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

                                   FORM 10-K

(Mark One)

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

                  For the fiscal year ended December 27, 1998

                                       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)

                           14103 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

              7 1/4% Convertible Subordinated Debentures due 2004

                                        

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, as
amended (the "Exchange Act"), 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
$19,996,436 at March 22, 1999 (based on the closing sale price on the Nasdaq
SmallCap Market on March 22, 1999, as reported by The Wall Street Journal
(Western Edition)).  At March 22, 1999, the registrant had issued and
outstanding an aggregate of 34,083,681 shares of common stock (including 813,146
shares of common stock held by a subsidiary of the Company).

                      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 24, 1999 described in Part III hereof
are incorporated by reference in this report.
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                                    PART I
                                        
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
                                        
     Certain statements in this Form 10-K 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,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  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"), Einstein/Noah Bagel Partners, L.P., a majority-owned subsidiary
of the Company ("Bagel Partners"), Einstein Bros(R) 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; advertising
and promotional efforts; brand awareness; availability and terms of capital;
adverse publicity; acceptance of new product offerings; the Company's
relationship with Boston Chicken, Inc. ("Boston Chicken"), the Company's
majority stockholder; changes in business strategy or development plans;
achievement of development schedules; availability, locations, and terms of
sites for store development; food, labor, and employee benefit costs; changes in
government regulation; regional weather conditions; the Company's ability to
implement new information technology systems; Year 2000 compliance of systems
provided to the Company by Boston Chicken or other third party vendors; Year
2000 compliance of systems used by Company suppliers; and other factors
referenced in this Form 10-K.  The Company cannot predict which factors would
cause actual results to differ materially from those indicated by the forward-
looking statements.  In addition to considering statements that explicitly
describe such risks and uncertainties, readers are urged to consider statements
that include the terms "believes," "belief," "expects," "plans," "anticipates,"
"intends" or the like to be uncertain and forward-looking.



ITEM 1.  BUSINESS

General

     References in this Form 10-K to the "Company" mean the Company, its
predecessors and its and their subsidiaries, including Bagel Partners, unless
the context otherwise requires.  Einstein Bros.(R) and Noah's New York Bagels(R)
are trademarks owned by the Company.

     The Company owns and operates 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
brand name and also under the Noah's New York Bagels brand name.  The Company's
primary brand, Einstein Bros. Bagels, was developed by the Company after it was
formed in March 1995.  The Noah's New York Bagels brand was acquired by the
Company in February 1996.  As of December 27, 1998, there were 546 Company
stores in operation systemwide in 44 designated market areas ("DMAs"), 433
Einstein Bros. Bagels stores in 40 of such DMAs throughout the United States and
113 Noah's New York Bagels stores in four of such DMAs: northern California,
portions of Los Angeles, Portland and Seattle/Tacoma.  The Company also licenses
one Einstein Bros. Bagels store located in a hotel in Phoenix, Arizona and one
Noah's New York Bagels store located in the San Francisco International Airport.
During fiscal 1998 the Company closed 43 stores and opened 15 new stores.
Subsequent to the end of fiscal 1998, the Company closed ten stores and opened
five new stores.

     In February 1999, the Company announced that it intended to test the
Einstein Bros. Bagels concept in the Los Angeles area by converting three to
five of the 39 Noah's New York Bagels stores in that area to the Einstein Bros.
Bagels concept.  If the test proves successful, the Company intends to convert
the remaining Noah's New York Bagels stores in that market to the Einstein Bros.
Bagels concept.

     During fiscal 1998 the Company focused primarily on improving store
operations to increase same store sales and margins.  The Company instituted
programs to more effectively hire, train and incentivize store general managers,
established consistent measurements of weekly store level performance, expanded
menus to include new 

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lunch and sweets offerings, increased menu prices, closed underperforming stores
and began more aggressive in-store merchandising.

     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 store using
steamed-baking processes.

     The Company's 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 and fountain sodas, juices and
waters.  The menu also includes creative soups, salads and 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
locations of approximately 2,000 square feet, substantial indoor seating and
when practical, additional outdoor seating.

     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 14103 Denver West Parkway, Golden, Colorado 80401 and its
telephone number is (303) 215-9300.

Loan Conversions and Area Developer Merger

     From November 1995 until December 1997, stores were developed and operated
primarily by area developers funded in part through convertible loans made by
the Company.  The Company believes that its area developers substantially
assisted the Company in accomplishing its goal of rapidly developing stores and
brand awareness in targeted local markets to achieve market leadership.
However, as a result of the Company's decision in 1997 to slow new store
development, the Company believed its business would be strengthened by focusing
on a number of business objectives better accomplished through a Company-
controlled system.

     After considering a number of alternative transactions, the Company's
management recommended, and the board of directors of the Company approved, the
conversion of its loans to its area developers into a majority equity interest
in the area developers and the purchase of additional area developer equity
interests.  Accordingly, on December 5, 1997, four of the Company's five area
developers merged into the surviving area developer now known as Einstein/Noah
Bagel Partners, L.P. ("Bagel Partners").  As a result of the loan conversions
and the area developer merger (together with certain related transactions, the
"Transactions"), the Company owns approximately 78% of Bagel Partners, with the
remaining minority interest owned by Bagel Store Development Funding, L.L.C.
("Bagel Funding") and management of the former area developers.  Einstein/Noah
Bagel Partners, Inc., a wholly-owned subsidiary of the Company, is the general
partner of Bagel Partners (the "General Partner").  By reason of its holdings,
the Company is able to control the affairs and policies of Bagel Partners, elect
the board of directors of the General Partner and approve or disapprove any
matter submitted to a vote of the partners of Bagel Partners, including a change
in control of Bagel Partners.

     The Company believes that a Company-controlled system has allowed it to
develop and refine its brands by unifying store operations and customer
experience and has enhanced the Company's focus on store operations.  In
addition, a Company-controlled system has enabled the Company to reduce
systemwide overhead, facilitate debt financing, improve tax efficiency and
attract and retain qualified employees through unified performance incentives.
Continued achievement of the foregoing benefits is dependent on a number of
factors, many of which are beyond the control of the Company.  See "Special Note
Regarding Forward-Looking Statements" on page 2.

     While the Company believes it has realized certain benefits from the
Transactions, the timing and extent of the benefits have not been as anticipated
by management at the time of the Transactions.  After operating and controlling
the Einstein Bros. Bagels and Noah's New York Bagels stores acquired in the
Transactions for one year, the Company, as part of its continual evaluation
process, assessed the recoverability of certain long-lived assets and determined
that they were impaired.  The impairment was based primarily upon an evaluation
of realized operating results, which were below those anticipated upon
consummation of the Transactions, and current revenue growth and cash flow
projections.  As a result, the Company recorded an impairment of intangible
assets and identifiable long-lived assets in 1998.  See Note 13 of Notes to the
Company's Consolidated Financial Statements.

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Development Agreement

     The Company's development agreement with Bagel Partners currently provides
for the development of ten stores in fiscal 1999.  Subsequent to the end of
fiscal 1998, five of these stores have been opened.  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 general economic and business conditions.
Not all of the foregoing factors are within the control of the Company.  The
financial resources required by the Company to achieve systemwide plans will be
dependent upon, among other things, the number and cost of stores developed and
store operating results.  The cost to develop a prototype store ranges from
approximately $350,000 to $450,000.  There can be no assurance that the Company
will have access to the financial resources necessary to achieve systemwide
plans or that stores will be successfully developed and operated.

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 utilizes traditional marketing and advertising methods,
including 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 food service industry is intensely competitive with respect to food
quality, concept, convenience, location, customer service and value.  In
addition, there are many well-established food service competitors with
substantially greater financial and other resources and substantially longer
operating histories than the Company.  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, 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, customer service and value.

     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 businesses 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.  Dependence on frequent deliveries of
produce and supplies also subjects food service businesses such as the Company
to the risk that shortages or interruptions in supply caused by adverse weather
or other conditions could adversely affect the availability, quality and cost of
ingredients.  In addition, material changes in, or the Company's failure to
comply with, applicable federal, state and local government regulations, and
factors such as inflation, increased food, labor and employee benefit costs,
regional weather conditions and unavailability of an adequate number of
experienced managers and hourly employees may also adversely affect the food
service industry in general and the Company's results of operations and
financial condition in particular.

