded: (i) 701,177 shares of the Company's common stock subject to options
granted by Boston Chicken, (ii) any shares of common stock held by officers,
directors or employees of Boston Chicken, and (iii) any shares of common stock
held by any person or entity that would not be counted under generally accepted
accounting principles in determining whether Boston Chicken owns a majority of
the voting stock for consolidated financial statement purposes.  Pursuant to
such calculation, as of April 21, 1997, Boston Chicken owned approximately 50.4%
of the outstanding common stock of the Company and the right to purchase
1,109,368 shares of common stock of the Company at prices ranging from $23.28 to
$30.75 per share.  The Company also granted Boston Chicken, pursuant to a
registration rights agreement, five demand and unlimited piggyback registration
rights under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to shares of the Company's common stock owned by Boston Chicken.  See
Note 12 of Notes to Consolidated Financial Statements.

  Boston Chicken has also provided the Company with a $50.0 million unsecured,
subordinated, non-convertible loan facility.  As of May 1, 1997, there was no
balance outstanding under the facility.  Interest on the loan will be based on
the reference rate of the Bank of America Illinois plus 0.5%.  Any borrowings
outstanding are payable on June 15, 2003.  Boston Chicken may satisfy its
funding obligations under the loan facility in either cash or shares of Boston
Chicken common stock.  Boston Chicken has agreed to guarantee the price of any
shares of common stock delivered to the Company in satisfaction of its
obligations under the loan facility and thereafter sold by the Company.

  During fiscal 1996, the Company and Boston Chicken were parties to several fee
service agreements, pursuant to which Boston Chicken provided the Company with
infrastructure support services, including accounting and administration
services, financial services, real estate services and computer and
communications services.  During fiscal 1996, the Company paid Boston Chicken an
aggregate of approximately $10.2 million pursuant to such agreements.  Boston
Chicken continues to provide the Company with certain accounting and
administration and computer and communications services pursuant to such
agreements.  The Company and Boston Chicken are also parties to two subleases,
pursuant to which the Company is entitled to the non-exclusive use of aircraft
leased by Boston Chicken from unaffiliated third party leasing companies.
During fiscal 1996, the Company paid Boston Chicken an aggregate of
approximately $.5 million under the 

                                       10
<PAGE>
 
two subleases. In addition, Boston Chicken subleases to the Company
approximately 38,000 square feet of office space (and certain common areas,
including parking areas) for the Company's support center located in Golden,
Colorado. The sublease currently provides for rental payments of $38,000 per
month and has an initial term of 15 years expiring in August 2011. The Company's
agreements with Boston Chicken were negotiated at arms' length and the Company
believes that terms of such agreements are as favorable to the Company as those
that it would have with an unaffiliated third party.

EMPLOYEES

  At April 21, 1997, the Company had approximately 124 employees.  None of the
Company's employees are represented by a labor union or covered by a collective
bargaining contract.  The Company believes that its relationship with its
employees is good.

EXECUTIVE OFFICERS

  Set forth below are the names and ages of the executive officers of the
Company, the positions they hold with the Company, and summaries of their
business experience.  Executive officers are elected by, and serve at the
discretion of the Board of Directors.  The executive officers of the Company are
as follows:

  Scott A. Beck, age 38, became Chairman of the Board of the Company in July
1996.  Mr. Beck has served as a director of the Company since March 1995.  He
has been Chief Executive Officer and a director of Boston Chicken since June
1992 and has served as Chairman or Co-Chairman of the Board of Boston Chicken
since that date.  In January 1997, he also assumed the responsibilities of
President of Boston Chicken.  He was Vice Chairman of the Board of Blockbuster
Entertainment Corporation ("Blockbuster") in Fort Lauderdale, Florida from
September 1989 until his retirement in January 1992 and Chief Operating Officer
of Blockbuster from September 1989 to January 1991.  From June 1987 to August
1989, Mr. Beck was Managing Partner of Blockbuster's first and largest
franchisee until its acquisition by Blockbuster in 1989.  Since 1980, Mr. Beck
also has been President of Pace Affiliates, Inc., an investment banking firm he
founded.

  Mark R. Goldston, age 42, became President and Chief Executive Officer and a
director of the Company in April 1996.  Since January 17, 1996, Mr. Goldston has
also been employed by Boston Chicken to undertake various special projects and
in August 1996, he became a Vice Chairman of the Board and a director of Boston
Chicken.  From July 1994 to April 1996, Mr. Goldston was Chairman and Chief
Executive Officer of The Goldston Group, a strategic advisory firm.  From
October 1991 to June 1994, Mr. Goldston served as President and Chief Operating
Officer of L.A. Gear, Inc.

  W. Eric Carlborg, age 33, became Chief Financial Officer in April 1997.  Prior
thereto he was Senior Vice President -- Finance of the Company since July 1996.
From October 1995 through June 1996, he was Vice President of Alignment and
Planning of Boston Chicken.  Prior to that time, Mr. Carlborg served as Vice
President -- Corporate Finance of Merrill Lynch from January 1994 to October
1995 and served as an Associate of Merrill Lynch from August 1989 through
December 1993.

  David G. Stanchak, age 38, became a director and Chief Development Officer of
the Company in March 1995.  From June 1992 until March 1995, he served as a
Senior Vice President of Boston Chicken, and from August 1989 until June 1992,
Mr. Stanchak was the National Director of Real Estate and Real Estate Legal
Counsel for Blockbuster.

  Jeffrey L. Butler, age 35, became President of Einstein Bros. Bagels Concept
in May 1996.  From January 1996 until May 1996, Mr. Butler served as Chief
Operating Officer of the Company.  Prior to that time, he was employed by BC
Great Lakes, L.L.C., an area developer of Boston Chicken ("BC Great Lakes"),
since June 1995, and also served as President of the managing member of BC
Heartland, L.L.C., also a Boston Chicken area developer, since August 1995.
From June 1993 until June 1995, Mr. Butler served as President and Chief
Executive Officer of the general partner of BC Detroit L.P., a predecessor of BC
Great Lakes.  From January 1992 to June 1993, Mr. Butler served as Vice
President -- Human Resources of Boston Chicken.  Prior to that time, Mr. Butler
was an independent consultant from July 1991 until January 1992.

  Joel M. Alam, age 39, became a Senior Vice President of the Company in
February 1997 and has been Secretary of the Company since April 1995.  From
April 1995 to February 1997, he was a Vice President of the Company.  From
January 1994 to April 1995, he was Vice President and Associate General Counsel
of Boston Chicken and from May 1993 to January 1994 he was Assistant General
Counsel of Boston Chicken.  Prior to that time, Mr. Alam was an associate at the
Chicago law firm of Bell, Boyd & Lloyd from 1986 to May 1993.

                                       11
<PAGE>
 
  Paul A. Strasen, age 40, became a Senior Vice President of the Company in
February 1997 and has been General Counsel of the Company since April 1995.
From April 1995 to February 1997, he was a Vice President of the Company.  Prior
to that time, he was a partner at the Chicago law firm of Bell, Boyd & Lloyd
from 1988 to April 1995.

  Theodore P. Heininger, age 43, became Vice President-Controller of the Company
in March 1997.  Prior to that time, he served as Vice President of Performance
Evaluation since January 1996 and was the Company's Controller from April 1995
until January 1996.  From June 1993 to March 1995, Mr. Heininger was employed as
Vice President and Chief Financial Officer with Meyercord Co., a subsidiary of
the Berwind Group in Carol Stream, Illinois.  He served as Vice President and
Chief Financial Officer of GPS Healthcare, also a subsidiary of the Berwind
Group, in Pottsville, Pennsylvania, from October 1990 to May 1993.  Mr.
Heininger is a certified public accountant.

ITEM 2.  PROPERTIES

  The Company leases its support center facility in Golden, Colorado, which
consists of approximately 38,000 square feet of office space (and certain common
areas, including parking areas), from Boston Chicken.  The Company also leases
office space in Los Angeles, California.

  The Company and its subsidiaries also lease sites for stores and commissaries
that are subleased to area developers.  While the Company expects its area
developers primarily to continue to lease sites in the future, the Company or
its area developers may also purchase land and/or buildings for stores and
commissaries to the extent acceptable terms are available.

  Stores and commissaries leased by the Company are typically leased under
"triple net" leases that require the lessee to pay its proportionate share of
real estate taxes, maintenance costs and insurance premiums.  In some cases,
store leases require not only base rent but also percentage rent based on sales
in excess of specified amounts.  Generally, the Company's store leases have
initial terms of five years with options to renew for two or three additional
five-year periods at market rates.

  A subsidiary of the Company leases dough production facilities in San Leandro
and Whittier, California, which are subleased to one of the Company's area
developers.

ITEM 3.  LEGAL PROCEEDINGS

  The Company, like others in the food service business, is from time to time
the subject of complaints, threat letters or litigation from customers alleging
illness, injury or other food quality, health (including food-borne illness
claims) or operational concerns.  Claims relating to foreign objects, food-borne
illness or operating issues are common in the food service industry and a number
of such claims may exist at any given time.  Adverse publicity resulting from
such allegations may materially adversely affect the Company and one or more of
its brands, regardless of whether such allegations are valid or whether the
Company is liable.  In addition, the Company also encounters complaints and
allegations from former or prospective employees or others from time to time, as
well as other matters which are common for businesses similar to the Company's.
The Company does not believe that any such matters of which it is aware are
material to the Company individually or in the aggregate, but matters may arise
which could adversely affect the Company or its business operations.

  In the course of enforcing its rights under existing area development and
franchise agreements, the Company may also be the subject, from time to time, of
complaints, threat letters or litigation concerning the proper interpretation
and application of these agreements, particularly in the event of a default or
termination of area development or franchise rights.  No such matters are
currently pending.

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

  No matters were submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1996.

                                       12
<PAGE>
 
                                    PART II

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

  The following table sets forth the high and low sales prices of the common
stock during each of the Company's fiscal quarters since its initial public
offering of common stock on August 1, 1996, as quoted on the Nasdaq National
Market as reported by The Wall Street Journal (Western Edition).
<TABLE>
<CAPTION>
 
                                             High    Low
                                            ------  ------
<S>                                         <C>     <C>
 
  1996:
  Third Quarter (ended October 6, 1996)     36 1/2      19
  Fourth Quarter (ended December 29, 1996)  36 1/8  29 1/4
 
</TABLE>

  As of April 21, 1997, there were approximately 730 record holders of the
common stock.

  The Company has never paid cash dividends on its common stock and the Board of
Directors intends to continue a policy of retaining any earnings for use in the
Company's operations.  The Company does not anticipate paying any cash dividends
in the foreseeable future.  In addition, the Company's current revolving credit
facilities contain prohibitions on the payment of any cash dividends.

  During the fourth quarter of 1996, the Company issued an aggregate of 124,139
shares of common stock pursuant to the exercise of warrants for an aggregate
exercise price of $803,179.33.  The shares of common stock issued upon exercise
of such warrants were sold without registration under the Securities Act of
1933, as amended (the "Securities Act"), in reliance on Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act.

                                       13
<PAGE>
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

   The following table sets forth selected consolidated financial and store data
for the Company.  This data should be read in conjunction with the  Consolidated
Financial Statements of the Company and the Notes thereto included in Item 8
hereof and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Item 7 hereof.
<TABLE>
<CAPTION>
                                 PERIOD FROM
                                MARCH 24, 1995
                                (INCEPTION)                    FISCAL YEAR
                                  THROUGH                        ENDED
                              DECEMBER 31, 1995             DECEMBER 29, 1996(1)
                           ---------------------          ----------------------
                         (In thousands, except share data and number of stores)
<S>                                  <C>                          <C>    
CONSOLIDATED STATEMENTS OF
 OPERATIONS DATA:
Revenue:
 Company stores............             $ 25,685                      $ 35,803
 Royalties and franchise                     
  related fees.............                  671                        19,918
 Interest income...........                   67                         5,986
                                  --------------                 -------------
   Total revenue...........               26,423                        61,707
Cost and expenses:
 Cost of products sold.....                8,239                        11,546
 Salaries and benefits.....               13,531                        18,302
 General and                              
  administrative expenses..               47,805(2)                     21,820
                                  --------------                 -------------
                                          69,575                        51,668
                                  --------------                 -------------
Income (loss) from                       
 operations................              (43,152)                       10,039
Other expense, net.........                 (564)                       (4,332)
                                  --------------                 -------------
 
Net income (loss)..........             $(43,716)                     $  5,707
                                  ==============                 =============
 Net income (loss) per
  common and equivalent                   
 share.....................             $  (4.54)                        $0.25
                                  ==============                 =============
 Weighted average number
  of common and equivalent
  shares outstanding during 
  the period...............                9,659                        22,344
                                  ==============                 =============
 
STORE DATA (UNAUDITED):
Systemwide revenue (3).....             $ 26,986                      $145,631
                                  ==============                 =============
Number of stores:
 Beginning of period.......                    -                            60
 Opened or acquired........                   60                           266
 Closed (4)................                    -                           (11)
                                  --------------                 -------------
 End of year...............                   60                           315
                                  ==============                 =============
 
 Company stores............                   47                            14
 Area developer stores.....                   13                           301
 
CONSOLIDATED BALANCE SHEET
 DATA:
Working capital............             $     41                      $ 46,421
Notes receivable...........                7,267                       146,087
Total assets...............               50,299                       332,418
Long-term debt (5).........               58,875                             -
Stockholders' equity                    
 (deficit).................             $(20,994)                     $315,517
</TABLE>

(1) The Company's fiscal year is the 52/53-week period ending on the last Sunday
    in December and normally consists of 13 four-week periods.
(2) Includes a $25,575,000 write-off of intangible assets.  See "Item 7.
    Management's Discussion and Analysis of Financial Condition and Results of
    Operations".
(3) Includes gross revenue for all stores in the Einstein/Noah Bagel Corp.
    system.
(4) Such stores were closed because the sites were determined to be unsuitable
    for the Einstein Bros. Bagels brand and store. The Company closed five
    stores in Colorado and one store in California and area developers closed
    the remaining stores located in three states. Such stores were open for an
    average of approximately 23 months prior to closing. Costs associated with
    such closings were expensed by the owners of such stores.
(5) Includes at December 31, 1995, $11,062,000 attributable to repurchase common
    stock shares and $7,813,000 attributable to Series A preferred stock.  See
    Note 12 of Notes to Consolidated Financial Statements.