Vendors

     The Company is party to an agreement with Harlan Bagel Supply Company,
L.L.C. ("Harlan") and the equity owners of Harlan.  Under the agreement, Harlan
has agreed to sell frozen bagel dough to the Company at a price equal to the
cost of ingredients and packaging, a predetermined allowance for product losses
and 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 to purchase certain minimum numbers of bagels).  The Company
leases to Harlan certain equipment owned by the Company.  Harlan has granted to
the Company an option 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 supply

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agreement.  The option is exercisable through the term of the supply agreement
or the equipment lease agreement (currently April 2005) in the event of a
default under the equipment lease agreement or a default under Harlan's third-
party loan agreements or other debt obligations.

     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 at a negotiated fixed mark-up above cost.
The Company purchases the majority of its products and supplies from Marriott.
Certain vendors have provided funds to the Company to be used for advertising,
marketing and promotions.

     The Company 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
Einstein Bros.(R) and Noah's New York Bagels(R).  In addition, the Company has
federal trademark applications pending for a number of trademarks and service
marks, 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 in more
than 30 foreign countries and Einstein Bros. in approximately 70 foreign
countries.  Most of the applications pending in the United States and foreign
countries were filed in 1995 and 1996.  The Company has not yet obtained federal
registrations for certain of the trademarks and service marks used in its
business, and there can be no assurance that such registrations will be
obtained.

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

Government Regulation

     The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and building and zoning requirements.  The Company is subject to laws
governing its relationship with employees, including minimum wage requirements,
overtime, working and safety conditions and citizenship requirements.  The
failure to obtain or retain food licenses, or increases in employee benefit
costs or other costs associated with employees, could adversely affect the
Company.

Relationship with Boston Chicken

     On October 5, 1998, Boston Chicken, the owner of approximately 51% of the
outstanding shares of common stock of the Company, filed a voluntary petition
for protection under Chapter 11 of the Federal Bankruptcy Code.  The Company
understands that Boston Chicken is in the process of developing alternative
reorganization plans.  Depending on the terms of the reorganization plan
ultimately submitted to and approved by the Bankruptcy Court, the shares of
Company common stock owned by Boston Chicken may be transferred, sold or
otherwise disposed of to one or more persons or entities.  The Company does not
believe that Boston Chicken's bankruptcy proceedings will otherwise materially
affect the Company.  Boston Chicken currently provides the Company with
accounting and administration services and computer and communications services;
however, the Company has advised Boston Chicken that during fiscal 1999 it
intends to develop a business infrastructure that will permit it to perform
those services independently of Boston Chicken.  The Company and Boston Chicken
have had discussions regarding this transition, although the terms on which the
Company may be able to transition from the existing fee service agreements are
not known at this time.  The failure of the Company to negotiate acceptable
transition terms, the inability to effect the transition on a timely basis or
the interruption of services provided by Boston Chicken prior to the Company's
development and implementation of a satisfactory business infrastructure could
have a material adverse effect on the Company.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000."  See
"Special Note Regarding Forward-Looking Statements" on page 2.

     Boston Chicken has 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 

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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) shares of the Company's common
stock subject to options granted by Boston Chicken and its subsidiaries prior to
the date of the agreement, (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 December 27, 1998, Boston Chicken had the right to purchase
2,124,579 shares of common stock of the Company at prices ranging from $3.87 to
$30.75 per share. Boston Chicken also has 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.

     The Company previously had an unsecured subordinated, non-convertible
credit facility with Boston Chicken providing for borrowings of up to $50.0
million.  There was no balance outstanding under the facility during fiscal
1998.  Interest on loans made under the credit facility was based on the
reference rate of the Bank of America National Trust and Savings Association,
plus 1.5%, and any borrowings outstanding were required to be repaid by June 15,
2003.  In June 1998, the Company and Boston Chicken agreed to terminate such
credit facility.

     In June 1998, the Company and Boston Chicken amended the agreements
pursuant to which Boston Chicken provides the Company with accounting and
administration services and computer and communications services.  Those
agreements were amended to reduce the amount of fees payable by the Company for
such services.  In addition, Boston Chicken subleases to the Company
approximately 26,450 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 $27,000 per
month and has an initial term expiring in December 2001.  During fiscal 1998,
the Company paid Boston Chicken an aggregate of approximately $7.4 million
pursuant to such agreements.

Employees; Labor Matters

     In connection with the Transactions, the Company offered employment to all
of the employees of Bagel Partners.  Pursuant to the services agreement dated
December 15, 1997 between the Company and Bagel Partners, the Company provides
to Bagel Partners the services of such employees and certain other employees
hired by the Company and Bagel Partners reimburses the Company for the cost of
such employees.  As of March 22, 1999, the Company had approximately 11,700
employees, of which approximately 11,435 were store-level employees.

     Certain operations of the Company conducted in northern California under
the Noah's New York Bagels brand have from time to time been the subject of
union organizing activities.  Two stores in the San Francisco Bay area are
currently in union contract negotiations.  Union affiliation may have a negative
impact upon employee relations and labor costs.

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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:

     Robert M. Hartnett, age 47, became Chief Executive Officer and a director
of the Company in February 1998, and he became President and Chairman of the
Board of the Company in May 1998.  Mr. Hartnett has also served as Vice
President-Eastern Zone of the General Partner of Bagel Partners since December
1997.  From March 1996 to February 1998, Mr. Hartnett served as President and
Chief Executive Officer of one of the Company's former area developers.  From
August 1992 until March 1996, Mr. Hartnett was Chief Executive Officer of R&A
Foods, L.L.C., an area developer of Boston Chicken.

     Paul J. B. Murphy III, age 44, became Executive Vice President - Operations
of the Company in March 1998.  From December 1997 to March 1998, Mr. Murphy
served as Senior Vice President - Operations of the Company and from July 1996
until December 1997, he was Chief Operating Officer of one of the Company's
former area developers.  Prior to that time, he was Director of Operations of
R&A Foods, L.L.C., an area developer of Boston Chicken, from August 1992 until
July 1996.  Before that, Mr. Murphy spent 11 years with S&A Restaurants, owner
and operator of Steak & Ale and Bennigans restaurants.  In his most recent
position, he was an Area Manager responsible for Bennigans restaurants in Texas
and New Mexico.

     W. Eric Carlborg, age 35, 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.

     Gail A. Lozoff, age 48, became Chief Marketing Officer of the Company in
March 1998 and has been a director of the Company since April 1995.  From
October 1997 until March 1998, Ms. Lozoff served as Chief Concept Officer of the
Company.  From September 1996 until October 1997, Ms. Lozoff served as a Vice
President of the Company and from April 1995 until September 1996, she served as
Vice President-Design and Merchandising of the Company.  Prior to that time, Ms.
Lozoff was President and Chief Executive Officer of Bagel & Bagel, Inc. from May
1992 until 1995.

     Paul A. Strasen, age 42, has been a Senior Vice President of the Company
since February 1997 and has been General Counsel of the Company since April
1995.  Mr. Strasen has also served as a Vice President of the General Partner of
Bagel Partners since December 1997 and was a Senior Vice President of Boston
Chicken from May 1997 until December 1997.  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.

     Paula E. Manley, age 45, has been a Vice President of the Company since
February 1998 and became Vice President - Operations Finance, Controller and
Assistant Secretary in October 1998.  From October 1996 to January 1998, Ms.
Manley was Chief Financial Officer of one of the Company's former area
developers.  Prior to that time, Ms. Manley served as Real Estate Manager for
the Franchise Division of Burger King Corp. from October 1994 to October 1996
and as Controller of that division from January 1990 to October 1994.

ITEM 2.  PROPERTIES

     The Company leases its support center facility (containing its principal
executive offices and test bakery) in Golden, Colorado, which consists of
approximately 26,450 square feet of office space (and certain common areas,
including parking areas), from Boston Chicken.  The Company and its subsidiaries
also lease sites for stores and commissaries.  While the Company expects to
continue to lease sites in the future, the Company 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 

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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.

     The Company also leases a 54,640  square-foot dough production facility in
Whittier, California.

     In some cases, the Company remains legally obligated on leases for stores
or commissaries that have been closed, either because the Company has assigned
its rights under the lease without termination of the lease or because the
Company has subleased such sites.  As of March 22, 1999 the Company had entered
into 12 such lease assignments and 20 such subleases.

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 in food,
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 or
its brands, regardless of whether such allegations are valid or whether the
Company is liable.  In addition, the Company 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 such as the Company.  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.

     The Company and certain of its current and former officers and directors
have entered into an agreement to settle a class action lawsuit brought against
them in the United States District Court for the District of Colorado and in
state court in Jefferson County, Colorado.  The complaints allege, among other
things, that the Company and the other defendants violated Sections 11, 12(2)
and 15 of the Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, as well
as certain similar provisions of Colorado state law.  The settlement does not
include the claims pending in the lawsuit against the underwriters in the
Company's public offerings of common stock in August 1996 and November 1996 (the
"Underwriters") and against the Company's independent public accountants.

     The settlement of the litigation is being funded with proceeds of director
and officer liability insurance policies and is subject to certain customary
conditions, including final approval of the United States District Court for the
District of Colorado where the lawsuit is pending. As also required by the
settlement agreement, the United States Bankruptcy Court for the District of
Arizona which has jurisdiction over the Chapter 11 bankruptcy case of Boston
Chicken has granted relief from the automatic stay in effect in the Boston
Chicken bankruptcy case to permit the settlement to be funded with proceeds of
the insurance policies, which cover directors and officers of both Boston
Chicken and the Company.

     The Underwriters have requested that the Company indemnify them against any
damages, costs and expenses they may incur in the litigation (including amounts
paid in settlement thereof).  The Company's director and officer liability
insurance policies do not cover any amounts the Company may be obligated to pay
in connection with the indemnification claim.  Although the Company cannot
predict the outcome of the lawsuits against the Underwriters and the independent
public accountants, the Company believes that the complaints are without merit.

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 1998.

                                       8
<PAGE>
 
                                    Part II
                                        
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     On October 15, 1998, the Company's common stock began trading on the Nasdaq
SmallCap Market.  Prior to that time the Company's common stock was traded on
the Nasdaq National Market.

     The following table sets forth the high and low sales prices of the common
stock during each of the Company's 1997 and 1998 fiscal quarters, as quoted on
the Nasdaq National Market or Nasdaq SmallCap Market, as reported by The Wall
Street Journal (Western Edition).

<TABLE>
<CAPTION>
                                                                High                 Low
1997
----
<S>                                                      <C>                 <C>
First Quarter                                                  $33.750             $17.000
Second Quarter                                                  21.750               8.750
Third Quarter                                                   15.000              10.000
Fourth Quarter                                                  11.750               5.000
1998
----
First Quarter                                                  $ 6.875             $ 3.500
Second Quarter                                                   6.250               3.250
Third Quarter                                                    4.250               1.094
Fourth Quarter                                                   3.625               0.938
</TABLE>

     On March 22, 1999, the last reported sale price of the common stock on the
Nasdaq SmallCap Market was $1.31 per share.  As of March 22, 1999, there were
approximately 703 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 credit
facilities contain prohibitions on the payment of any cash dividends.

                                       9
<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.  Income (loss) from
operations includes a $26.6 million write-off of intangible assets during the
1995 period, an $18.2 million charge associated primarily with the Transactions
during fiscal year 1997, and a $212.4 million charge for impairment of store
fixed assets, goodwill and other intangible assets during fiscal year 1998.
<TABLE>
<CAPTION>
                                                              
                                                Period from  
                                              March 24, 1995 
                                                (inception)                   Fiscal Year Ended
                                                  through       -----------------------------------------------
                                                December 31,    December 29,     December 28,     December 27,
                                                    1995            1996             1997             1998
                                               ---------------  ------------  ------------------  -------------
                                                  (In thousands, except per share data and number of stores)
<S>                                            <C>              <C>           <C>                 <C>
Consolidated Statements of Operations Data:
Revenue:
  Store revenue..............................        $ 25,685       $ 35,803           $ 28,436      $ 371,919
  Royalties and franchise-related fees.......             671         19,918             28,286              0
  Interest income from franchisees...........              67          5,986             21,566              0
                                                     --------       --------           --------      ---------
    Total revenue............................          26,423         61,707             78,288        371,919
Income (loss) from operations................         (43,152)        10,039              3,664       (234,885)
Net income (loss)............................         (43,716)         5,707             (1,402)      (203,927)
Basic earnings (loss) per share..............           (7.87)          0.29              (0.04)         (6.18)
Diluted earnings (loss) per share............           (7.87)          0.27              (0.04)         (6.18)
Weighted average number of common
  shares outstanding:
    Basic....................................           5,570         19,286             32,956         33,024
    Diluted..................................           5,570         21,023             32,956         33,024
 
Store Data (unaudited):
Systemwide net revenue.......................        $ 26,410       $138,251           $302,995      $ 371,919
Company-owned stores.........................              47             14                574            546
Area developer stores........................              13            301                  0              0
                                                     --------       --------           --------      ---------
Number of stores at end of year..............              60            315                574            546
                                                     ========       ========           ========      =========
 
Consolidated Balance Sheet Data:
Total assets.................................        $ 50,299       $332,418           $643,128      $ 375,142
Long-term debt...............................          58,875              -            149,000        143,000
Stockholders' equity (deficit)...............         (20,994)       315,517            330,346        129,358
</TABLE>

                                       10
<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 period ended March
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 basic and
fully diluted earnings (loss) per share and the weighted average number of
common 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.  Accordingly, the Company does not believe
that such operating results are meaningful or are indicative of future operating
results of the Company.

<TABLE>
<CAPTION>
                                                                Period from
                                                              January 1, 1995
                                                 Year ended       through
                                                December 31,     March 31,
                                                    1994            1995
                                                ------------  ----------------
                                                        (in thousands)
<S>                                             <C>           <C>
     Combined Statements of Operations Data:
       Total revenue..........................       $19,158           $5,882
       Income from operations.................         1,452               39
       Net income (loss)......................           696             (158)
 
     Combined Balance Sheet Data:
       Total assets...........................       $ 9,511
       Long-term debt.........................         2,822
</TABLE>

                                       11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

General

     From November 1995 until December 1997, stores were developed and operated
primarily by area developers of the Company.  The area developers were funded in
part through convertible loans made by the Company.  The Company believes that
its area developers substantially assisted the Company in accomplishing its goal
of rapidly developing stores and brand awareness in targeted local markets to
achieve market leadership.  However, as a result of the Company's decision in
1997 to slow new store development, the Company believed its business would be
strengthened by focusing on a number of business objectives better accomplished
through a Company-controlled system.

     After considering a number of alternative transactions, the Company's
management recommended, and the board of directors of the Company approved, the
conversion of its loans to its area developers into a majority equity interest
in the area developers and the purchase of additional area developer equity
interests.  Accordingly, on December 5, 1997, four of the Company's five area
developers merged into the surviving area developer now known as Einstein/Noah
Bagel Partners, L.P. ("Bagel Partners").  As a result of the loan conversions
and the area developer merger (together with certain related transactions, the
"Transactions"), the Company owns approximately 78% of Bagel Partners, with the
remaining minority interest owned by Bagel Store Development Funding, L.L.C. and
management of the former area developers.

     While the Company believes it has realized certain benefits from the
Transactions, the timing and extent of the benefits have not been as anticipated
by management at the time of the Transactions.  After operating and controlling
the Einstein Bros. Bagels and Noah's New York Bagels stores acquired in the
Transactions for one year, the Company, as part of its continual evaluation
process, assessed the recoverability of certain long-lived assets and determined
that they were impaired.  The impairment was based primarily upon an evaluation
of realized operating results, which were below those anticipated upon
consummation of the Transactions, and current revenue growth and cash flow
projections.  As a result, the Company recorded an impairment of intangible
assets and identifiable long-lived assets in 1998.  See Note 13 of Notes to the
Company's Consolidated Financial Statements.  In addition, during 1998 the
Company closed 43 underperforming stores acquired in the Transactions.