                                       14
<PAGE>
 
                             Predecessor Companies

     The summary historical combined financial data shown below represent the
financial data of the Company's predecessors: Brackman Brothers, Inc.
("Brackman"), Bagel & Bagel, Inc. ("Bagel & Bagel") and Offerdahl's Bagel
Gourmet, Inc. ("Offerdahl's").  The financial data for the year ended December
31, 1995 include the results of operations of the predecessors through their
respective dates of acquisition which were March 24, 1995 for Brackman and Bagel
& Bagel and March 31, 1995 for Offerdahl's. The financial information is
presented on the historic cost basis of each of the predecessors. The net income
(loss) per common and equivalent share and the weighted average number of common
and equivalent shares outstanding during the period have not been presented for
these periods because the Company believes this information is not meaningful.
Subsequent to the acquisition of these predecessors, the Company sold
substantially all of their assets. See Note 4 of Notes to the Company's Audited
Consolidated Financial Statements included elsewhere herein. Accordingly, the
Company does not believe that such operating results are meaningful or are
indicative of future operating results of the Company.

<TABLE>
<CAPTION>
                                                                                                                     
                                                                          YEAR ENDED                                   PERIOD FROM
                                     ------------------------------------------------------------------------------- JANUARY 1, 1995

                                        DECEMBER 31,        DECEMBER 31,        DECEMBER 31,        DECEMBER 31,          THROUGH
                                            1991                1992                1993                1994          MARCH 31, 1995

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

COMBINED STATEMENTS OF OPERATIONS DATA:
<S>                                      <C>                 <C>                 <C>                 <C>                 <C>
Total revenue........................        $4,134              $7,880             $12,048             $19,158             $5,882
Income from operations...............           400                 565                 449               1,452                 39
Net income (loss)....................           351                 501                 389                 696               (158)
COMBINED BALANCE SHEET DATA:
Total assets.........................        $1,708             $ 2,580             $ 4,770              $9,511
Long-term debt.......................           532                 591               1,011               2,822
</TABLE>


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

GENERAL

  The Company commenced operations in March 1995 through the acquisition of
three regional bagel retailers, with subsequent acquisitions in August 1995 and
February 1996.  The Company has sold all of the stores operated by it to area
developers financed in part by the Company.  Because the Company has sold all of
its stores to its area developers and also intends to continue to expand its
business primarily through such area developers, the Company anticipates that
its future revenue will be derived principally from royalties, franchise-related
fees and interest income from its area developers as opposed to revenue from
Company stores.  Consequently, comparisons of operating results to date may not
be meaningful.

  The Company currently estimates that there will be between 615 and 665 stores
in operation systemwide by the end of 1997.  SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 2.  This rapid expansion significantly
affects the comparability of results of operations from period to period in a
number of ways.  store revenue is generally not as high in the first periods
following opening as it is in later periods, and revenue for any new store is
also highly dependent on the proximity of other franchise stores and those of
competitors, the size of the store and its visibility.  Further, salaries,
benefits and the cost of products sold are generally higher as a percentage of
revenue for newly opened stores than for more mature stores because of
inefficiencies caused by less experienced employees and a lack of store-specific
operating history from which to predict daily food production needs.  Moreover,
in order to support its expansion program, the Company is continuing to develop
its corporate support center, and accordingly, certain related expenditures will
be higher as a percentage of revenue in earlier periods than in later comparable
periods.  in addition, the Company's rapid expansion significantly affects its
liquidity and capital requirements.

  As of April 21, 1997, Boston Chicken owned a majority of the voting stock of
the Company. In addition, Boston Chicken has an option that permits it to
maintain ownership of shares of common stock having up to 52% of the voting
power of all of the outstanding shares of capital stock of the Company having
the power generally to vote in the election of directors. See "Item 1. 
Business--Relationship with Boston Chicken". The Company and Boston Chicken are
parties to various agreements, pursuant to which Boston Chicken has agreed to
provide to the Company certain accounting and administration and computer and
communications services. Boston Chicken has also made available to the Company a
non-convertible loan facility of up to $50.0 million. See "-- Liquidity and
Capital Resources."

RESULTS OF OPERATIONS

  Fiscal year ended December 29, 1996 compared to the period beginning March 24,
1995 (inception) and ended December 31, 1995

  Revenue.  Total revenue increased 134% for the year ended December 29, 1996
over the prior period.  Royalties and franchise-related fees were $19.9 million
compared to $671,000 in the prior period, caused by an increase in stores opened
and operated by area developers, which totaled 301 as of December 29, 1996
compared to 13 as of December 31, 1995.  Interest income was $6.0 million
compared to $67,000 in the prior period, due to higher interest income generated
on increased loans made to area developers.  Revenue from Company stores
increased 39% for the year ended December 29, 1996 to $35.8 million from $25.7
million in the prior period.  The increase was due to the revenue from acquired
stores and stores opened by the Company prior to being sold to area developers.

  Cost of Products Sold.  Cost of products sold increased 40% to $11.5 million
for the year ended December 29, 1996, compared to $8.2 million in the prior
period.  The increase was primarily due to the increase in revenue from Company
stores.  Cost of products sold, as a percentage of Company store revenue,
increased to 32.2% in 1996 from 32.1% in 1995.

  Salaries and Benefits.  Salaries and benefits increased 35% to $18.3 million
for the year ended December 29, 1996, compared to $13.5 million in the prior
period.  The increase in salaries and benefits was due to a greater number of
Company stores in 1996 and an increase in the number of employees at the
Company's support center necessary to support systemwide expansion.

  General and Administrative.  General and administrative expenses decreased 54%
to $21.8 million for the year ended December 29, 1996 compared to $47.8 million
in the prior period.  The decrease was due primarily to a $26.6 million write-
off of intangible assets in the prior period.  After the acquisition of 
Brackman, Bagel & Bagel,

                                       15
<PAGE>
 
Offerdahl's, and Baltimore Bagel Co. (collectively the "Founding Companies"),
the Company launched a development project, pursuant to which management
analyzed (i) the Founding Companies' stores, including brand positioning,
product offerings, operational service systems and atmosphere, (ii) the
competitive environment and (iii) the preferences of consumers across the United
States. The project resulted in the development of the Einstein Bros. Bagels
brand and store. In connection with, and as a result of, the development of the
Einstein Bros. Bagels brand and store, management determined to discontinue the
use of the identifiable intangible assets acquired in the acquisitions of the
Founding Companies, including trademarks and recipes. This change in business
strategy resulted in an impairment of such intangible assets, and accordingly,
the assets were written down to their fair market values. In addition, in 1995,
certain acquired store locations were determined to be unsuitable for the
Einstein Bros. Bagels brand and store, resulting in a $2.4 million provision for
anticipated costs required to close those locations. Absent these write-downs,
general and administrative expenses increased 16% for the year ended December
29, 1996 compared to the prior period. This increase was due to an increase in
expenditures at the Company's support center necessary to support systemwide
expansion and a greater number of Company stores in 1996.

  Included in general and administrative expenses are depreciation and
amortization charges of $5.4 million in fiscal year 1996 and $1.7 million in the
prior period.  The increase in depreciation and amortization charges was
primarily attributable to the goodwill and intangible assets related to the
acquisition of Noah's in February 1996.

  Other Income (Expense).  The Company incurred other expense of $4.3 million
for the year ended December 29, 1996, compared to $564,000 in the prior period.
The increase reflects higher net interest expense attributable to borrowings
under the Company's loan agreements, offset by gains recognized on the sale of
marketable equity securities.

  Income Taxes.  No income tax expense has been recorded for the year ended
December 29, 1996 or the prior period.  During 1996, the Company recognized a
portion of its deferred tax asset which resulted in no tax expense.

LIQUIDITY AND CAPITAL RESOURCES

  Cash provided from operations in 1996 totaled $6.5 million, an increase of
$18.8 million from the cash used in operations in 1995 of $12.3 million.  The
primary cause of the change resulted from the Company incurring a net loss of
$43.7 million in 1995 compared to net income of $5.7 million in 1996.  Included
in the 1995 net loss was a non-cash charge of $26.6 million to write-off
intangible assets.  See "-- Results of Operations -- General and
Administrative."

  Cash provided from financing activities totaled $271.6 million in 1996.  In
August 1996, the Company completed an underwritten initial public offering of
3,105,000 shares of its common stock, a concurrent non-underwritten public
offering of 425,000 shares of its common stock and a concurrent private
placement of 2,000,000 shares of its common stock to Boston Chicken.  In
December 1996, the Company completed an underwritten offering of 2,640,000
shares of its common stock to the public and a concurrent non-underwritten
public offering of 500,000 shares of its common stock to Boston Chicken.  The
aggregate net proceeds of all these offerings totaled approximately $174.6
million.  In 1996, the Company borrowed $80.0 million from Boston Chicken under
its convertible secured loan agreement resulting in a $120.0 million outstanding
balance.  In June 1996, Boston Chicken converted the entire $120.0 million
balance of convertible debt into 15,307,421 shares of common stock of the
Company.  As of December 29, 1996, the Company had $50.7 million available in
cash and cash equivalents.  In addition, the Company had a $50.0 million non-
convertible credit facility with Boston Chicken and a $45.0 million senior
secured credit facility with Bank of America Illinois and the lenders named
therein.  No balance was outstanding under either facility at December 29, 1996.
During 1995, the Company borrowed $40.0 million from Boston Chicken under its
convertible secured loan agreement (which Boston Chicken converted to equity of
the Company in 1996) and raised $20.8 million from the sale of approximately
3,500,000 shares of its common stock.

  The Company's primary use of capital reflects its goal of establishing brand
awareness and market leadership by providing partial financing to its area
developers for their use in rapid store development and to finance their working
capital needs.  As of December 29, 1996, the Company had secured loan
commitments to its area developers aggregating $283.2 million, of which $140.8
million had been advanced.  Net loan advances to area developers were $137.3
million in 1996 (consisting of $206.8 million of loan advances, net of $69.5
million of loan repayments) and $3.6 million in 1995 (consisting of $7.4 million
of loan advances net of $3.8 million of loan repayments).  The majority of the
loan advance and repayment activity reflects the revolving nature of the loans;
that is, amounts are drawn and repaid on a regular basis to optimize cash
management.  The increase in loan advances was attributable to the increase in
the number of area developer stores opened in 1996 compared to 1995.

                                       16
<PAGE>
 
  As a result of executing the rapid expansion strategy required by the Company,
the Company's area developers have incurred aggregate net losses of $1.3 million
in 1995 (during which period most stores were operated by the Company) and $40.6
million in 1996, which amounts included (a) approximately $10.5 million of
depreciation and amortization charges, (b) approximately $26.0 million
attributable to investment overhead, scale inefficiencies in operating overhead,
and other start-up costs which the Company believes are necessary to establish
the Einstein Bros. Bagels and Noah's New York Bagels brands in new territories
and open stores at a rate sufficient to gain a competitive advantage over
similar concepts, and (c) royalties, interest, and other franchise-related fees
that would no longer be incurred in the event the Company acquired, or converted
its convertible secured loans to its area developers.  As a result of the
foregoing factors, as well as ongoing improvements to store operating
performance and increases in scale efficiencies, the Company does not consider
these start-up losses to be a meaningful financial measure during this rapid
expansion phase (i.e., that period during which new stores constitute a
significant percentage of the store base).  The Company believes the rapid
expansion phase for most of its area developers should last approximately three
to four years from the time significant development commences in an area
developer's DMA.  As the rapid expansion phase ends, the size of an area
developer's store base should enable the area developer to gradually reduce and
eventually recover start-up losses.  The reduction in and recovery of losses are
expected to be driven primarily by lower investment overhead, increased
operational and advertising efficiencies, greater economies of scale, and
increases in store revenue through continued product and service enhancements.
The point at which losses may be recovered will vary by area developer depending
primarily upon the size and timing of the area developer's store development
schedule, the achievement of advertising efficiency, the level of debt and
interest charges, the intensity of competition and the quality of management;
however, there can be no assurance that such losses will be recovered.  Because
a majority of the Company's area developers are less than one year into
significant store development in their respective DMAs, the Company believes
they will remain in the rapid expansion phase during 1997.  Subsequent to the
completion of the rapid expansion phase, the Company expects area developer
profitability to be a more meaningful factor in assessing loan recoverability
and any future loan commitments.  Although the Company believes its current area
developers will achieve profitability, in the event the foregoing strategy does
not come to fruition or an area developer otherwise fails to achieve a
sufficient level of profitability subsequent to the completion of its rapid
expansion phase, such event could have material adverse impact on the Company's
financial position and results of operations.  SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" ON PAGE 2.

  The allowance for area developers' loan losses is maintained at a level that
in management's judgment is adequate to provide for estimated possible loan
losses.  The amount of the allowance is based on management's review of use of
loan proceeds, adherence to store development schedules, store performance
trends, type and amount of collateral securing the loan, prevailing economic
conditions, and other factors that management deems relevant at the time.  Based
upon this review and analysis, no allowance for loan losses was required as of
December 31, 1995 and December 29, 1996.

  Area developer loans are convertible into a majority equity interest in the
area developer at a conversion price set forth in the loan agreement, which is
at a premium over the per unit price paid by investors in the area developer for
their equity investments, after the expiration of a moratorium period, provided
that the area developer has completed not less than 80% of its area development
commitment, or in the event of certain defaults.  Any determination to convert
any area developer loan or otherwise acquire an equity interest in any area
developer would involve a variety of economic and operational considerations,
including the projected financial impact of converting the loan, the status of
the area developer's market penetration, the performance of the area developer's
stores, the Company's desire to own such stores and the willingness of the
Company to incur the risk of owning such stores versus receiving income as a
franchisor, lender, and service provider, the Company's ability to manage stores
if necessary, the future capital requirements of the area developer and its
ability to raise a portion of such capital, and the demand on Company resources.
However, factors and circumstances unique to a specific transaction may also
impact the Company's decision.  In addition, any loan conversion or other
acquisition of an equity interest in an area developer by the Company would not
be indicative of whether the Company intended to, or would, convert or otherwise
acquire an equity interest in any other area developer.  There can be no
assurance that the Company will exercise its future rights to acquire an equity
interest in any area developer to which it provides financing or that such
exercise will result in control of the area developer.  At April 21, 1997, the
Company had not converted (nor did it have the right to convert) any loan to any
area developer or otherwise acquired any equity interest in any area developer.