     As of March 22, 1999, Boston Chicken held approximately 51% 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 fee service
agreements, pursuant to which Boston Chicken provides to the Company certain
accounting and administration and computer and communications services.  In
January 1999, the Company's management informed Boston Chicken that the Company
intended to develop a business infrastructure that will permit it to perform
those services independently.  The Company and Boston Chicken have had
discussions regarding this transition, although the terms on which the Company
may be able to transition from the existing fee service agreements are not known
at this time.  The failure of the Company to negotiate acceptable transition
terms, the inability to effect the transition on a timely basis or the
interruption of services provided by Boston Chicken prior to the Company's
development and implementation of a satisfactory business infrastructure could
have a material adverse effect on the Company.  See "Special Note Regarding
Forward-Looking Statements" on page 2.

     In connection with the development of a business infrastructure, in
February 1999 the Company entered into license and support service agreements
with a third-party software vendor to obtain a license and support services for
enterprise systems (consisting of financial, human resources and payroll
systems). The Company has also entered into an agreement with a third-party
consulting group that will assist the Company in the implementation of the new
systems. The Company currently anticipates that the financial systems will begin
operating in the third quarter of fiscal 1999 and that the human resources and
payroll systems will begin operating at the beginning of fiscal 2000.

                                      12
<PAGE>
 
     The Company has also commenced negotiations to obtain from several third-
party vendors licenses for back office and point-of-sale store systems and
support services for those systems, and it anticipates entering into
negotiations to obtain other licenses and support services required in the
operation of its business.  The Company has also begun to hire additional
support center employees to provide the various accounting, administrative and
systems support services that are currently provided by Boston Chicken,
including human resources administration, benefits administration, risk
management, payroll, accounts payable, fixed assets, treasury, and systems
administration and support.

     The transition to a business structure and systems that are independent of
Boston Chicken will require the dedication of significant management resources
and may distract attention from the day-to-day business of the Company, which
could adversely affect the Company's business and operating results.  In
addition, there can be no assurance that the new systems will be implemented in
a timely fashion or that the cost of such implementation will not exceed the
amount estimated by the Company.  The failure to implement such systems in a
timely manner or at the budgeted cost could have a material adverse effect on
the Company. There can also be no assurance that the Company will be able to
hire and train sufficient qualified personnel to perform the required services
in a timely manner and on acceptable terms.  See "Special Note Regarding
Forward-Looking Statements" on page 2.

Results of Operations

     As a result of the Transactions, the revenue generated by the Company as a
lender, franchisor and service provider to the area developers prior to the date
of the Transactions is eliminated in consolidation and replaced with store
revenue and operating expenses from and after the date of the Transactions.  The
foregoing results are adjusted in the "minority interest" line item to reflect
the minority interests not owned by the Company.  As a result of the
Transactions, the operating results for the 1998 fiscal year and later periods
will not be readily comparable to those for prior fiscal years.

  Fiscal year ended December 27, 1998 compared to fiscal year ended December 28,
1997

     The Company's results of operations for fiscal year ended December 27, 1998
reflect the Company's first full year of operations as the majority owner and
operator of stores systemwide.

     Revenue.  Total systemwide net revenue increased 22.7% to $371.9 million
for 1998 compared to $303.0 million in the prior year.  The increase in
systemwide net revenue was due to an increase in the average number of stores
and average net weekly per store sales.  The average number of stores in
operation were 551 compared to 458 in the prior year.  Average net weekly per
store sales were $13,103 compared to $12,980 in the prior year.  Average net
weekly per store sales represents weekly per store average revenue, after
customer and employee discounts, for all stores open at the end of the periods
presented.  The increase in average net weekly per store sales was due to a
higher proportion of mature stores in comparison to the prior year and to the
effect of several Company initiatives, including a new lunch menu, higher menu
prices, closure of underperforming stores, and focus on improved store level
operations.  These Company initiatives were instituted earlier, and have to date
proven more effective, in the Company's Einstein Bros. Bagels concept than in
its Noah's New York Bagels concept, and they were offset by declines due to less
marketing spending and lower per store revenue generated by the Noah's New York
Bagels stores.

     The increase in Company store revenue along with the decline in royalties
and franchise-related fees was due to an increase in average number of Company
stores as a result of the Transactions.

     Store Costs and Expenses.  Total store costs and expenses increased to
$342.5 million for 1998 compared to $29.1 million in the prior year, due to an
increase in average number of Company stores as a result of the Transactions.

     While line by line comparisons may not meaningful as a result of the
Transactions, the Company believes that overall store performance improved in
1998, compared to the performance of the stores in 1997 following the
Transactions.  This improvement was illustrated by the increase in average net
weekly per store sales, mentioned above, in addition to the positive margin
generated from store revenue less store costs and expenses compared to the

                                       13
<PAGE>
 
negative margin generated in the prior year.  However, the improvement in store
level revenue growth and cash flow did not meet the Company's expectations at
the time of the Transactions.

     Salaries, Benefits, General and Administrative.  Salaries, benefits,
general and administrative expenses increased to $37.6 million compared to $27.9
million in the prior year, due primarily to an increase in the number of company
employees as a result of the Transactions.  Salaries, benefits, general and
administrative expenses previously paid by the Company's area developers are now
reflected in the Company's consolidated financial statements. Salaries,
benefits, general and administrative expenses include $2.3 million for severance
charges incurred in 1998 in connection with the elimination of certain
positions, primarily at the Company's support center.

     Impairment of Long-Lived Assets.  In 1998, as part of the Company's ongoing
evaluation of long-lived assets, management made an assessment of the
recoverability of certain long-lived assets.  As a result of such assessment,
the Company recorded an impairment of intangible assets and identifiable long-
lived assets aggregating $212.4 million in 1998, consisting of the following
amounts:  $125.5 million - goodwill, $20.4 million - trademarks and copyrights,
$3.7 million - capitalized recipes and $62.8 million - property and equipment.
See Note 13 of Notes to the Company's Consolidated Financial Statements.

     In 1997 the Company recognized an impairment loss on various long-lived
assets of $10.8 million, resulting primarily from the closure of a bagel dough
production facility and the conversion to a Company-controlled system.  The
assets subject to the impairment loss had a net book value of $11.6 million
before the impairment loss.

     Useful Lives of Long-Lived Assets.  In 1998, as part of the Company's
ongoing evaluation of long-lived assets, management evaluated the useful lives
of goodwill and trademarks.  The evaluation was made after the Company had
operated and controlled the Einstein Bros. Bagels and Noah's New York Bagels
stores acquired in the Transactions for a period of one year.  Based primarily
upon the assessment of realized operating results, which were below those
anticipated upon consummation of the Transactions, and current revenue growth
and cash flow projections, the Company concluded that 20 years would be a more
accurate estimate of useful lives for goodwill and trademarks than the 35-year
and 30-year periods previously used for goodwill and trademarks, respectively.
The new useful life of 20 years is effective on a prospective basis beginning in
1999.  Based upon balances as of December 27, 1998, this would result in annual
amortization related to goodwill and trademarks of $11.7 million and $0.1
million, respectively.  See Note 2 of Notes to the Company's Consolidated
Financial Statements.

     Other Expense.   The Company incurred other expense of $14.9 million for
1998 compared to $4.1 million in the prior year, due primarily to increased
interest expense from the Company's outstanding subordinated debt being
outstanding for the entire year and a higher average amount of bank facility
debt, together with the write-off of $3.4 million notes receivable from a
stockholder.

     Minority Interest.  The minority interest in losses of Bagel Partners was
$46.1 million in 1998, compared to $4.0 million in the prior year.  This
increase was due to greater losses incurred in the current year.

     Income Taxes.  The Company had a $0.2 million income tax expense in 1998,
consisting of state and local taxes.

  Fiscal year ended December 28, 1997 compared to fiscal year ended December 29,
1996

     The Company's results of operations for fiscal year ended December 28, 1997
reflect primarily the Company's operations as a franchisor.  As a result of the
Transactions, the Company's results of operations after December 5, 1997 reflect
results of the Company as the majority owner and operator of stores systemwide.

     Revenue.  Total systemwide net revenue increased 119.2% to $303.0 million
for 1997 compared to $138.3 million in the prior year.  The increase in
systemwide net revenue was due to an increase in the number of stores in
operation systemwide offset by lower average net weekly per store sales.  The
lower average net weekly per store sales were due to a lower proportion of
mature stores in the system in 1997 compared to the prior year.

                                       14
<PAGE>
 
     Revenue from Company stores decreased 20.6% to $28.4 million in 1997 from
$35.8 million in the prior year.  The decrease was due to a lower average number
of Company stores in 1997 compared to 1996.

     Royalties and franchise-related fees increased to $28.3 million for 1997
from $19.9 million in the prior year, due primarily to an increase in royalties,
real estate fees and lease income attributable to the larger base of franchise
stores operating in 1997 compared to 1996.

     Interest income from loans to area developers increased to $21.6 million
for 1997 from $6.0 million in the prior year due to higher outstanding loan
balances associated with the increase in stores opened by the Company's area
developers during fiscal 1997.

     Store Costs and Expenses.  Total store costs and expenses were $29.1
million for 1997 compared to $29.7 million in the prior year.  Total store
expenses in 1996 represented primarily expenses for stores prior to their sale
to area developers; expenses in 1997 represented expenses incurred primarily by
Company stores after the Transactions.

     Salaries, Benefits, General and Administrative.  Salaries, benefits,
general and administrative expenses were $27.9 million in 1997 compared to $17.7
million in the prior year, due primarily to an increase in the number of
employees, an increase in expenditures at the Company's support center necessary
to support systemwide expansion and a charge of $7.4 million associated
primarily with the Transactions.

     Impairment of Long-Lived Assets.  In 1997 the Company recognized an
impairment loss on various long-lived assets of $10.8 million, resulting
primarily from the closure of a bagel dough production facility and the
conversion to a Company-controlled system.  The assets subject to the impairment
loss had a net book value of $11.6 million before the impairment loss.

     Other Expense.  The Company incurred other expense of $4.1 million for 1997
compared to $4.3 million in the prior year.

     Minority Interest.  The minority interest in losses of Bagel Partners was
$4.0 million in 1997 as a result of the Transactions.

     Income Taxes.  The Company had a $5.0 million income tax expense in 1997
resulting primarily from certain non-deductible intangible amortization and the
uncertainty associated with the realization of its deferred tax asset.

Liquidity and Capital Resources

     The Company's primary sources of capital have been from issuances of equity
and debt securities, borrowings under the Company's revolving credit facility
and internally generated cash from operations.  In 1998, $12.5 million of cash
was used in operations, compared to $27.7 million of cash provided from
operations in 1997.  The decrease in cash from operations was a result of the
Transactions, because cash previously used in area developer operations is now
used in Company operations.  Cash provided from operations in 1997 totaled $27.7
million, an increase of $21.2 million from the cash provided from operations in
1996 of $6.5 million.  The increase was due primarily to an increase in
royalties and franchise-related fees and interest income from loans to area
developers attributable to the larger base of franchise stores operating in 1997
compared to 1996.

     In 1998, $0.4 million of net cash was used in financing activities,
resulting from repayments under the Company's term loan facility and borrowings
under the Company's revolving credit facility.  As of December 27, 1998, the
Company had $3.8 million available in cash and cash equivalents.  At December
27, 1998, a $24.0 million term loan and a $5.6 million revolving loan were
outstanding under the Company's secured bank credit facility with Bank of
America National Trust and Savings Association and two other lenders.  The bank
credit facility consists of a term loan facility (originally in the amount of
$30.0 million) and a $25.0 million revolving credit facility.  The bank credit
facility contains financial covenants that require the Company to maintain
minimum average weekly net 

                                       15
<PAGE>
 
sales levels and to comply with ratios of system cash flow to senior
indebtedness and pro forma fixed charges. As of December 27, 1998, the Company
had $25.0 million available from its revolving credit facility. See Note 6 of
Notes to the Company's Consolidated Financial Statements.

     Cash provided from financing activities totaled $158.7 million in 1997.  In
May 1997, the Company completed a private offering of $125.0 million principal
amount of 7 1/4% convertible subordinated debentures due 2004.  As of December
28, 1997, the Company had $34.1 million available in cash and cash equivalents.

     During 1996, the Company borrowed $80.0 million from Boston Chicken under a
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.  Also during 1996, the Company raised $174.6 million from the sale of
approximately 8,670,000 shares of its common stock.  At December 29, 1996, there
was no balance outstanding under the Company's credit facility.

     In 1998, the Company's primary uses of capital, other than providing
working capital for normal operating expenses, consisted of satisfaction of
current liabilities (including liabilities incurred in closing stores and
severance obligations incurred in reducing overhead), expenditures related to
building and opening new stores and retrofitting existing stores, and payment of
principal and interest on outstanding indebtedness.

     Prior to 1998, the Company's primary use of capital consisted of providing
partial financing to its area developers for use in rapid store development and
working capital needs.  Net loan advances to area developers were $190.0 million
in 1997 (consisting of $359.2 million of loan advances, net of $169.2 million of
loan repayments) and $137.3 million in 1996 (consisting of $206.8 million of
loan advances, net of $69.5 million of loan repayments).  The majority of the
loan advance and repayment activity reflects the revolving nature of the loans;
that is, amounts were 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 1997 compared to 1996.

     In addition to providing funding to its area developers, the Company's
capital requirements in 1997 and 1996 consisted of store acquisition and
development, development of its corporate infrastructure, which supports
systemwide expansion, and investments in food production facilities.  In 1997,
the Company expended $8.2 million on its corporate infrastructure and
investments in food production facilities compared to $10.1 million in 1996.  In
1996, the Company expended $107.9 million on store acquisition and development,
including the acquisition of all the capital stock of Noah's New York Bagels,
Inc. for $100.9 million.  The Company generated $3.6 million in 1997 and $49.9
million in 1996 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's primary uses of capital in 1999, other than providing working
capital for normal operating expenses, are expected to consist primarily of
satisfaction of current liabilities, expenditures related to the development of
business infrastructure and systems, including the acquisition of hardware,
software licenses, maintenance and support for enterprise and store systems,
expenditures related to building and opening a small number of new stores and
refurbishing existing stores, and payment of principal and interest on
outstanding indebtedness.  The Company estimates that the aggregate cost
associated with acquiring and implementing new enterprise systems will be
approximately $3.0 million (of which approximately $750,000 has been incurred)
and that the capital cost associated with upgrading store systems to become Year
2000 compliant will be approximately $1.6 million, primarily to purchase
hardware that will accommodate Year 2000 compliant software.  In addition, the
Company expects to incur additional capital costs in obtaining ownership of
software licenses, including licenses for back office and point-of-sale store
systems, and additional operating expenses in building and operating a business
infrastructure to perform services that to date have been provided to the
Company by Boston Chicken.  Moreover, until such time as the Company's fee
service agreements with Boston Chicken expire or are terminated, the Company
will continue to be obligated to pay fees to Boston Chicken under those
agreements in addition to paying the expenses of building and operating its own
infrastructure.

     The Company's primary sources of capital in 1999 are expected to consist
primarily of internally generated cash from operations and borrowings under the
Company's revolving credit facility.  The Company anticipates the 

                                      16
<PAGE>
 
expected sources of capital will be sufficient to fund the expected uses. In the
event the Company requires additional capital for the foregoing purposes, there
can be no assurance that the Company will be able to raise such capital on
satisfactory terms, if at all. See "Special Note Regarding Forward-Looking
Statements" on page 2. If the Company is unable to comply with any of the
financial covenants under its bank credit facility, the Company would be unable
to draw on its revolving credit facility and, upon action of the lenders under
the bank credit facility, all outstanding principal and interest under the bank
credit facility could be accelerated and become immediately due and payable. To
the extent the Company did not have borrowing availability under the bank credit
facility, the Company could be required to seek additional sources of capital
and, if unable to obtain such capital, could be unable to satisfy its
obligations when due.