  In addition to providing funding to its area developers, the Company's capital
requirements have consisted of store acquisition and development, development of
its corporate infrastructure, which supports systemwide expansion, and
investments in food production facilities.  In 1996, the Company expended $107.9
million on store acquisition and development, including the acquisition of all
the capital stock of Noah's for $100.9 million.  In 1995, the Company expended
$16.9 million on store acquisition and development.  In 1996, the Company
expended $10.1 million on its corporate infrastructure and investments in food
production facilities compared to $1.2 million in 1995.  These capital

                                       17
<PAGE>
 
expenditures have been offset with proceeds from selling Company stores.  The
Company generated $49.9 million in 1996 and $5.5 million in 1995 from the sale
of stores to newly-formed area developers.  There were no material gains or
losses recognized as a result of these sales.  The Company completed its
practice of selling Company stores to newly-formed area developers during the
first quarter of 1997.  Consequently, the Company does not anticipate it will
realize cash proceeds from the sale of stores in the future.

  The Company anticipates it will have a continuing need for additional
financing to continue systemwide expansion.  The timing of the Company's capital
requirements will be affected by the number of stores opened, operational
results of the stores, and the amount and timing of borrowings under the loan
agreements between the Company and its area developers.  As the Company's
capital requirements increase, the Company will seek additional funds from
public or private offerings of debt or equity securities.  There can be no
assurance that the Company will be able to raise such capital on satisfactory
terms when needed.  SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" ON
PAGE 2.

SEASONALITY

  Historically, the Company has experienced lower average store revenue during
the November and December holiday periods.

IMPACT OF INFLATION

  The Company believes that inflation has not had a material impact on its
operations to date.  Substantial increases in the cost of labor, employee
benefits, food and other operating expenses could adversely affect store
operations.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
                (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)

  The following table shows quarterly financial results for the period from
March 24, 1995 (inception) through December 31, 1995 and fiscal 1996.  The first
quarter consists of four four-week periods (first quarter 1995 data is for the
period from March 24, 1995 (inception) through April 16, 1995) and the second,
third and fourth quarters consist of three four-week periods, except the fourth
quarter in 1995, which consists of two four-week periods and one five-week
period.
<TABLE>
<CAPTION>
 
                                      FIRST     SECOND      THIRD     FOURTH
1995:                                QUARTER    QUARTER    QUARTER    QUARTER
-----                               ---------  ---------  ---------  ---------
<S>                                 <C>        <C>        <C>        <C>
 
Revenue...........................   $ 1,423    $ 6,292   $  8,483   $ 10,225
Loss from Operations..............      (180)    (1,784)   (30,220)   (10,968)
Net Loss..........................      (260)    (1,924)   (30,010)   (11,522)
Net Loss per Common and
  Equivalent Share................   $ (0.03)   $ (0.20)  $  (3.11)  $  (1.20)
 
1996:
-----
 
Revenue...........................   $22,379    $18,206   $ 10,257   $ 10,865
Income (Loss) from Operations.....    (1,270)     2,303      4,235      4,771
Net Income (Loss).................    (3,317)       295      3,953      4,776
Net Income (Loss) per Common and
  Equivalent Share................   $ (0.35)   $  0.01   $   0.13   $   0.15
</TABLE>

                                       18
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

<S>                                                          <C>
Einstein/Noah Bagel Corp. and Subsidiaries
Report of Independent Public Accountants..................... 20

Consolidated Financial Statements:

   Consolidated Balance Sheets at December 31, 1995 and
    December 29, 1996........................................ 21

   Consolidated Statements of Operations for the period
    from March 24, 1995 (inception) through December 31,
    1995 and the fiscal year ended December 29, 1996......... 22

   Consolidated Statements of Stockholders' Equity (Deficit)
    for the period from March 24, 1995 (inception) through
    December 31, 1995, and the fiscal year ended December 29,
       1996.................................................. 23

   Consolidated Statements of Cash Flows for the period
    from March 24, 1995 (inception) through December 31, 1995
    and the fiscal year ended December 29, 1996.............. 24

   Notes to Consolidated Financial Statements................ 25

Bagel & Bagel, Inc.

Report of Independent Public Accountants..................... 39

Financial Statements:

   Statements of Operations for the fiscal year ended 
    December 27, 1994 and for the period from December 28, 
    1994 through March 23, 1995.............................. 40

   Statements of Cash Flows for the fiscal year ended 
    December 27, 1994 and for the period from December 28,
    1994 through March 23, 1995.............................. 41

   Notes to Audited Financial Statements..................... 42

Offerdahl's Bagel Gourmet, Inc. and Affiliates

Report of Independent Public Accountants..................... 44

Combined Financial Statements:

   Combined Statements of Operations for the fiscal years 
    ended December 31, 1993 and December 31, 1994 and for 
    the period from January 1, 1995 through April 2, 1995.... 45

   Combined Statements of Cash Flows for the fiscal years 
    ended December 31, 1993 and December 31, 1994 and for 
    the period from January 1, 1995 through April 2, 1995.... 46

   Notes to Audited Combined Financial Statements............ 47

Report of Independent Public
 Accountants on Schedule II.................................. 49

Supplemental Schedule II..................................... 50

</TABLE>

                                       19
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:

  We have audited the accompanying consolidated balance sheets of Einstein/Noah
Bagel Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995
and December 29, 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period from March 24, 1995
(inception) through December 31, 1995, and for the fiscal year ended December
29, 1996.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Einstein/Noah Bagel Corp. and
subsidiaries as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for the period from March 24, 1995
(inception) through December 31, 1995 and for the fiscal year ended December 29,
1996, in conformity with generally accepted accounting principles.

                                       ARTHUR ANDERSEN LLP

Denver, Colorado
March 24, 1997

                                       20
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (In thousands, except share data)
<TABLE>
<CAPTION>
 
                                          DECEMBER 31,   DECEMBER 29,
                                              1995           1996
                                        --------------  -------------
<S>                                       <C>            <C>
ASSETS
------
Current Assets:
 Cash and cash equivalents..............      $  5,368       $ 50,741
 Accounts receivable, net...............         1,327          5,589
 Prepaid expenses and other current              
  assets................................         2,592            579 
                                        --------------  -------------
  Total current assets..................         9,287         56,909    
Property and Equipment, net.............        19,410         28,213
Notes Receivable........................         7,267        146,087
Goodwill, net...........................        13,715         68,921
Trademarks, net.........................             -         22,239
Recipes, net............................             -          4,758
Other Assets, net.......................           620          5,291
                                        --------------  -------------
  Total assets..........................      $ 50,299       $332,418
                                        ==============  =============
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 (DEFICIT)
----------------------------------------
Current Liabilities:
 Accounts payable.......................      $  5,633       $  3,873
 Accrued expenses.......................         2,968          3,615
 Deferred franchise revenue.............           645          3,000
                                        --------------  -------------
  Total current liabilities.............         9,246         10,488
Convertible Debt........................        40,000              -
Deferred Franchise Revenue..............           265          6,105
Other Noncurrent Liabilities............         2,907            308
Repurchase Common Stock Shares -                
 1,721,250 issued and outstanding in
 1995...................................        11,062              -
Series A Preferred Stock - 6,250 issued          
 and outstanding in 1995................         7,813              -   
Commitments and Contingencies
Stockholders' Equity (Deficit):
 Preferred Stock -  $.01 par value;
  20,000,000 shares authorized; no                   
  shares issued and outstanding...                   -              -
 Common Stock - $.01 par value;
  200,000,000 shares authorized;                    
  3,848,607 shares issued and
  outstanding in 1995 and 32,299,756
  issued and outstanding in 1996........            38            323
 
 Additional paid-in capital.............        22,684        353,203
 Accumulated deficit....................       (43,716)       (38,009)
  Total stockholders' equity (deficit)..       (20,994)       315,517
                                        --------------  -------------
   Total liabilities and stockholders'        
    equity (deficit)....................      $ 50,299       $332,418
                                        ==============  ===============
 
</TABLE>


The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                       21
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
<TABLE>
<CAPTION>
 
                                           Period from
                                         March 24, 1995      Fiscal
                                           (inception)        Year
                                             through          Ended
                                          December 31,    December 29,
                                              1995            1996
                                       ----------------  -------------
<S>                                      <C>              <C>
Revenue:
 Company stores........................        $ 25,685        $35,803
 Royalties and franchise-related fees..             671         19,918
 Interest income.......................              67          5,986
                                       ----------------  -------------
   Total revenue.......................          26,423         61,707
 
Costs and Expenses:
 Cost of products sold.................           8,239         11,546
 Salaries and benefits.................          13,531         18,302
 General and administrative............          47,805         21,820
                                       ----------------  -------------
   Total costs and expenses............          69,575         51,668
                                       ----------------  -------------
 
Income (Loss) from Operations..........         (43,152)        10,039
 
Other Income (Expense):
 Interest expense, net.................          (1,281)        (6,261)
 Other income, net.....................             717          1,929
   Total other income (expense)........            (564)        (4,332)
                                       ----------------  -------------
 
Income (Loss) Before Income Taxes......         (43,716)         5,707
Income Taxes...........................               -              -
                                       ----------------  -------------
Net Income (Loss)......................        $(43,716)       $ 5,707
                                       ================  =============
 
Net Income (Loss) Per Common and
 Equivalent Share......................          $(4.54)         $0.25
                                       ================  =============
 
Weighted Average Number of Common
 and Equivalent Shares Outstanding.....           9,659         22,344
                                       ================  =============
 
</TABLE>


The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                       22
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In thousands)
<TABLE>
<CAPTION>
 
                                           Period from
                                            March 24,
                                              1995          Fiscal
                                           (inception)       Year
                                             through         Ended
                                           December 31,   December 29,
                                              1995           1996
                                          -------------  -------------
<S>                                       <C>            <C>
COMMON STOCK
 Balance at beginning of period.........      $      -       $     38
 Conversion of preferred stock,
  repurchase common stock,                           
  and debt..............................             -            175
 Issuance of common stock...............            38             96
 Exercise of stock options and warrants.             -             14
                                          -------------  -------------
 Balance at end of year.................      $     38       $    323
                                          =============  =============
 
ADDITIONAL PAID-IN CAPITAL
 Balance at beginning of period.........      $      -       $ 22,684
 Conversion of preferred stock,
  repurchase common stock and                        
  debt..................................             -        140,270
 Issuance of common stock, net of
  offering costs of $500 in 1995                
  and $10,343 in 1996...................        22,051        182,491
 Exercise of stock options and warrants.             -          9,227
 Dividends on Series A preferred stock
  and accretion of dividends                    
  on repurchase common stock............        (1,077)        (1,708)
 Issuance of options and warrants.......         1,710            239
                                          -------------  -------------
 Balance at end of year.................      $ 22,684       $353,203
                                          =============  =============
 
ACCUMULATED DEFICIT
 Balance at beginning of period.........      $      -       $(43,716)
 Net income (loss)......................       (43,716)         5,707
                                          -------------  -------------
 Balance at end of year.................      $(43,716)      $(38,009)
                                          =============  =============
 
</TABLE>


The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                       23
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                            Period from
                                          March 24, 1995      Fiscal
                                            (inception)        Year
                                              through          Ended
                                           December 31,    December 29,
                                               1995            1996
                                        ----------------   ------------
<S>                                       <C>              <C>
Cash Flows from Operating Activities:
 Net income (loss)......................        $(43,716)     $   5,707
 Adjustments to reconcile net income
  (loss) to net cash used in
   operating activities:
   Depreciation and amortization........           1,657          5,431
   Warrant and option expense...........           1,710            239
   Write-off of intangible assets.......          26,575              -
   Gain on the sale of marketable                   (719)        (1,824)
    equity securities...................
   Changes in assets and liabilities,
    net of effect of acquisitions:
     Accounts receivable................            (680)        (3,966)
     Accounts payable and accrued                  1,778           (292)
      expenses..........................
     Deferred franchise revenue.........             910          8,180
     Other assets and liabilities.......             173         (7,003)
      Net cash provided by (used in)            
       operating activities.............         (12,312)         6,472
                                        ----------------   ------------
Cash Flows from Investing Activities:
 Purchase of property and equipment.....         (18,109)       (38,198)
 Proceeds from sale of net assets.......           5,519         49,943
 Acquisition of Noah's New York Bagels,                
  Inc., net of cash acquired............               -       (100,902) 
 Purchase of marketable equity                  
  securities, net of proceeds from sales         (22,682)         1,824
 Purchase of other assets...............            (621)        (6,552)
 Issuance of notes receivable...........         (10,569)      (209,514)
 Repayment of notes receivable..........           3,831         70,694
                                        ----------------   ------------
   Net cash used in investing activities         (42,631)      (232,705)
                                        ----------------   ------------
Cash Flows from Financing Activities:
 Proceeds from issuance of common stock.          20,311        191,606
 Proceeds from convertible debt.........          91,060        352,272
 Repayment of convertible debt..........         (51,060)      (272,272)
                                        ----------------   ------------
   Net cash provided by financing                
    activities..........................          60,311        271,606
Net Increase in Cash and Cash                     
 Equivalents............................           5,368         45,373
Cash and Cash Equivalents, beginning of              
 period.................................               -          5,368
                                        ----------------   ------------
Cash and Cash Equivalents, end of year..        $  5,368      $  50,741
                                        ================   ============
 
Supplemental Cash Flow Information:
 Interest Paid..........................        $  1,107      $   7,232
                                        ================   ============
 
Supplemental Schedule of Non-Cash
 Activities:
 Conversion of debt to common stock.....        $      -      $ 120,000
                                        ================   ============
 Conversion of preferred stock,
  repurchase common stock                       
   and accrued dividends on preferred
    stock...............................        $      -      $  20,445
                                        ================   ============
 Exchange of preferred stock,
  repurchase common stock,
   common stock and marketable equity           
    securities for net
   assets acquired......................        $ 42,742      $       -
 
 Issuance of common stock for note        ==============   ============
  receivable............................        $    437      $       -
                                          ==============   ============
 
 Accretion of dividends on repurchase     ==============   ============
  common stock..........................        $    933      $   1,486
                                          ==============   ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                       24
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  DESCRIPTION OF BUSINESS

  Einstein/Noah Bagel Corp. and its subsidiaries (the "Company") franchise and
operate specialty retail stores in the United States that feature fresh-baked
bagels, cream cheeses, specialty coffees and teas, and creative soups, salads
and sandwiches.  At December 31, 1995, there were 60 stores in operation
systemwide, consisting of 47 Company stores and 13 franchise stores.  In 1995,
the Company sold 13 Company stores to area developers of the Company.  At
December 29, 1996, there were 315 stores in operation systemwide, consisting of
301 franchise stores and 14 Company stores.  In 1996, the Company sold 105
Company stores to area developers of the Company.  Subject to the provisions of
the applicable franchise agreements, the Company is obligated to allow
franchisees to utilize the Company's trademarks, copyrights, recipes, operating
procedures and other elements of its systems in the operation of franchise
stores.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation.  The accompanying consolidated financial
statements include the accounts of Einstein/Noah Bagel Corp. and its
subsidiaries.  All material intercompany accounts and transactions have been
eliminated in consolidation.