Seasonality

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

Year 2000

     The Year 2000 issue is the result of computer programs written to identify
the applicable year with two digits rather than four.  As written, these
programs may identify the year "00" as 1900 rather than 2000, which could result
in systems miscalculations or systems failure leading to potentially substantial
business disruptions.  The Company has adopted a comprehensive plan to identify
and resolve its Year 2000 issues.  The Company's Year 2000 plan consists of (a)
assuring that its information technology systems, currently provided by Boston
Chicken under the terms of a computer and communications services agreement, are
Year 2000 compliant, (b) assuring that new information technology systems
acquired by the Company as part of its development of an independent business
infrastructure are Year 2000 compliant, and (c) obtaining assurances from other
third party vendors that their businesses and systems will be Year 2000
compliant on a timely basis.

     Boston Chicken has informed the Company that the information technology
systems it provides are, or will be by September 1999, Year 2000 compliant. Such
systems include back office and point of sale store systems as well as
financial, human resources, payroll and desktop systems utilized at the
Company's support center. In addition to the public disclosure provided by
Boston Chicken with respect to its Year 2000 compliance efforts, the Company
receives periodic reports from Boston Chicken management relating to Year 2000
issues. In addition to the fees the Company pays to Boston Chicken under the
computer and communications services agreement, the Company expects to incur
capital expenditures of approximately $1.6 million, primarily to purchase
hardware for store systems that will accommodate Year 2000 compliant software.
The Company intends to continue monitoring Boston Chicken's Year 2000 compliance
efforts on a regular basis with respect to systems provided by Boston Chicken
and to seek assurances of Year 2000 compliance from any other vendors who may
grant licenses to the Company or support its information technology systems. See
"Special Note Regarding Forward-Looking Statements" on page 2.

     The Company has received assurances from the third party software vendor
that is providing the Company with a software license and support services for
its enterprise systems that the software will be Year 2000 compliant.  The
Company has received similar assurances from its principal third party systems
hardware vendor.  The Company intends to seek assurances of Year 2000 compliance
from other vendors of systems software, hardware and services.  See "Special
Note Regarding Forward-Looking Statements" on page 2.

     The Company has also implemented a program to obtain third party vendor
assurances of Year 2000 compliance. The Company is currently in the process of
identifying all of its third party vendors and assessing the impact on the
Company if vendors are not Year 2000 compliant. Management of the Company
expects to meet with its most significant vendors, such as its bagel and cream
cheese suppliers and its distribution vendor, by the end of its first fiscal
quarter in 1999 to discuss their Year 2000 compliance plans. The Company is
sending to substantially all other vendors, including the Company's landlords,
equipment vendors, service providers, banks and utility companies, letters from
the Company requesting written assurance of Year 2000 compliance on a timely
basis. Management intends to evaluate all vendor responses and, if any response
is deemed inadequate, will follow-up with letters, telephone calls and/or
meetings with the applicable vendor. Throughout this process, management of the
Company will assess both the likelihood of compliance by the vendor and the
impact on the Company if it is determined that the vendor will not be compliant
on a timely basis. To the extent that the Company determines that

                                      17
<PAGE>
 
a significant vendor is not likely to be Year 2000 compliant in a timely manner,
the Company intends to develop contingency plans, including obtaining
alternative sources for any product or service material to maintaining
uninterrupted business operations. The Company expects that its third party
vendor compliance program, including the development of contingency plans, if
necessary, will be complete by the end of its second fiscal quarter in 1999. See
"Special Note Regarding Forward-Looking Statements" on page 2.

     The Company's Year 2000 compliance efforts involve a significant amount of
time and effort by management and employees, the total cost of which is
difficult to precisely estimate.  The Company does not, however, anticipate that
these costs will be material to the Company.  The Company does not expect
significant business disruptions arising from the failure of its third party
vendors to be Year 2000 compliant on a timely basis; however, compliance efforts
of Boston Chicken, other providers of information technology systems and other
third party vendors are not within the Company's control.  There can be no
assurance that all of such persons will be Year 2000 compliant, or that the
Company will successfully develop and implement satisfactory contingency plans
on a timely basis.  The occurrence of any such event could have a material
adverse effect on the financial condition or results of operations of the
Company.  See "Special Note Regarding Forward-Looking Statements" on page 7.

Impact of Inflation

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

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Over time, the Company is exposed to market risks arising from changes in
interest rates.  The Company has not historically used derivative financial
instruments.

     As of December 27, 1998, $29.6 million of floating-rate debt was exposed to
changes in interest rates compared to $30.0 million in the prior year.  This
exposure was primarily linked to the prime lending rate.  A hypothetical 10%
change in the prime lending rate would not have had a material effect on the
Company's annual earnings.

     As of December 27, 1998 and December 28, 1997, the Company also had $125.0
million of fixed-rate convertible subordinated debentures due 2004.  A
hypothetical 10% change in interest rates on this debt would affect the market
value of these financial instruments.

                                       18
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
                     (In thousands, except per share data)

     The following table shows quarterly unaudited financial results for fiscal
years 1998 and 1997.  The first quarter consists of four four-week periods and
the second, third and fourth quarters consist of three four-week periods.  The
fourth quarter of 1998 Loss from Operations includes a $212.4 million charge for
impairment of store fixed assets, goodwill and other intangibles.  See Note 13
of Notes to the Company's Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                            First     Second    Third      Fourth
                                           Quarter   Quarter   Quarter    Quarter
                                          ---------  --------  --------  ----------
<S>                                       <C>        <C>       <C>       <C>
    1998:
    -----
    Revenue.............................  $110,475   $87,899   $87,325   $  86,220
    Loss from Operations................   (12,661)   (3,855)   (2,636)   (215,733)
    Net Loss............................   (13,417)   (8,949)   (4,433)   (177,128)
    Basic Loss per Share................     (0.41)    (0.27)    (0.13)      (5.32)
    Diluted Loss per Share..............     (0.41)    (0.27)    (0.13)      (5.32)
 
    1997:
    -----
    Revenue.............................  $ 16,728   $13,275   $13,882   $  34,403
    Income (Loss) from Operations.......     7,232     8,142     9,267     (20,977)
    Net Income (Loss)...................     5,178     5,114     5,364     (17,058)
    Basic Earnings (Loss) per Shares....      0.16      0.15      0.16       (0.52)
    Diluted Earnings (Loss) per Shares..      0.15      0.15      0.16       (0.52)
</TABLE>

                                       19
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

                         INDEX TO FINANCIAL STATEMENTS
                                        
<TABLE>
<CAPTION>
 
<S>                                                                                                  <C>
Report of Independent Public Accountants...........................................................     21
 
Consolidated Financial Statements:
 
   Consolidated Balance Sheets at December 28, 1997 and December 27, 1998..........................     22
 
   Consolidated Statements of Operations for the fiscal years ended December 29, 1996,
   December  28, 1997 and December 27, 1998........................................................     23
 
   Consolidated Statements of Stockholders' Equity for the fiscal years ended
   December 29, 1996, December 28, 1997 and December 27, 1998......................................     24
 
   Consolidated Statements of Cash Flows for the fiscal years ended December 29, 1996,
   December 28, 1997 and December 27, 1998.........................................................     25
 
   Notes to Consolidated Financial Statements......................................................     26
 
Report of Independent Public Accountants on Schedule II............................................     42
Supplemental Schedule II...........................................................................     43
</TABLE>

                                       20
<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 28, 1997 and December 27, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for the fiscal years ended
December 29, 1996, December 28, 1997 and December 27, 1998.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Einstein/Noah Bagel Corp.
and subsidiaries as of December 28, 1997 and December 27, 1998, and the results
of their operations and their cash flows for the fiscal years ended December 29,
1996, December 28, 1997 and December 27, 1998, in conformity with generally
accepted accounting principles.

                                               ARTHUR ANDERSEN LLP

Denver, Colorado
February 17, 1999

                                       21
<PAGE>
 
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
                                        
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)
                                        
<TABLE>
<CAPTION>
                                                                             December 28,               December 27,
                                                                                 1997                       1998
                                                                        -------------------        -------------------
<S>                                                                       <C>                        <C>
ASSETS
------
Current Assets:
 Cash and cash equivalents..............................................           $ 34,148                  $   3,766
 Accounts receivable, net...............................................              1,593                      1,716
 Inventories............................................................              9,823                      9,672
 Prepaid expenses and other current assets..............................                502                      1,699
                                                                        -------------------        -------------------
  Total current assets..................................................             46,066                     16,853
 
Property and Equipment, net.............................................            194,152                    122,403
Goodwill, net...........................................................            360,155                    223,482
Trademarks, net.........................................................             22,075                      2,065
Recipes, net............................................................              7,202                      2,670
Other Assets, net.......................................................             13,478                      7,669
  Total assets..........................................................           $643,128                  $ 375,142
                                                                        ===================        ===================
 
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
 Accounts payable.......................................................           $ 16,140                  $  17,804
 Accrued expenses.......................................................             38,369                     23,284
 Current portion of senior term loan....................................              6,000                      6,000
                                                                        -------------------        -------------------
  Total current liabilities.............................................             60,509                     47,088
 
Revolving Credit Facility...............................................                  -                      5,625
Long-Term Portion of Senior Term Loan...................................             24,000                     18,000
Convertible Subordinated Debentures.....................................            125,000                    125,000
Other Noncurrent Liabilities............................................             23,225                     16,140
Minority Interest.......................................................             80,048                     33,931
 
Stockholders' Equity:
 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;
   33,332,594 shares issued in 1997
   and 34,083,681 shares issued in 1998.................................                333                        341
 Additional paid-in capital.............................................            374,685                    377,616
 Treasury Stock, at cost (813,146 shares in 1997 and 1998)..............             (5,261)                    (5,261)
 Accumulated deficit....................................................            (39,411)                  (243,338)
                                                                        -------------------        -------------------
   Total stockholders' equity...........................................            330,346                    129,358
   Total liabilities and stockholders' equity...........................           $643,128                  $ 375,142
                                                                        ===================        ===================
</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 OPERATIONS
                     (in thousands, except per share data)
<TABLE>
<CAPTION>
 
                                                                      Fiscal Year Ended
                                                       ------------------------------------------------
                                                       December 29,      December 28,     December 27,
                                                           1996              1997             1998
                                                       -------------  ------------------  -------------
<S>                                                    <C>            <C>                 <C>
Revenue:
  Store revenue......................................       $35,803             $28,436      $ 371,919
  Royalties and franchise-related fees...............        25,904              49,852              -
                                                            -------             -------      ---------
     Total revenue...................................        61,707              78,288        371,919
 
Costs and Expenses:
  Store:
     Cost of products sold...........................        11,546               9,479        127,573
     Salaries and benefits...........................        10,411              10,734        116,226
     Other controllable costs........................         4,670               2,404         29,392
     Rent, occupancy and related costs...............         1,074               4,680         35,603
     Marketing expenses..............................           842                 126         13,291
     Depreciation and amortization...................         1,146               1,683         20,411
                                                            -------             -------      ---------
       Total store costs and expenses................        29,689              29,106        342,496
  Non-Store:
     Salaries, benefits, general and administrative..        17,694              27,865         37,571
     Impairment of long-lived assets.................             -              10,835        212,371
     Depreciation and amortization
       (excluding goodwill amortization).............         1,313               4,154          3,588
     Goodwill amortization...........................         2,972               2,664         10,778
                                                            -------             -------      ---------
       Total non-store costs and expenses............        21,979              45,518        264,308
                                                            -------             -------      ---------
       Total costs and expenses......................        51,668              74,624        606,804
                                                            -------             -------      ---------
 
Income (Loss) from Operations........................        10,039               3,664       (234,885)
 
Other Income (Expense):
  Interest income....................................           689               1,969            282
  Interest expense...................................        (6,950)             (6,098)       (11,811)
  Other..............................................         1,929                   -         (3,409)
                                                            -------             -------      ---------
     Total other income (expense)....................        (4,332)             (4,129)       (14,938)
                                                            -------             -------      ---------
 
Income (Loss) before Income Taxes and
  Minority Interest..................................         5,707                (465)      (249,823)
Income Taxes.........................................             -               4,973            221
Minority Interest in Loss of Subsidiary..............             -              (4,036)       (46,117)
                                                            -------             -------      ---------
Net Income (Loss)....................................       $ 5,707             $(1,402)     $(203,927)
                                                            =======             =======      =========
 
Basic Earnings (Loss) per Share......................         $0.29              $(0.04)        $(6.18)
                                                            =======             =======      =========
Diluted Earnings (Loss) per Share....................         $0.27              $(0.04)        $(6.18)
                                                            =======             =======      =========
Weighted Average Number of Common
  Shares Outstanding:
     Basic...........................................        19,286              32,956         33,024
                                                            =======             =======      =========
     Diluted.........................................        21,023              32,956         33,024
                                                            =======             =======      =========
</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 STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>
 
                                                                                 Fiscal Year Ended
                                                                  -------------------------------------------------
                                                                  December 29,      December 28,     December 27,
                                                                      1996              1997             1998
                                                                  -------------  ------------------  -------------
<S>                                                               <C>            <C>                 <C>
Common Stock
  Balance at beginning of year..................................      $     38            $    323      $     333
  Conversion of preferred stock, repurchase common stock
     and debt...................................................           175                   -              -
  Issuance of common stock......................................            96                   2              8
  Exercise of stock options and warrants........................            14                   8              -
                                                                      --------            --------      ---------
  Balance at end of year........................................      $    323            $    333      $     341
                                                                      ========            ========      =========
 
Additional Paid-in Capital
  Balance at beginning of year..................................      $ 22,684            $353,203      $ 374,685
  Conversion of preferred stock, repurchase common stock
     and debt...................................................       140,270                   -              -
  Issuance of common stock, net of offering costs of
     $10,343 in 1996, $229 in 1997 and $- in 1998...............       182,491               5,369          2,929
  Exercise of stock options and warrants, including income tax
     benefits of $1,597 in 1997.................................         9,227               6,694              2
  Dividends on Series A preferred stock and accretion of
     dividends on repurchase common stock.......................        (1,708)                  -              -
  Issuance of options and warrants..............................           239               1,619
  Options issued in connection with acquisitions................             -               7,800              -
                                                                      --------            --------      ---------
  Balance at end of year........................................      $353,203            $374,685      $ 377,616
                                                                      ========            ========      =========
 
Treasury Stock
  Balance at beginning of year..................................      $      -            $      -      $  (5,261)
  Purchase of 813,146 shares in 1997............................             -              (5,261)             -
                                                                      --------            --------      ---------
  Balance at end of year........................................      $      -            $ (5,261)     $  (5,261)
                                                                      ========            ========      =========
 
Accumulated Deficit
  Balance at beginning of year..................................      $(43,716)           $(38,009)     $ (39,411)
  Net income (loss).............................................         5,707              (1,402)      (203,927)
                                                                      --------            --------      ---------
  Balance at end of year........................................      $(38,009)           $(39,411)     $(243,338)
                                                                      ========            ========      =========
 