  Fiscal Year.  The Company's fiscal year is the 52/53-week period ending on the
last Sunday in December, and normally consist of 13 four-week periods.  The
first quarter consists of four periods and each of the remaining three quarters
consist of three periods.  Fiscal period 1995 was the period from March 24, 1995
(inception) through December 31, 1995.  Fiscal year 1996 contained 13 four-week
periods.

  Cash and Cash Equivalents.  Cash and cash equivalents consist of cash on hand
and on deposit and highly liquid instruments purchased with maturities of three
months or less.

  Inventories.  Inventories, which are classified in prepaid expenses and other
current assets, are stated at the lower of cost (first-in, first-out) or market
and consist of food, paper products and supplies.

  Property and Equipment.  Property and equipment is stated at cost, less
accumulated depreciation and amortization.  The provision for depreciation and
amortization has been calculated using the straight-line method with buildings
and improvements being depreciated over 15 to 30 years, leasehold improvements
being amortized over the lesser of their useful lives or their lease terms,
including option periods, furniture, fixtures and equipment being depreciated
over 5 to 8 years, and pre-opening costs being depreciated over one year.

  Property and equipment additions include acquisitions of buildings and
equipment, costs incurred in the development and construction of new stores, and
major improvements to existing stores.  Expenditures for maintenance and repairs
are charged to expense as incurred.  Pre-opening costs consist primarily of
salaries and other direct expenses incurred in connection with the set-up,
initial stocking of stores, initial training of employees and general store
management activities incurred prior to the opening of new stores.

  Long-Lived Assets.  The Company evaluates whether events and circumstances
have occurred that indicate revision to the remaining useful lives or the
remaining balances of long-lived assets may be appropriate.  Such events and
circumstances include, but are not limited to, a change in business strategy or
a change in current and long-term projected operating performance.  When factors
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows expected to result from the use of such
asset and its eventual disposition.  If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, the Company will recognize an impairment loss equal to the
excess of the carrying amount over the fair value of the asset.

                                       25
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
  Revenue Recognition. Revenue from Company stores is recognized in the period
during which related food and beverage products are sold. Royalties are
recognized in the same period that related franchise store revenue is generated.
Revenue derived from initial franchise fees and area development fees is
recognized when the franchise store opens. Real estate fees are recognized as
earned, and lease income is recognized over the life of the lease on a straight-
line basis. Interest income is recognized as earned. The components of royalties
and franchise-related fees are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
                                                                           
                                              FISCAL PERIOD OR YEAR ENDED  
                                             ----------------------------  
                                               DECEMBER 31,  DECEMBER 29,  
                                                   1995          1996      
                                             --------------  ------------ 
     <S>                                       <C>           <C>           
     Initial franchise and area development           $ 520       $12,140  
      fees...................................                              
     Royalties...............................            35         6,086  
     Real estate fees and lease income.......             -         1,564  
     Other...................................           116           128  
                                              --------------  ------------ 
     Total royalties and franchise related            $ 671       $19,918  
      fees...................................                              
                                              ==============  ============
</TABLE>

  Per Share Data.  Net income (loss) per common share is computed by dividing
net income (loss), adjusted for dividends on Series A preferred stock, by the
weighted average number of common shares and dilutive common stock equivalents
outstanding during the period.  Common and equivalent shares include any common
stock, options and warrants issued within one year prior to the effective date
of the Company's initial public offering, with a price below the initial public
offering price.  These have been included as common stock equivalents
outstanding, reduced by the number of shares of common stock which could be
purchased with the proceeds from the assumed exercise of the options and
warrants, including tax benefits assumed to be realized.

  Advertising Costs.  Advertising costs are expensed in the period incurred.

  Employee Stock Options.  The Company accounts for its employee stock options
in accordance with the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25.  Required pro forma disclosures of compensation
expense determined under the fair value method of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") are presented in Note 12.

  Employee Benefit Plan.  The Company has a 401(k) plan to which the Company
makes no contributions.

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

  Reclassifications.  Certain reclassifications have been made to the 1995
amounts to conform with the 1996 presentation.

                                       26
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
3.  SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT DATA

  Accounts receivable are net of an allowance for doubtful accounts of $81,000
at December 31, 1995.  There was no allowance at December 29, 1996.
<TABLE>
<CAPTION>
 
                                             DECEMBER 31,                    DECEMBER 29,
                                                1995                            1996
                                             --------------                  ------------
<S>                                          <C>                             <C>
Property and equipment consists of 
 (in thousands of dollars):
 Land......................................    $    123                        $     118   
 Buildings and improvements................         366                              384
 Development in progress...................       1,212                            1,449
 Leasehold improvements....................      10,505                            9,763
 Furniture, fixtures and equipment.........       7,544                           17,962
 Pre-opening expenses......................         401                                -
                                             --------------                  ------------
                                                 20,151                           29,676
 Less: Accumulated depreciation and                                 
  amortization.............................        (741)                          (1,463)
                                             --------------                  ------------
  Total property and equipment, net........    $ 19,410                        $  28,213 
                                             ==============                  ============
</TABLE> 
 
    Included in furniture, fixtures and equipment are $14.9 million (net of
    accumulated depreciation of approximately $860,000) of assets leased to
    others at December 29, 1996.
 
  Goodwill, trademarks, and recipes are reported net of accumulated amortization
of $2.2 million, $584,000, and $484,000, respectively, as of December 29, 1996.
Goodwill is net of accumulated amortization of $269,000 as of December 31, 1995.

<TABLE>
<CAPTION>
                                              DECEMBER 31,                    DECEMBER 29,
                                                  1995                            1996
                                              -------------                   ----------- 
<S>                                           <C>                             <C> 
Accrued expenses consist of (in thousands 
 of dollars):
 Accrued payroll and  fringe benefits.....    $      876                        $     871
 Accrued interest.........................           325                               17
 Accrued other............................         1,767                            2,727
                                              -------------                   -----------
  Total accrued expenses..................    $    2,968                        $   3,615
                                              =============                   ===========
</TABLE> 
<TABLE> 
<CAPTION> 
                                                     FISCAL PERIOD OR YEAR ENDED
                                            ------------------------------------------------
                                              DECEMBER 31,                    DECEMBER 29,
                                                  1995                            1996
                                              -------------                   -----------
<S>                                           <C>                             <C> 
Interest expense, net consists of (in 
 thousands of dollars):
 Interest expense..........                   $   (1,432)                       $  (6,950)
 Interest income...........                          151                              689
                                              -------------                   -----------
  Total interest expense, net............     $   (1,281)                       $  (6,261)
                                              =============                   ===========
</TABLE>
4.  ACQUISITIONS

  In 1995, the Company acquired four regional bagel companies.  In March 1995,
the acquisitions included Brackman Brothers, Inc., for which the Company issued
573,750 shares of common stock valued at $5.88 per share and other marketable
equity securities with a value of $8.3 million, Bagel & Bagel, Inc., for which
the Company issued 573,750 shares of common stock valued at $5.88 per share and
other marketable equity securities with a value of $5.5 million, and Offerdahl's
Bagel Gourmet, Inc., for which the Company issued 811,625 shares of common stock
valued at $5.88 per share and other marketable equity securities with a value of
$5.6 million.  In August 1995, the Company acquired Baltimore Bagel Co.
("Baltimore Bagel"), for which the Company issued 6,250 shares of Series A
preferred stock with a value of $7.8 

                                       27
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
million and other marketable equity securities with a value of $4.0 million.
Pursuant to the acquisitions, the Company agreed to repurchase up to 1,721,250
shares of the common stock under certain circumstances (see Note 12). The
acquisitions have been accounted for as purchases, and, accordingly, the
purchase prices were allocated to assets (both tangible and intangible) and
liabilities based upon their fair values at the dates of the acquisitions. The
total purchase price for these four companies, including assumption of
liabilities, was $51.1 million, of which $21.2 million was allocated to
trademarks (amortized over a 35-year life), $5.4 million was allocated to
recipes (amortized over a 10-year life) and $14.0 million was allocated to
goodwill (amortized over a 35-year life). Such assets were identified by
management based upon its evaluation of the businesses acquired. The allocation
of the purchase price to trademarks and recipes was based upon a royalty savings
methodology which determines the present value of the stream of royalties which
the Company believes an independent third party would be willing to pay to
obtain the use of such trademarks and recipes. The estimated useful life for
these assets was based upon various factors which existed at the time of the
acquisitions, including the anticipated periods of benefit to be derived from
the utilization of such assets in connection with executing a regional brand
business strategy, increasing consumer demand for bagel products, the lack of a
competitor with national brand awareness, the lack of regulatory limitations on
the potential useful lives of such assets, the absence of any inherent or
technological obsolescence for such assets, and in the case of trademarks, the
long-lived nature of a primary brand name in the consumer marketplace.
Subsequent to these acquisitions, management launched a project which resulted
in the development of the Einstein Bros. Bagels brand and store, at which time
management determined it would discontinue the use of the acquired trademarks
and recipes. Consequently, this change in business strategy resulted in an
impairment of these intangible assets, and, accordingly, the assets were written
down to their fair market values, resulting in a write-off of $26.6 million in
1995.

  In February 1996, the Company acquired all of the outstanding capital stock of
Noah's New York Bagels, Inc. for approximately $100.9 million.  The acquisition
has been accounted for as a purchase, and, accordingly, the purchase price was
allocated to assets (both tangible and intangible) and liabilities based upon an
evaluation of their fair values at the date of the acquisition.  Of the total
purchase price, $22.1 million was allocated to trademarks (amortized over a 35-
year life), $5.2 million was allocated to recipes (amortized over a 10-year
life) and $56.3 million was allocated to goodwill (amortized over a 35-year
life).  Such assets were identified by management based upon its evaluation of
the business acquired.  The allocation of the purchase price to trademarks and
recipes was based upon the royalty savings methodology described in the
preceding paragraph.

  The financial statements include the results of operations for the acquired
entities from their dates of acquisition.  The following represents the
unaudited pro forma results of operations as if all of the purchase transactions
described above had occurred at the beginning of the periods presented (in
thousands of dollars, except per share data):
<TABLE>
<CAPTION>
                                                                 
                                    DECEMBER 31,   DECEMBER 29,  
                                        1995           1996      
                                    -------------  ------------  
     <S>                            <C>            <C>           
     Revenue......................      $ 70,388        $65,011  
     Net income (loss)............       (56,236)         3,825  
     Net income (loss) per share..         (5.82)          0.16   
</TABLE>

  The pro forma information given above does not purport to be indicative of the
results that actually would have been reported if the transactions had occurred
at the beginning of the periods presented and is not intended to be a projection
of future results or trends.

5.  FAIR VALUE OF FINANCIAL INSTRUMENTS

  The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

  Cash and Cash Equivalents.  The carrying value approximates fair value due to
the length of maturity of the investments.

                                       28
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
  Notes Receivable.  The estimated fair value of notes receivable (Notes 6 and
11), including the conversion option, is based on the discounted value of future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings.

  Convertible Debt.  The estimated fair value of convertible debt, including the
conversion option, is based on the discounted value of future payments using the
current rate at which similar loans would be made to companies with similar
credit ratings.

  Repurchase Common Stock Shares.  The estimated fair value of common stock
subject to repurchase by the Company is based on the price of other common stock
transactions near December 31, 1995.

  Series A Preferred Stock.  The estimated fair value of Series A preferred
stock is based on the discounted value of future cash flows using interest rates
which would be applicable to similar instruments held in companies with similar
credit ratings.

  The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
 
                                                   DECEMBER 31, 1995               DECEMBER 29, 1996
                                        ----------------------------------------------------------------
                                             CARRYING             FAIR            CARRYING        FAIR
                                              AMOUNT              VALUE            AMOUNT        VALUE
                                        ------------------  -----------------  ---------------  --------
<S>                                       <C>               <C>                <C>              <C>
Cash and cash equivalents...............        $ 5,368            $ 5,368         $ 50,741     $ 50,741
Notes receivable........................          7,267              7,267          146,087      146,087
Convertible debt........................         40,000             40,000                -            -
Repurchase common stock shares..........         11,062             11,142                -            -
Series A preferred stock................          7,813              7,813                -            -
</TABLE> 
 
6.  NOTES RECEIVABLE
 
  The following table summarizes the primary components of notes receivable (in
thousands of dollars):
<TABLE> 
<CAPTION> 
 
                                                               DECEMBER 31,     DECEMBER 29,
                                                                  1995              1996
                                                          -------------------  ---------------
<S>                                                        <C>                  <C> 
Due from area developers (Note 11)......                              $ 3,538         $140,754
Notes receivable from stockholder.......                                1,888            3,437
Term loans..............................                                1,108            1,496
Other...................................                                  733              400
                                                          -------------------  ---------------
                                                                      $ 7,267         $146,087
                                                          ===================  ===============
</TABLE>

  Notes receivable from stockholder bear interest at the applicable reference
rate of Bank of America Illinois ("Reference Rate") plus 1%.  Principal and
interest are due April 2001.  The notes are collateralized by various assets.

  Term loans bear interest at the Reference Rate plus 1%.  Principal is due in
annual installments with balloon payments required on various dates through
2001.  The loans are collateralized by various assets.

7.  DEBT

  The Company has a secured revolving credit facility providing for borrowings
of up to $45.0 million through April 30, 1998.  Borrowings under the facility
may be either floating rate loans with interest at the Reference Rate plus
applicable margin or, eurodollar rate loans with interest at the eurodollar rate
plus applicable margin.  In addition, a commitment fee of .5% of the average
daily unused portion of the loan is required.  The facility contains covenants
that, among other things, restrict other borrowings, prohibit cash dividends,
and require maintenance of specified cash flow ratios, store-level sales, 

                                       29
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

and minimum capital levels. The facility is collateralized by substantially all
of the assets of the Company. As of December 29, 1996, no balance was
outstanding under the facility.

  The Company also has an unsecured non-convertible revolving credit facility
from Boston Chicken, Inc. ("Boston Chicken") providing for borrowings of up to
$50.0 million through June 15, 2003.  The facility bears interest at the
Reference Rate plus applicable margin.  As of December 29, 1996, there was no
balance outstanding under the facility.

8.  INCOME TAXES

  As of December 29, 1996, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $17.0 million which begin to expire in 2010.

  The primary components that comprise deferred tax assets and liabilities are
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
 
                                          DECEMBER 31, 1995   DECEMBER 29, 1996
                                        -------------------   -----------------
<S>                                       <C>                 <C>
Deferred tax assets:
   Accounts payable and accrued expenses            $   218            $    199
   Deferred franchise revenue...........                355               3,551
   Other noncurrent liabilities.........                220                 226
   Write-off of intangible assets that                2,017               1,582
    are amortizable for tax.............
   Net operating loss carryforwards.....              4,104               6,648
   Other................................              1,380                  63
                                        -------------------  ------------------
       Total deferred tax assets........              8,294              12,269
 
Deferred tax liabilities:
   Property and equipment...............               (489)             (1,335)
   Other assets.........................               (116)               (652)
       Total deferred tax liabilities...               (605)             (1,987)
                                        -------------------  ------------------
       Net deferred tax assets..........              7,689              10,282
   Valuation allowance..................             (7,689)            (10,282)
                                        -------------------  ------------------
   Net deferred tax assets..............            $     -            $      -
                                        ===================  ==================
</TABLE>

  The increase in the valuation allowance of $2,593,000 from December 31, 1995
to December 29, 1996 is due to uncertainty regarding the realization of the
related tax benefits.  The difference between the Company's actual tax provision
and the tax provision that would result from applying the statutory federal
income tax rate to income before income taxes is attributable to the following
(in thousands of dollars):
<TABLE>
<CAPTION>
 
                                          FISCAL YEAR ENDED
                                          DECEMBER 29, 1996
                                        -------------------
<S>                                       <C>
Income tax expense at statutory rate....            $ 1,997
State taxes, net of federal benefit.....                228
Permanent difference related to 
 goodwill...............................              1,138
Change of valuation allowance...........             (3,363)
                                        -------------------
Provision for income taxes..............            $     -
                                        ===================
</TABLE>

9.  NATIONAL AND LOCAL ADVERTISING FUNDS

  The Company administers a National Advertising Fund (the "Fund") to which
stores make contributions based on individual franchise agreements (2% of base
revenue).  Collected amounts are spent primarily on developing marketing and
advertising materials for use systemwide.  In addition, the Company maintains
Local Advertising Funds ("LAFs") that 

                                       30
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
provide comprehensive advertising and sales promotion support for stores in
particular markets. Contributions are made by all stores (a minimum of 4% of net
revenue). The Company disburses funds and accounts for all transactions related
to the Fund and LAFs. Such amounts are not segregated from the cash resources of
the Company; however, consistent with Statement of Financial Accounting
Standards No. 45 "Accounting for Franchise Fee Revenue", such funds are
accounted for separately and are not included in the financial statements of the
Company because the Company acts only as an agent for its franchisees in placing
orders for advertising and paying related invoices out of such accounts.

10.  COMMITMENTS AND CONTINGENCIES

  The Company leases sites for its stores, commissaries and office space.  Lease
terms are generally five years with two or three five-year renewal options.  The
Company also subleases sites to its area developers.  The sublease terms to area
developers are negotiated at arm's length on commercially reasonable terms.  The
Company is contingently liable for all lease costs including common area
maintenance charges.  Most of the leases contain escalation clauses and common
area maintenance charges.

  The following is a schedule of future minimum rental payments which are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year, sublease proceeds, and rental receipts due
under leases on equipment owned by the Company as of December 29, 1996 (in
thousands of dollars):
<TABLE>
<CAPTION>
 
                                                              MINIMUM
                                                          RENTAL RECEIPTS
                                                                ON
                  MINIMUM      SUBLEASE    NET MINIMUM    EQUIPMENT OWNED
              RENTAL PAYMENTS  PROCEEDS  RENTAL PAYMENTS  BY THE COMPANY
            -----------------  --------  ---------------  ---------------
<S>           <C>              <C>       <C>              <C>
1997........          $14,085   $13,139           $  946           $1,279
1998........           13,436    12,686              750            1,278
1999........           12,892    12,232              660            1,276
2000........           11,952    11,395              557            1,284
2001........            9,130     8,627              503            1,273
Thereafter..           36,573    30,704            5,869            2,076
            -----------------  --------  ---------------  ---------------
                      $98,068   $88,783           $9,285           $8,466
            =================  ========  ===============  ===============
</TABLE>

  Rental expense, net of sublease income, under operating leases was
approximately $1,909,000 and $1,601,000 for the period from March 24, 1995
(inception) through December 31, 1995 and for the fiscal year ended December 29,
1996, respectively.

  As of December 29, 1996, Bagel Store Development Funding, L.L.C. ("Bagel
Funding") had invested a total of $70.2 million in the common equity of the
Company's area developers.  At December 29, 1996, the Company was the manager of
Bagel Funding.  Bagel Funding has the right to require each area developer to
redeem Bagel Funding's equity interest in an area developer at a pre-determined
formula price based on the store level cash flow of the area developer in the
event that (i) the Company acquires a majority equity interest in the area
developer pursuant to the exercise of its conversion or option rights under the
area developer's secured loan agreement; (ii) the Company does not consent to
the area developer's request to undertake a firm commitment underwritten public
offering after the Company's conversion and option rights under its loan
agreement with the area developer have expired unexercised; or (iii) the Company
does not consent to the area developer's request to terminate the area
developer's area development and franchise agreements with the Company after the
Company's conversion and option rights under its loan agreement with the area
developer have expired unexercised.  In the event the area developer does not
redeem Bagel Funding's equity interest when required to do so, the Company will
be obligated to purchase from Bagel Funding its equity interest in the area
developer at the same price applicable to the area developer.

                                       31
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


  The Company has entered into a supply agreement relating to the purchase of
certain minimum levels of cream cheese, which expires in October 2000, or
earlier in certain circumstances.  The agreement requires the Company, its
subsidiaries, area developers and other authorized purchasers to purchase the
lesser of 160,000 pounds of cream cheese per week or 60% of their requirements
for cream cheese (excluding certain requirements that may be satisfied through
other commitments and certain requirements of acquired companies).  The price
per pound is determined over the term of the contract based upon production
costs.

  The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business.  The Company believes that the
outcome of such lawsuits, claims and other legal matters will not have a
material impact on the Company's financial position or results of operations.

11.  AREA DEVELOPER FINANCING

  The Company currently offers partial financing to its area developers for use
in expansion of their operations.  The maximum loan amount is established to
give the Company majority ownership of the area developer upon conversion (or
option exercise, as described further below) provided the Company exercises its
right to participate in any intervening financing of the area developer.  Area
developer financing requires the developer to expend at least 75% of its
contributed capital toward developing stores prior to drawing on the revolving
loan facility provided by the Company, with draws permitted during a three-year
draw period in a predetermined maximum amount generally equal to four times the
amount of the area developer's equity capital.  Upon expiration of the draw
period, the loan converts to an amortizing term loan payable over five years in
periodic installments, with a final balloon payment.  The Company may extend the
draw and repayment periods, subject to the area developer purchasing additional
development rights, contributing additional capital, or in connection with other
amendments to the loan agreement.  Interest is set at the Reference Rate from
time to time (8.25% at December 29, 1996 and an average rate of 8.27% for 1996)
plus 1%, and is payable each four-week period.  The loan is secured by a pledge
of substantially all of the assets of the area developer.

 (a) Loan Conversion Option

  All or any portion of the loan amount may be converted at the Company's
election at any time after the expiration of a specified moratorium period
(generally two years) and after the area developer has completed not less than
80% of its area development commitment or in the event of certain defaults into
equity in the area developer at the conversion price set forth in such loan
agreement, which is at a premium over the per unit price paid by the investors
in the area developer for their equity investment made concurrently with the
execution of the loan agreement.  Default provisions contained in the area
developer loans typically include default in payment of principal and interest,
breach of a representation or warranty or of any covenant contained in the loan
agreement or security instruments, bankruptcy or bankruptcy-related act of the
borrower, resignation or termination of key management personnel, default under
the area development agreement, termination of three or more franchise
agreements, dissolution or liquidation, material adverse change in financial
condition, default of other indebtedness, sublease or any real estate lease, a
judgment in excess of $100,000 (not satisfied, vacated or covered by insurance)
and the invalidity or termination of any security instrument.  The conversion
price is negotiated at arms' length with each area developer and, at December
29, 1996, the average conversion premium was 12% over the per unit price paid by
the investors in the area developer for their equity investment made
concurrently with the execution of the loan agreement or subsequent amendments
thereto.  To the extent such loan is not fully drawn or has been drawn and
repaid, the Company has a corresponding option to acquire at the loan conversion
price the amount of additional equity it could have acquired by conversion of
the loan had it been fully drawn.

  There can be no assurance the Company will convert any loan amount or exercise
its option at such time as it may be permitted to do so and, if it does convert
or exercise its option, that such conversion or option exercise will result in a
majority interest in such area developer.

                                       32
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
  (b) Commitments to Extend Area Developer Financing

  The following table summarizes credit commitments for area developer financing
(in thousands of dollars, except number of area developers):
<TABLE>
<CAPTION>
 
                                                    DECEMBER 31,   DECEMBER 29,
                                                        1995           1996
                                                    ------------   ------------
<S>                                                 <C>            <C>
Number of area developers receiving                     
 financing..............................                       2             11
Loan commitments........................                $ 16,000      $ 283,200
Unused loans............................                 (12,462)      (142,446)
                                                        --------      ---------
Loans outstanding (included in Notes                    
 Receivable)............................                $  3,538      $ 140,754
                                                        ========      =========
Contributed capital.....................                $  4,000      $  75,765
                                                        ========      =========
</TABLE> 
 
  The following table summarizes area developer financing activity of the 
Company during 1995 and 1996 (in thousands of dollars):
<TABLE> 
<CAPTION> 
                                                            1995         1996
                                                        ----------    ---------
<S>                                                     <C>           <C> 
Area developer loan balances,
   beginning of period..................                $      -      $   3,538
Loan advances...........................                   7,369        206,762
Loan repayments.........................                  (3,831)       (69,546)
                                                        ---------     ---------
Area developer loan balances,
   end of year..........................                $  3,538      $ 140,754
                                                        =========     =========
</TABLE>

  The majority of the loan advance and repayment activity reflects the revolving
nature of the loans, that is, amounts are drawn and repaid on a regular basis to
optimize cash management.

  The principal maturities on the aforementioned notes receivable are as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
 
<S>                                           <C>
1998.......................................   $    375
1999......................................       9,582
2000......................................      14,075
2001......................................      14,075
Thereafter................................     102,647
                                           -----------
                                              $140,754
                                           ===========
</TABLE>
 (c) Credit Risk and Allowance for Loan Losses

  Five of the Company's area developers accounted for 21%, 17%, 15%, 10% and 10%
of the area developers' notes receivable balance at December 29, 1996, and no
other area developer of the Company individually accounted for 10% or more of
such notes receivable balance as of such date.

  The allowance for credit losses is maintained at a level that in management's
judgment is adequate to provide for estimated possible loan losses.  The amount
of the allowance is based on management's review of each area developer's use of
loan proceeds, stage of development, adherence to its store development
schedule, store performance trends, type and amount of collateral securing the
loan, prevailing economic conditions, and other factors which management deems
relevant at the time.  Based upon this review and analysis, no allowance was
required as of December 31, 1995 or December 29, 1996.

  The following table sets forth certain combined financial information, as of
the dates indicated, provided by all the Company's area developers.  During
1995, two area developers were formed, and their data have been included in the
table 

                                       33
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 
for 1995 from the dates of their respective formation.  During 1996, ten
area developers were formed, and their data has been included in the table for
1996 from the dates of their respective formations.  In addition, one area
developer combined with one other area developer with geographically contiguous
territory.
<TABLE>
<CAPTION>
 
                                            DECEMBER 31,                 DECEMBER 29,
                                                1995                         1996
                                          --------------                 ------------
                                            (in thousands, except number of area 
                                                  developers and store data)
<S>                                       <C>                            <C>
Total number of area developers.........           2                              11
Total number of area developer
 stores open............................          13                             301
 
Balance sheet data:
 Total gross assets.....................     $ 9,262                       $ 221,156
 Total debt:
   To the Company.......................       3,538                         140,754
   To third parties.....................          -                               -
 Total other liabilities (including            
  trade payables).......................       3,011                          37,033
 Total partner/member equity............       2,676                          33,847
</TABLE> 
<TABLE> 
<CAPTION> 
 
                                                      FISCAL PERIOD ENDED
                                           DECEMBER 31,                  DECEMBER 29,
                                               1995                         1996
                                           ------------                  ------------
                                                         (in thousands)
<S>                                       <C>                            <C>
Statement of operations data:
 Gross revenue..........................     $    768                       $ 109,940
 Income (loss) from continuing                
  operations............................       (1,324)                        (40,592)
 
Statement of cash flows data:
 Cash flows from (used in) operating          
  activities............................      $ 1,616                       $ (16,382)
 Cash flows from (used in) investing           
  activities............................       (8,064)                       (187,955)
 Cash flows from (used in) financing            
  activities............................        7,038                         205,756
                                            ------------                  -------------
   Net change in cash...................      $   590                       $   1,419
                                            =============                 ==============
</TABLE>

12.  STOCKHOLDERS' EQUITY

  Common Stock.  On July 8, 1996, the Company effected a 225-for-one split of
the Company's common stock in the form of a stock dividend.  Per share amounts,
the number of common shares and capital accounts have been restated to give
retroactive effect to the stock split.

  The Company issued 3,536,361 shares of common stock at the time of its
formation, which provided net proceeds of approximately $20.8 million.

  In June 1996, Boston Chicken converted its $120.0 million loan to the Company
into 15,307,421 shares of common stock.

  In August 1996, the Company completed an underwritten initial offering of
3,105,000 shares of its common stock to the public, a concurrent non-
underwritten public offering of 425,000 shares of its common stock and a
concurrent private placement of 2,000,000 shares of its common stock to Boston
Chicken raising aggregate net proceeds of approximately $86.0 million.

                                       34
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


  In December 1996, the Company completed an additional underwritten offering of
2,640,000 shares of its common stock to the public and a concurrent non-
underwritten public offering of 500,000 shares to Boston Chicken.  The aggregate
net proceeds of these offerings were approximately $88.6 million.

  Preferred Stock.  In connection with the acquisition of the net assets of
Baltimore Bagel, the Company issued 6,250 shares of Series A preferred stock.
The Series A preferred stock had a liquidation preference of $1,000 per share,
paid annual dividends of $60 per share, and was automatically convertible into
common stock of the Company upon closing of its initial public offering, with
the number of shares of common stock received being equal to $1,000 plus accrued
and unpaid dividends divided by 80% of the gross offering price per share to the
public.  The total number of shares of common stock issued on conversion was
465,829.

  Repurchase Common Stock Shares.  Pursuant to the purchase agreements (see Note
4), the Company had agreed that, in the event it had not completed an initial
public offering of its common stock resulting in gross proceeds of at least
$15.0 million by specified dates or if Boston Chicken's ownership of, or right
to acquire an ownership interest in, the Company's common stock fell below 25%,
the holders of common stock subject to repurchase by the Company could require
the Company to redeem such shares of common stock at their fair market value,
but not less than a specific floor price per share.  In 1996, as a result of the
completion of an initial public offering of common stock, the repurchase
obligation was eliminated, resulting in such shares being reclassified to
stockholders' equity.

  Warrants.  The Company sold warrants to purchase 1,012,500 shares of common
stock of the Company to Bagel Funding.  The warrants have an exercise price of
$6.47 per share and expire in 2000.  In 1996, the Company also sold or issued
warrants to purchase an aggregate of 1,252,425 shares of common stock of the
Company to other third parties at exercise prices ranging from $6.47 to $11.58
per share.  The warrants expire at various dates through 2001.

  Stock Option Plans.  The Company has a stock option plan (the "Plan") under
which options to purchase up to 5,500,000 shares of common stock may be granted
to certain employees and officers of, and consultants to, the Company.  The
option price is equal to the fair market value of the stock on the date of the
grant and each option has a term of ten years.  Options granted under the Plan
generally vest at a rate of 10% at the end of the first year, an additional 20%
at the end of the second year, an additional 30% at the end of the third year,
and the balance vesting at the end of the fourth year from the date of the
grant.

  The Company also has a non-employee directors stock option plan (the
"Directors Plan"), under which options to purchase up to 100,000 shares of the
common stock of the Company may be granted to directors of the Company who are
not officers or employees of the Company.  Under the terms of the Directors
Plan, the Company automatically grants to each such director, upon election or
re-election as a director of the Company, options to purchase shares having a
fair market value of $50,000 at the date of the grant, except that initial
grants under the Directors Plan were made on the date the Directors Plan was
adopted by the Company's board of directors.  Options are granted at a price
equal to the fair market value of the stock on the date of grant, become
exercisable after the end of one year from the date of grant and have a term of
ten years from the date of grant.  The options are subject to termination should
the optionee's service as a director of the Company terminate.  At December 29,
1996, 12,954 shares had been granted under the Directors Plan, at an exercise
price of $11.58 per share.

                                       35
<PAGE>
 
  The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no employee compensation expense has been recognized for the
Company's stock option plans.  Had employee compensation expense for the
Company's plans been determined based on the fair value at the grant date for
awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net income and net income per common and equivalent share would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
 
                                            1995      1996
                                        -------------------
<S>                                       <C>        <C>
Net income (loss) - as reported.........  $(43,716)  $5,707
Net income (loss) - pro forma...........   (44,395)   3,188
Net income (loss) per common and
 equivalent share - as reported.........     (4.54)    0.25
  
Net income (loss) per common and
 equivalent share - pro forma...........     (4.97)    0.14
 
 
</TABLE>

  The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
 
                                             1995        1996
                                        -----------------------
<S>                                       <C>         <C>
Expected volatility.....................       38.0%       37.1%
Risk-free interest rate.................        6.8%        6.3%
Expected lives..........................        5 years     5 years
Dividend yield..........................        0           0
 
</TABLE> 
  Activity under the option plans through December 29, 1996 was as follows:
<TABLE> 
<CAPTION> 

                                                      WEIGHTED
                                                       AVERAGE
                                                       OPTION
                                          NUMBER OF     PRICE
                                           SHARES     PER SHARE
                                        -----------  ------------
<S>                                       <C>            <C> 
Granted.................................  2,090,248       $5.93
Canceled................................    (16,778)       5.88
                                        -----------  ------------
Outstanding as of December 31, 1995.....  2,073,470        5.93
  Granted...............................  1,959,165        7.94
  Exercised.............................   (353,096)       6.03
  Canceled..............................   (201,464)       7.27
                                        -----------  ------------
Outstanding as of December 29, 1996.....  3,478,075       $6.87
                                        ===========  ============
Exercisable as of December 29, 1996.....    275,824       $5.93
                                        ===========  ============
</TABLE>

                                       36
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
<TABLE>
<CAPTION>
 
Information on options outstanding at December 29, 1996 is as follows:
 
                                                                    OPTIONS EXERCISABLE
                                     WEIGHTED                   ---------------------------
                                     AVERAGE
                                    REMAINING       WEIGHTED                    WEIGHTED
      RANGE OF           NUMBER    CONTRACTUAL      AVERAGE        NUMBER       AVERAGE
   EXERCISE PRICE      OF OPTIONS  LIFE (YEARS)  EXERCISE PRICE  OF OPTIONS  EXERCISE PRICE
-----------------      ----------  ------------  --------------  ----------  --------------
<S>                    <C>         <C>           <C>             <C>         <C>
        $5.88           1,616,739         8.46           $ 5.88     257,700           $5.88
   6.01  -   9.00       1,433,755         9.04             6.58      18,124            6.54
   9.01  -  12.00         417,411         9.41            11.36           -               -
  12.01  -  15.00           8,109         9.58            15.00           -               -
  27.01  -  30.00             685         9.70            29.13           -               -
  30.01  -  33.00           1,376         9.76            32.63           -               -
                       ----------  ------------  --------------  ----------  --------------
        Total           3,478,075         8.81           $ 6.87     275,824           $5.93
                       ==========  ============  ==============  ==========  ==============
</TABLE>

  Boston Chicken Option.  The Company has granted to Boston Chicken an option
(the "BCI Option") to purchase such number of shares of the Company's common
stock as will permit Boston Chicken to maintain ownership of shares of common
stock having up to 52% of the voting power of all of the outstanding shares of
the capital stock of the Company having the power generally to vote in the
election of directors.  The terms of the BCI Option provide that certain shares
of the Company's common stock owned by Boston Chicken are excluded in
determining the percentage ownership of the voting stock of the Company owned by
Boston Chicken for purposes of BCI Option.  As of December 29, 1996, Boston
Chicken had the right under the BCI Option to purchase 416,407 shares of the
Company's common stock at a weighted average price of $28.61.

  As of December 29, 1996, the Company had 6,878,449 shares of common stock
reserved for issuance upon exercise of options and warrants.

13.  RELATED PARTY TRANSACTIONS

  Boston Chicken is the majority shareholder of the Company.  For the Company's
1995 fiscal year, the Company paid to Boston Chicken approximately $1.2 million
for the purchase of furniture, equipment and other miscellaneous assets, and the
Company paid to Boston Chicken amounts aggregating approximately $3.0 million
and $10.2 million in fiscal 1995 and 1996, respectively, for software license,
software maintenance, real estate, financial advisory and accounting fees, and
interest.

  Pursuant to Statement of Financial Accounting Standards No. 57, all the
Company's area developers may be deemed to be related parties as a result of the
lending and franchise relationships with its area developers.  Total royalties
and franchise-related fees earned from all area developers were $671,000 and
$19.9 million in 1995 and 1996, respectively.  Total interest income earned from
all area developers was $67,000 and $6.0 million in 1995 and 1996, respectively.
Total notes receivable from all area developers were $3.5 million and $140.8
million at December 31, 1995 and December 29, 1996, respectively.

  Certain officers and directors of the Company and Boston Chicken are investors
in Bagel Funding and had invested an aggregate of $15.2 million in Bagel Funding
at December 29, 1996.  The Company is the manager of Bagel Funding but has no
equity interest in Bagel Funding.  Bagel Funding paid $500,000 to the Company in
its capacity as manager during 1996.

  Certain directors and officers and members of their families have a direct or
indirect equity interest in the Company's area developers.  The Company received
fees and other payments from these entities aggregating approximately $2.3
million and $33.0 million in fiscal 1995 and 1996, respectively, for area
development, real estate, software maintenance, 

                                       37
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
franchise, royalty, miscellaneous fees, interest and deposits. The Company has
also sold to these entities, stores, inventory, equipment and other
miscellaneous net assets for which it received approximately $5.5 million and
$49.9 million in fiscal 1995 and 1996, respectively.

  During fiscal 1995 and 1996, the Company paid approximately $86,000 and
$98,000, respectively, to Bowana Aviation, Inc. ("Bowana") for the Company's use
of aircraft owned by Bowana.  A director and a member of his family (both
stockholders of the Company) own Bowana.  The Company believes that the amounts
charged by Bowana are at rates at least comparable to those charged by
unaffiliated third parties.

14.  SUBSEQUENT EVENT

  On March 24, 1997, the Company sold the 16 remaining Company stores and
related assets to Sunbelt Bagels, L.L.C., a newly-formed area developer, for
approximately $3.3 million.  No material gain or loss resulted from this sale.

                                       38
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Bagel & Bagel, Inc.:

     We have audited the accompanying statements of operations and cash flows
for the year ended December 27, 1994 and the period from December 28, 1994 to
March 23, 1995 of Bagel & Bagel, Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Bagel &
Bagel, Inc. for the year ended December 27, 1994 and the period from December
28, 1994 to March 23, 1995 in conformity with generally accepted accounting
principles.

                                MAYER HOFFMAN MCCANN L.C.


Kansas City, Missouri
April 26, 1996

                                       39

<PAGE>
 
                              BAGEL & BAGEL, INC.

                            STATEMENTS OF OPERATIONS

            FOR THE YEAR ENDED DECEMBER 27, 1994 AND THE PERIOD FROM

                      DECEMBER 28, 1994 TO MARCH 23, 1995

<TABLE>
<CAPTION>
 
                                                           YEAR ENDED       PERIOD FROM
                                                          DECEMBER 27,   DECEMBER 28, 1994
                                                              1994       TO MARCH 23, 1995
                                                          -------------  ------------------
<S>                                                       <C>            <C>
 
Net Sales ............................................      $5,858,908          $1,887,424
Cost and Expenses:
 Cost of products sold ...............................       2,369,512             735,691
 Salaries and benefits ...............................       1,534,138             534,759
 General and administrative ..........................       1,704,667             653,430
                                                            ----------          ----------
     Total costs and expenses.........................       5,608,317           1,923,880
                                                            ----------          ----------
Income (Loss) from Operations ........................         250,591             (36,456)
                                                            ==========          ==========
Other Expense:
 Interest expense ....................................        (133,331)            (79,093)
 Other expense, net ..................................        (249,000)            (14,277)
                                                            ----------          ----------
     Total other expense .............................        (382,331)            (93,370)
                                                            ----------          ----------
Net Loss .............................................      $ (131,740)         $ (129,826)
                                                            ==========          ==========
 
</TABLE>



The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                       40

<PAGE>
 
                              BAGEL & BAGEL, INC.

                            STATEMENTS OF CASH FLOWS

          FOR THE YEAR ENDED DECEMBER 27, 1994 AND FOR THE PERIOD FROM

                      DECEMBER 28, 1994 TO MARCH 23, 1995

<TABLE>
<CAPTION>
                                                                                                PERIOD FROM
                                                                           YEAR ENDED         DECEMBER 28, 1994
                                                                        DECEMBER 27, 1994     TO MARCH 23, 1995
                                                                        -----------------     -----------------
Cash Flows from Operating Activities:
<S>                                                                       <C>                  <C>
  Net loss.........................................................       $  (131,740)           $ (129,826)
  Adjustments to reconcile loss to net cash provided by operating                          
   activities:                                                                             
    Depreciation and amortization..................................           375,742               139,478
    Changes in assets and liabilities:                                                     
     Accounts receivable...........................................             1,469                63,053
     Inventories...................................................          (186,994)               20,349
     Prepaid expenses and other current assets.....................            (9,242)               34,587
     Accounts payable and accrued expenses.........................           683,417              (115,568)
                                                                       --------------            -----------
        Net cash provided by operating activities..................           732,652                12,073
Cash Flows from Investing Activities:                                                      
  Purchase of property and equipment...............................        (2,087,859)             (525,019)
  Purchase of other assets.........................................           (11,464)                   --
                                                                       --------------            ----------
        Net cash used in investing activities......................        (2,099,323)             (525,019)
Cash Flows from Financing Activities:                                                      
  Increase in short-term obligations...............................           632,679             2,038,652
  Proceeds from long-term obligations..............................           903,420               101,180
  Repayment of long-term obligations...............................          (125,894)           (1,672,197)
        Net cash provided by financing activities..................         1,410,205               467,635
                                                                       --------------           -----------
Net increase (decrease) in Cash....................................            43,534               (45,311)
Cash, beginning of period..........................................           210,340               253,874
Cash, end of period................................................       $   253,874           $   208,563
                                                                       ==============           ===========
Supplemental Cash Flow Information:
  Interest Paid....................................................       $    84,880           $    12,701
                                                                       ==============           ===========
</TABLE>



The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                       41
 
<PAGE>
 
                              BAGEL & BAGEL, INC.

                         NOTES TO FINANCIAL STATEMENTS

1.   DESCRIPTION OF BUSINESS

     The Company operates a chain of bagel stores in the Kansas City
metropolitan area.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Inventories

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

     Property and Equipment

     The provision for depreciation and amortization has been calculated using
the straight-line and accelerated methods. The following represents the useful
lives over which the assets are depreciated and amortized:

          Leasehold improvements.................   8 years
          Furniture, fixtures, and equipment..... 5-7 years

     Expenditures for maintenance and repairs are expensed as incurred.

     Revenue Recognition

     Revenue from sales is recognized in the period the related food and
beverage products are sold.

     Income Taxes

     The Company is organized as a Subchapter S corporation for federal and
state income tax purposes. Any taxable income or loss is the responsibility of
the individual stockholders.

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

     Reclassification

     Certain items in the financial statements for the year ended December 27,
1994 have been reclassified to conform with the presentation of the period ended
March 23, 1995.

                                      42
<PAGE>
 
3.   COMMITMENTS AND CONTINGENCIES

     The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with renewal options ranging from one to ten years. Most of
these leases contain escalation clauses and common area maintenance charges.
Total rent expense was approximately $306,000 for the year ended December 27,
1994 and $100,000 for the period ended March 23, 1995, including contingent
rental expense of approximately $101,000 for the year ended December 27, 1994
and $23,000 for the period ended March 23, 1995.

     On December 13, 1994, the Company suffered a fire at one of its retail
locations, resulting in the involuntary conversion of the equipment, inventory
and leasehold improvements therein. The Company retains insurance coverage at
the replacement value which is deemed to be in excess of the net book value of
the assets lost. As the claim for recovery from insurance is probable of
realization, no loss has been recorded in the financial statements for the year
ended December 27, 1994. In addition, as the amount of the insurance proceeds to
be collected is uncertain, no gain has been recorded in the financial statements
for the year ended December 27, 1994 and the period ended March 23, 1995. If the
final insurance proceeds exceed the net book value of the assets lost, a gain
may result which would be recorded at that time.

4.   RELATED-PARTY TRANSACTIONS

     The Company leases certain facilities from an entity controlled by the sole
stockholder. Total rent paid under this lease was $8,307 for the year ended
December 27, 1994 and $18,000 for the period ended March 23, 1995.

5.   SALE OF ASSETS

     In March 1995, the Company sold substantially all of its net assets in
exchange for consideration with a market value of approximately $8.9 million.

                                       43

<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Offerdahl's Bagel Gourmet, Inc.
and Affiliates:

     We have audited the accompanying combined statements of operations and cash
flows of Offerdahl's Bagel Gourmet, Inc. and Affiliates (Florida corporations)
for the years ended December 31, 1993 and 1994 and the period from January 1,
1995 to April 2, 1995. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
Offerdahl's Bagel Gourmet, Inc. and Affiliates for the years ended December 31,
1993 and 1994 and the period from January 1, 1995 to April 2, 1995 in conformity
with generally accepted accounting principles.

                                ARTHUR ANDERSEN LLP


Denver, Colorado
April 24, 1996

                                       44
<PAGE>
 
                 OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES

                       COMBINED STATEMENTS OF OPERATIONS

         FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND THE PERIOD
                     FROM JANUARY 1, 1995 TO APRIL 2, 1995

                                   PERIOD FROM
<TABLE>
<CAPTION>
                                     Year Ended December 31,    JANUARY 1, 1995
                                    -------------------------
                                        1993         1994      TO APRIL 2, 1995
                                    ------------  -----------  -----------------
<S>                                 <C>           <C>          <C>
 
Net Sales.........................   $2,691,161   $4,785,116         $1,712,091
Cost and Expenses:
 Cost of products sold............    1,167,075    2,082,739          1,010,311
 Salaries and benefits............      761,466    1,525,307            776,739
 General and administrative.......      487,359    1,014,670            227,585
                                     ----------   ----------         ----------
    Total costs and expenses......    2,415,900    4,622,716          2,014,635
                                     ----------   ----------         ----------
Income (Loss) from Operations.....      275,261      162,400           (302,544)
Other Income (Expense):
 Interest expense.................                      (585)            (6,085)
 Interest income..................           --          295                 --
 Other income (expense)...........       (2,909)      23,749                365
                                     ----------   ----------         ----------
    Total other income (expense)..       (2,909)      23,459             (5,693)
                                     ----------   ----------         ----------
Net Income (Loss).................   $  272,352   $  185,859         $ (308,237)
                                     ==========   ==========         ==========
 
</TABLE>



The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                       45

<PAGE>
 
                 OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES

                       COMBINED STATEMENTS OF CASH FLOWS

       FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 AND FOR THE PERIOD
                     FROM JANUARY 1, 1995 TO APRIL 2, 1995

<TABLE>
<CAPTION>
                                                                                                                   PERIOD FROM
                                                                        YEARS ENDED DECEMBER 31,                 JANUARY 1, 1995
                                                              ------------------------------------------
                                                                      1993                    1994               to April 2, 1995
                                                              ------------------      ------------------      -------------------
<S>                                                             <C>                     <C>                     <C>
Cash Flows from Operating Activities:
  Net income (loss).......................................             $ 272,352               $ 185,859                $(308,237)
  Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
    Depreciation and amortization.........................               120,091                 232,158                   68,321
    Changes in assets and liabilities:
      Accounts receivable.................................               (35,804)                 35,842                  (17,420)
      Inventories.........................................               (46,770)                (48,527)                   7,592
      Prepaid expenses and other current assets...........               (13,965)                (27,352)                  (9,969)
      Accounts payable and accrued expenses...............               111,424                  84,834                  879,557
      Other...............................................               (43,367)                (57,974)                 (28,848)
                                                              ------------------      ------------------      -------------------
        Net cash provided by operating activities.........               363,961                 404,840                  590,996
Cash Flows from Investing Activities:
  Purchases of property and equipment.....................              (600,775)               (800,205)                (458,380)
                                                              ------------------      ------------------      -------------------
        Net cash used in investing activities.............              (600,775)               (800,205)                (458,380)
Cash Flows from Financing Activities:
  Proceeds from issuance of common stock..................               547,005                 760,000                   28,080
  Distributions to stockholders...........................              (235,000)               (570,000)                 (32,000)
  Proceeds from long-term obligations.....................                    --                 250,000                       --
  Repayment of long-term obligations......................                    --                      --                 (250,000)
        Net cash provided by (used in) financing
        activities........................................               312,005                 440,000                 (253,920)
                                                              ------------------      ------------------      -------------------
Net increase (decrease) in Cash...........................                75,191                  44,635                 (121,304)
Cash, beginning of period.................................               128,316                 203,507                  248,142
Cash, end of period.......................................             $ 203,507               $ 248,142                $ 126,838
                                                              ==================      ==================      ===================
Supplemental Cash Flow Information:
  Interest Paid...........................................             $      --               $      --                $   6,643
                                                              ==================      ==================      ===================
</TABLE>



The accompanying notes to the financial statements are an integral part of these
                                  statements.

                                       46
<PAGE>
 
                 OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES

                         NOTES TO FINANCIAL STATEMENTS

1.   DESCRIPTION OF BUSINESS

     Offerdahl's Bagel Gourmet, Inc. and Affiliates (the "Company") operates a
chain of bagel stores in Southern Florida.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Combination

     The accompanying combined financial statements include the accounts of
Offerdahl's Bagel Gourmet Inc., Bagel Gourmet (Sheridan), Inc., Bagel Gourmet
(Weston), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet (Boynton), Inc.,
Bagel Gourmet (Promenade), Inc., Bagel Gourmet, Inc., and Bagel Gourmet
Production, Inc. Bagel Gourmet, Inc. was formed in 1993 through the merger of
Bagel Gourmet (Sheridan), Inc., Bagel Gourmet (Pembroke), Inc., Bagel Gourmet
(Boynton), Inc., Bagel Gourmet (Promenade), Inc. and Bagel Gourmet (Weston),
Inc., with Bagel Gourmet (Weston), Inc. as the surviving corporation. Bagel
Gourmet (Weston), Inc. then changed its name to Bagel Gourmet, Inc. Offerdahl's
Bagel Gourmet, Inc. was formed December 31, 1994 through the merger of Bagel
Gourmet Production, Inc. and Bagel Gourmet, Inc. All the companies are under
common control. All material intercompany accounts and transactions have been
eliminated in combination.

     Inventories

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

     Property and Equipment

     The provision for depreciation and amortization has been calculated using
the straight-line method. The following represents the useful lives over which
the assets are depreciated and amortized:

          Leasehold improvements.................. 10-15 years
          Furniture, fixtures, and equipment...... 5-7 years

     Expenditures for maintenance and repairs are expensed as incurred.

     Revenue Recognition

     Revenue from sales is recognized in the period the related food and
beverage products are sold.

     Income Taxes

     The Company is organized as a Subchapter S corporation for federal and
state income tax purposes. Any taxable income or loss is the responsibility of
the individual stockholders.

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

 
                                       47

<PAGE>
 
                 OFFERDAHL'S BAGEL GOURMET, INC. AND AFFILIATES

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.   COMMITMENTS

     The Company leases its corporate offices, store premises and commissary
under various noncancelable operating lease agreements. Lease terms are
generally five years with two or three five-year renewal options. Most of these
leases contain escalation clauses and common area maintenance charges. Total
rent expense was approximately $168,000 in 1993, $264,000 in 1994, and $97,000
from January 1, 1995 through April 2, 1995.

4.   SALE OF ASSETS

     In March 1995, the Company sold certain of its net assets in exchange for
consideration with a market value of approximately $10.4 million.


                                      48
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Einstein/Noah Bagel Corp.:

  We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Einstein/Noah Bagel Corp. and subsidiaries
as of December 31, 1995 and December 29, 1996, and for the period from March 24,
1995 (inception) through December 31, 1995, and for the fiscal year ended
December 29, 1996 included in this Form 10-K, and have issued our report thereon
dated March 24, 1997.  Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole.  The supplemental
schedule listed in Part IV, Item 14 of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements.  The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                       ARTHUR ANDERSEN LLP



Denver, Colorado
March 24, 1997

                                       49

<PAGE>
 
                                                                     SCHEDULE II

                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
 
 
 
                                         Balance   Additions    Deductions
                                           at      charged to      for        Balance
                                        beginning  costs and     accounts    at end of
Classifications                         of period   expenses   written-off    period
--------------------------------------  ---------  ----------  ------------  ---------
<S>                                     <C>        <C>         <C>           <C>
Fiscal year ended December 29, 1996:
  Allowance for Doubtful Accounts.....    $81,000  $        -     $(81,000)  $       -
Period ended December 31, 1995:
  Allowance for Doubtful Accounts.....          -      81,000            -      81,000
</TABLE>

                                       50
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

  None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Directors.  The information appearing under the caption "Election of
Directors" in the Company's Proxy Statement dated April 1, 1997 (the "Proxy
Statement") is incorporated herein by reference.

  Executive Officers.  Information with respect to executive officers of the
Company is set forth under the caption "Executive Officers" in Item 1 of this
report.

ITEM 11.  EXECUTIVE COMPENSATION

  The information appearing under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information appearing under the caption "Principal Stockholders and
Securities Ownership of Management" in the Proxy Statement is incorporated
herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information appearing under the captions "Certain Transactions" and "
Relationships with Boston Chicken" in the Proxy Statement is incorporated herein
by reference. The Company believes that all related party transactions discussed
under the heading "Certain Transactions" in the Proxy Statement are no less 
favorable in the Company than could have been reached with unaffiliated third 
parties.

                                    PART IV

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

(a)  Financial Statements, Schedules and Exhibits

     1. The Company's Consolidated Financial Statements are set forth in Part
        II, Item 8.

        A.  Report of Independent Public Accountants (Arthur Andersen LLP);
        B.  Consolidated Balance Sheets at December 31, 1995 and December 29,
            1996;
        C.  Consolidated Statements of Operations for the period from March 24,
            1995 (inception) through December 31, 1995 and the fiscal year ended
            December 29, 1996;
        D.  Consolidated Statements of Stockholders' Equity for the period from
            March 24, 1995 (inception) through December 31, 1995 and the fiscal
            year ended December 29, 1996;
        E.  Consolidated Statements of Cash Flows for the period from March 24,
            1995 (inception) through December 31, 1995 and the fiscal year ended
            December 29, 1996; and
        F.  Notes to Consolidated Financial Statements.

     2. Bagel & Bagel, Inc. Financial Statements
        
        A.  Report of Independent Public Accountants (Mayer Hoffman McCann L.C.)
        B.  Statements of Operations for the year ended December 27, 1994 and 
            for the period from December 28, 1994 to March 23, 1995.
        C.  Statements of Cash Flows for the year ended December 27, 1994 and 
            for the period from December 28, 1994 to March 23, 1995.
        D.  Notes to Financial Statements.

     3. Offerdahl's Bagel Gourmet, Inc. and Affiliates Financial Statements

        A.  Report of Independent Public Accountants (Arthur Andersen LLP).
        B.  Combined Statements of Operations for the years ended December 31,
            1993 and 1994 and for the period from January 1, 1995 to April 2,
            1995.
        C.  Combined Statements of Cash Flows for the years ended December 31,
            1993 and 1994 and for the period from January 1, 1995 to April 2,
            1995.
        D.  Notes to Combined Financial Statements.

     4. The following schedules are set forth in Part II, Item 8.

        A.  Report of Independent Public Accountants (Arthur Andersen LLP); and
        B.  Schedule II - Valuation and Qualifying Accounts.

                                       51

<PAGE>
 
    5.   Exhibits

    The exhibits to this report are listed in the Exhibit Index included
elsewhere herein.  Included in the exhibits listed therein are the following
exhibits which constitute management contracts or compensatory plans or
arrangements:

    (i)    The Company's Amended and Restated 1995 Stock Option Plan.

    (ii)   The Company's 1996 Stock Option Plan for Non-Employee Directors.

    (iii)  Letter Agreement dated April 5, 1996 between Mark R. Goldston and the
           Company.

    (iv)   Letter Agreement dated as of September 23, 1996 terminating the
           Employment Agreement dated March 31, 1995 between the Company and
           John A. Offerdahl.

    (v)    Consulting Agreement dated as of July 1, 1996 between Kyle T. Craig
           and the Company.

(b) Reports on Form 8-K

    The Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 1996.

                                       52

<PAGE>
 
                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 17, 1998
                                    Einstein/Noah Bagel Corp.

                                    By: /s/  Robert M. Hartnett
                                    ---------------------------------------
                                    Name:    Robert M. Hartnett
                                    Title:   Chief Executive Officer


 

                                       53

 


<PAGE>
 
                                    EXHIBITS
<TABLE>
<CAPTION>
 
  EXHIBIT
   NUMBER                            DESCRIPTION OF EXHIBIT+               PAGE
--------------------------------------------------------------------------------
 
<S>                          <C>                                            <C>
   2                         Merger Agreement dated as of January 22,
                             1996, as amended, among the Company, NNYB
                             Acquisition Corporation, Noah's New York
                             Bagels, Inc. ("Noah's"), and the
                             shareholders and optionholders of Noah's
                             (the "Noah's Agreement") (incorporated by
                             reference to Exhibit 2.5 to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   3.1                       Restated Certificate of Incorporation of the
                             Company ("Certificate of Incorporation")
                             (incorporated by reference to Exhibit 3 to
                             the Company's quarterly report for the
                             quarter ended October 6, 1996).
 
   3.2                       Amended and Restated Bylaws of the Company
                             ("Bylaws") (incorporated by reference to
                             Exhibit 3.2 to the Company's Registration
                             Statement on Form S-1 (Registration No.
                             333-04725)).
 
   4.1                       Certificate of Incorporation (included in
                             Exhibit 3.1).
 
   4.2                       Bylaws (included in Exhibit 3.2).
 
   4.3                       Certificate representing Common Stock
                             (incorporated by reference to Exhibit 4.3 to
                             the Company's Registration Statement on Form
                             S-1 (Registration No. 333-04725)).
 
   4.4                       Amended and Restated Registration Rights
                             Agreement dated February 1, 1996 by and
                             among the Company and certain stockholders
                             of the Company (incorporated by reference to
                             Exhibit 4.4 to the Company's Registration
                             Statement on Form S-1 (Registration No.
                             333-04725)).
 
   4.5                       Concurrent Private Placement Agreement dated
                             August 1, 1996 between Boston Chicken, Inc.
                             ("Boston Chicken") and the Company
                             (incorporated by reference to Exhibit 10.3
                             to Boston Chicken's quarterly report on Form
                             10-Q for the quarter ended July 14, 1996).
 
   4.6                       Registration Agreement dated August 1, 1996
                             between Boston Chicken and the Company
                             (incorporated by reference to Exhibit 10.3
                             to Boston Chicken's quarterly report on Form
                             10-Q for the quarter ended July 14, 1996).
</TABLE>
__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.

                                   Exhibit 1
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                              DESCRIPTION OF EXHIBIT+             PAGE
--------------------------------------------------------------------------------
<S>                          <C>                                            <C>
   4.7                       Concurrent Offering Purchase Agreement dated
                             November 26, 1996 between Boston Chicken and 
                             the Company ("Concurrent Offering Purchase 
                             Agreement") (incorporated by reference to 
                             Exhibit 10.41 to Boston Chicken's 1996 annual 
                             report on Form 10-K).
 
   4.8                       Registration Rights Agreement dated February
                             24, 1997 by and between the Company and
                             Alamo Bagels, L.P. (previously filed).
 
   10.1(a)                   Amended and Restated Loan Agreement dated
                             May 17, 1996 between Boston Chicken and the
                             Company (the "Loan Agreement") (incorporated
                             by reference to Exhibit 10.1(a) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.1(b)                   First Amendment to the Loan Agreement dated
                             July 19, 1996 (incorporated by reference to
                             Exhibit 10.1(b) to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.1(c)                   Second Amendment to the Loan Agreement dated
                             September 16, 1996 (incorporated by
                             reference to Exhibit 10.1(c) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-12395)).
 
   10.2                      Concurrent Private Placement Agreement dated
                             August 1, 1996 between Boston Chicken and
                             the Company (included in Exhibit 4.5).
 
   10.3(a)                   Secured Demand Note of the Company dated
                             January 30, 1996 payable to Boston Chicken
                             ("Secured Demand Note") (incorporated by
                             reference to Exhibit 10.23(d) to Boston
                             Chicken's 1995 annual report on Form 10-K).
 
   10.3(b)                   First Amendment to Secured Demand Note dated
                             as of March 7, 1996 (incorporated by
                             reference to Exhibit 10.3(b) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.3(c)                   Second Amendment to Secured Demand Note
                             dated as of September 16, 1996 (included in
                             Exhibit 10.1(c)).
 
   10.4                      Noah's Agreement (included in Exhibit 2).
</TABLE>

__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.

                                   Exhibit 2
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                               DESCRIPTION OF EXHIBIT+             PAGE
--------------------------------------------------------------------------------
 
<S>                          <C>                                            <C>
   10.5(a)                   Secured Credit Agreement dated as of May 17,
                             1996 among the Company, the Lenders named
                             therein, and Bank of America Illinois, as
                             Agent ("Secured Credit Agreement")
                             (incorporated by reference to Exhibit 10.9
                             to the Company's Registration Statement on
                             Form S-1 (Registration No. 333-04725)).
 
   10.5(b)                   First Amendment and Waiver to Secured Credit
                             Agreement dated August 27, 1996
                             (incorporated by reference to Exhibit
                             10.9(b) to the Company's Registration
                             Statement on Form S-1 (Registration No.
                             333-12395)).
 
   10.5(c)                   Second Amendment to Secured Credit Agreement
                             dated April 29, 1997 (previously filed).
 
   10.6                      The Company's Amended and Restated 1995
                             Stock Option Plan (incorporated by reference
                             to Exhibit 10.10 to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.7                      The Company's 1996 Stock Option Plan for
                             Non-Employee Directors (incorporated by
                             reference to Exhibit 10.11 to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.8(a)                   Amended and Restated Accounting and
                             Administration Services Agreement dated as
                             of May 28, 1996 between Boston Chicken and
                             the Company (incorporated by reference to
                             Exhibit 10.12(a) to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.8(b)                   First Amendment to Amended and Restated
                             Accounting and Administration Services
                             Agreement dated as of June 17, 1996 between
                             Boston Chicken and the Company (incorporated
                             by reference to Exhibit 10.12(b) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.9                      Financial Services Agreement Termination
                             Agreement effective as of May 20, 1996
                             (incorporated by reference to Exhibit
                             10.13(c) to the Company's Registration
                             Statement on Form S-1 (Registration No.
                             333-04725)).
</TABLE>

__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.

                                   Exhibit 3
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                               DESCRIPTION OF EXHIBIT+             PAGE
--------------------------------------------------------------------------------
 
<S>                          <C>                                            <C>
   10.10(a)                  Amended and Restated Real Estate Services
                             Agreement dated as of May 28, 1996 between
                             Boston Chicken and the Company (incorporated
                             by reference to Exhibit 10.14(a) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.10(b)                  Amended and Restated Real Estate Services
                             Agreement Termination Agreement dated as of
                             June 17, 1996 between the Company and Boston
                             Chicken (incorporated by reference to
                             Exhibit 10.14 (b) to the Company's
                             Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.11(a)                  Amended and Restated Computer and
                             Communications Systems Services Agreement
                             dated as of June 17, 1996 between Boston
                             Chicken and the Company (incorporated by
                             reference to Exhibit 10.15(a) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.11(b)                  First Amendment to the Amended and Restated
                             Computer and Communications Systems Services
                             Agreement dated as of June 17, 1996 between
                             Boston Chicken and the Company (incorporated
                             by reference to Exhibit 10.15(b) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.12                     Letter Agreement dated April 5, 1996 between
                             Mark R. Goldston and the Company
                             (incorporated by reference to Exhibit 10.18
                             to the Company's Registration Statement on
                             Form S-1 (Registration No. 333-04725)).
 
   10.13+++                  Project and Approved Supplier Agreement
                             dated May 24, 1996 among the Company, Harlan
                             Bagel Supply Company, L.L.C. ("Harlan Bagel
                             Supply"), Harlan Bakeries, Inc. ("Harlan
                             Bakeries") and Hal P. Harlan, Hugh P. Harlan
                             and Doug H. Harlan (the "Harlans")
                             (incorporated by reference to Exhibit 10.24
                             to the Company's Registration Statement on
                             Form S-1 (Registration No. 333-04725)).
 
   10.14                     Option Agreement dated August 27, 1996 among
                             Harlan Bagel Supply, the Harlans and the
                             Company (incorporated by reference to
                             Exhibit 10.25 to the Company's Registration
                             Statement on Form S-1 (Registration No.
                             333-12395)).
</TABLE>

__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.
+++Confidential treatment granted.

                                   Exhibit 4
<PAGE>
 
<TABLE> 
<CAPTION> 
  EXHIBIT
   NUMBER                              DESCRIPTION OF EXHIBIT+             PAGE
--------------------------------------------------------------------------------
 
<S>                          <C>                                            <C>
   10.15                      Right of First Refusal Agreement dated
                              August 27, 1996 among Harlan Bakeries, the
                              Harlans and the Company (incorporated by
                              reference to Exhibit 10.26 to the Company's
                              Registration Statement on Form S-1
                              (Registration No. 333-12395)).
 
   10.16                      Aircraft Dry Leases dated January 16, 1996
                              between the Company and Bowana Aviation,
                              Inc. (incorporated by reference to Exhibit
                              10.27 to the Company's Registration
                              Statement on Form S-1 (Registration No.
                              333-04725)).
 
   10.17                      Fifth Amended and Restated Limited Liability
                              Company Agreement of Bagel Store Development
                              Funding, L.L.C. ("Bagel Funding") dated as
                              of April 14, 1997 (previously filed).
 
   10.18                      Form of agreement between the Company and
                              Bagel Funding relating to the Company's
                              purchase of Bagel Funding's interests in
                              area developers (incorporated by reference
                              to Exhibit 10.30 to the Company's
                              Registration Statement on Form S-1
                              (Registration No. 333-04725)).
 
   10.19                      Form of Area Development Agreement between
                              the Company and its Area Developers
                              (included in Exhibit 99).
 
   10.20                      Form of Franchise Agreement between the
                              Company and its Area Developers (included in
                              Exhibit 99).
 
   10.21                      Form of Secured Loan Agreement between the
                              Company and its Area Developers (included in
                              Exhibit 99).
 
   10.22                      Letter Agreement dated as of September 23,
                              1996 terminating the Employment Agreement
                              dated March 31, 1995 between the Company and
                              John A. Offerdahl (incorporated by reference
                              to Exhibit 10.3 to the Company's quarterly
                              report on Form 10-Q for the quarter ended
                              October 6, 1996).
 
   10.23                      Office Lease Agreement dated as of July 1,
                              1996 between the Company and Boston Chicken
                              (incorporated by reference to Exhibit 10.35
                              to the Company's Registration Statement on
                              Form S-1 (Registration No. 333-04725)).
 
   10.24                      Consulting Agreement dated as of July 1,
                              1996 between Kyle T. Craig and the Company
                              (incorporated by reference to Exhibit 10.36
                              to the Company's Registration Statement on
                              Form S-1 (Registration No. 333-04725)).
</TABLE>

__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.

                                   Exhibit 5
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                              DESCRIPTION OF EXHIBIT+             PAGE
--------------------------------------------------------------------------------
 
<S>                          <C>                                            <C>
   10.25(a)                  Aircraft Dry Sublease and related Letter
                             Agreement dated as of July 9, 1996 between
                             the Company and Boston Chicken (incorporated
                             by reference to Exhibit 10.37(a) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.25(b)                  Aircraft Dry Sublease and related Letter
                             Agreement dated as of July 9, 1996 between
                             the Company and Boston Chicken (incorporated
                             by reference to Exhibit 10.37(b) to the
                             Company's Registration Statement on Form S-1
                             (Registration No. 333-04725)).
 
   10.26                     Concurrent Offering Purchase Agreement
                             (included in Exhibit 4.7).
 
   11                        Statement re: Computation of Earnings (Loss)
                             Per Share (previously filed).
 
   21                        Subsidiaries of the Company (previously filed).
 
   23.1                      Consent of Arthur Andersen LLP with respect
                             to the Audited Consolidated Financial
                             Statements of the Company

   23.2                      Consent of Mayer Hoffman McMann L.C. with respect
                             to the Audited Financial Statements of Bagel &
                             Bagel, Inc.

   23.3                      Consent of Arthur Andersen LLP with respect to the
                             Audited Combined Financial Statements of
                             Offerdahl's Bagel Gourmet, Inc.
 
   27                        Financial Data Schedule (previously filed).
 
   99                        Uniform Franchise Offering Circular dated
                             March 27, 1997 (previously filed).
 
</TABLE>

__________

+ In case of incorporation by reference to documents filed by the Company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Company's file number under that Act is 0-21097. In the case of incorporation by
reference to documents filed by Boston Chicken, Inc. ("Boston Chicken") under
the Exchange Act, Boston Chicken's file number under that Act is 0-22802.

                                   Exhibit 6