</TABLE>

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

                                       24
<PAGE>
 
                   EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                         Fiscal Year Ended
                                                                          ------------------------------------------------
                                                                          December 29,      December 28,     December 27,
                                                                              1996              1997             1998
                                                                          -------------  ------------------  -------------
<S>                                                                       <C>            <C>                 <C>
Cash Flows from Operating Activities:
  Net income (loss).....................................................     $   5,707           $  (1,402)     $(203,927)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization......................................         5,431               8,502         34,777
     Minority interest..................................................             -              (4,036)       (46,117)
     Provision for write-down of assets.................................             -              12,773        217,104
     Warrant and option expense.........................................           239               1,619              -
     Gain on the sale of marketable equity securities...................        (1,824)                  -              -
     Changes in assets and liabilities, net of effect of acquisitions:
      Accounts receivable...............................................        (3,966)              5,662           (123)
      Accounts payable and accrued expenses.............................          (292)            (11,377)        (8,456)
      Deferred franchise revenue........................................         8,180              (1,030)             -
      Other assets and liabilities......................................        (7,003)             16,950         (5,724)
                                                                             ---------           ---------      ---------
        Net cash provided by (used in) operating activities.............         6,472              27,661        (12,466)
                                                                             ---------           ---------      ---------
Cash Flows from Investing Activities:
  Purchase of property and equipment....................................       (38,198)            (11,189)       (17,430)
  Proceeds from sale of assets..........................................        49,943               3,600              -
  Acquisitions of Noah's New York Bagels, Inc.,
     net of cash acquired...............................................      (100,902)                  -              -
  Purchase of marketable equity securities,
     net of proceeds from sales.........................................         1,824                   -              -
  Purchase of other assets..............................................        (5,608)             (5,381)          (111)
  Issuance of notes receivable..........................................      (209,514)           (359,218)             -
  Repayment of notes receivable.........................................        70,694             169,223              -
                                                                             ---------           ---------      ---------
     Net cash used in investing activities..............................      (231,761)           (202,965)       (17,541)
                                                                             ---------           ---------      ---------
Cash Flows from Financing Activities:
  Proceeds from issuance of common stock................................       191,606              10,475              -
  Increase in deferred financing costs..................................          (944)             (6,764)             -
  Proceeds from term loan...............................................             -              30,000              -
  Borrowings under credit facility......................................             -              62,200         68,357
  Repayments under credit facility......................................             -             (62,200)       (68,732)
  Proceeds from convertible debt........................................       352,272             125,000              -
  Repayment of convertible debt.........................................      (272,272)                  -              -
                                                                             ---------           ---------      ---------
     Net cash provided by  (used in) financing activities...............       270,662             158,711           (375)
                                                                             ---------           ---------      ---------
Net Increase (Decrease) in Cash and Cash Equivalents....................        45,373             (16,593)       (30,382)
Cash and Cash Equivalents, beginning of year............................         5,368              50,741         34,148
                                                                             ---------           ---------      ---------
Cash and Cash Equivalents, end of year..................................     $  50,741           $  34,148      $   3,766
                                                                             =========           =========      =========
 
Supplemental Cash Flow Information:
  Interest Paid.........................................................     $   7,232           $   5,098      $  11,818
                                                                             =========           =========      =========
  Income Taxes Paid.....................................................     $       -           $     640      $     220
                                                                             =========           =========      =========
 
Supplemental Schedule of Non-Cash Activities:
  Conversion of debt to common stock....................................     $ 120,000           $       -      $       -
                                                                             =========           =========      =========
  Conversion of notes receivable into equity interests and assets.......     $       -           $ 332,646      $       -
                                                                             =========           =========      =========
  Issuance of debt in connection with purchase
     of equipment and other assets......................................     $       -           $       -      $   1,682
                                                                             =========           =========      =========
  Tax benefit of stock options exercised................................     $       -           $   1,597      $       -
                                                                             =========           =========      =========
  Options issued in connection with acquisitions........................     $       -           $   7,800      $       -
                                                                             =========           =========      =========
  Issuance of common stock in connection with acquisition...............     $       -           $       -      $   2,922
                                                                             =========           =========      =========
  Conversion of preferred stock, repurchase common stock and
     accrued dividends on preferred stock...............................     $  20,445           $       -      $       -
                                                                             =========           =========      =========
  Accretion of dividends on repurchase common stock.....................     $   1,486           $       -      $       -
                                                                             =========           =========      =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                       25
<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") operate
specialty retail bagel stores in the United States, primarily under the Einstein
Bros. Bagels and Noah's New York Bagels brand names.  At December 27, 1998,
there were 546 Company stores in operation.

     On October 5, 1998, Boston Chicken, Inc. ("Boston Chicken") the owner of
approximately 51% of the outstanding shares of common stock of the Company,
filed a voluntary petition for protection under Chapter 11 of the Federal
Bankruptcy Code.  The Company understands that Boston Chicken is in the process
of developing alternative reorganization plans.

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 consists of 13 four-week periods.  The
first quarter consists of four periods and each of the remaining three quarters
consist of three 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 are stated at the lower of cost (first-in, first-
out) or market and consist of food, paper products and supplies.

     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.  See Note 13.

     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 12 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 five to eight years, computer equipment being depreciated over three years,
and pre-opening costs being depreciated over one year.  The cost and accumulated
depreciation for property and equipment sold, retired or otherwise disposed of
are relieved from the accounts, and resulting gains or losses are reflected in
income.

     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 and
stocking of stores, employee training and general store management activities
incurred prior to the opening of new stores.  Pre-opening costs are capitalized
until the stores become operational and are then amortized over a one-year
period.  Beginning in 1999, all pre-opening expenses will be expensed as
incurred in accordance with AICPA Statement of Position 98-5, "Reporting on the

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

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
 
Costs of Start-up Activities" ("SOP 98-5")  The Company does not expect the
adoption of SOP 98-5 to have a material impact on its results of operations in
1999.

     Goodwill and Other Intangible Assets.  Goodwill, trademarks and recipes are
being amortized over 35, 30 and 10 years, respectively, through 1998.  In 1998,
as part of the Company's ongoing evaluation of long-lived assets, management
evaluated the useful lives of goodwill and trademarks.  The evaluation was made
after the Company had operated and controlled the Einstein Bros. Bagels and
Noah's New York Bagels stores acquired from its area developers for one year.
Based primarily upon the assessment of realized operating results, which were
below those anticipated upon consummation of that acquisition, and current
revenue growth and cash flow projections, the Company concluded that 20 years
would be a more accurate estimate of useful lives for goodwill and trademarks
than the periods previously used.  The new useful life of 20 years is effective
on a prospective basis beginning in 1999.  Based upon balances as of December
27, 1998, this would result in annual amortization related to goodwill and
trademarks of $11.7 million and $0.1 million, respectively.

     Deferred Financing Costs.  Deferred financing costs are amortized over the
period of the related financing, which ranges from three to seven years.

     Revenue Recognition.  Revenue from Company stores is recognized in the
period during which related food and beverage products are sold.  Royalties were
recognized in the same period that related franchise store revenue was
generated.  Revenue derived from initial franchise fees and area development
fees were recognized when the franchise store opened.  Real estate fees were
recognized as earned, and lease income was recognized over the life of the lease
on a straight-line basis.  Interest income was recognized as earned.  Pursuant
to Statement of Financial Accounting Standards No. 45, "Accounting for Franchise
Fee Revenue" ("SFAS No. 45"), commencing with the Company's announcement in
October 1997 to transition from a franchised to a Company-controlled system, the
Company ceased recognizing initial franchise and area development fees for the
opening of new stores.  Upon consummation of the Company's conversion of its
loans to area developers into equity interests on December 5, 1997, revenue
recognized by the Company as lender, franchisor and service provider to the area
developers was eliminated in consolidation.  The components of royalties and
franchise-related fees are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                           Fiscal Year Ended
                                                       --------------------------
                                                       December 29,  December 28,
                                                           1996          1997
                                                       ------------  ------------
<S>                                                    <C>           <C>
     Initial franchise and area development fees.....       $12,140       $ 9,920
     Royalties.......................................         6,086        15,487
     Real estate fees and lease income...............         1,564         2,375
     Other...........................................           128           504
     Interest Income.................................         5,986        21,566
                                                            -------       -------
         Total royalties and franchise related fees..       $25,904       $49,852
                                                            =======       =======
</TABLE>

     Per Share Data.  Basic earnings (loss) per share are computed by dividing
net income (loss), adjusted for dividends of $0.1 million on Series A preferred
stock in 1996, by the weighted average number of common shares outstanding
during the period.  Diluted earnings (loss) per share are computed by dividing
net income (loss), adjusted for dividends of $0.1 million on Series A preferred
stock in 1996, by the weighted average number of common shares and dilutive
Company securities outstanding during the period.

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

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
 
     The difference between the weighted average number of common shares
outstanding to compute basic and diluted earnings (loss) per share in 1996
represents the dilutive effect of common stock options and warrants of 1.7
million shares.  These securities were excluded for 1997 and 1998 because they
were antidilutive.

     The calculation of diluted earnings (loss) per share excludes shares of
common stock underlying the Company's 7 1/4% convertible subordinated debentures
due June 1, 2004 because of their antidilutive effect.  In addition, stock
options and warrants outstanding in 1996 which had exercise prices greater than
the average market price of the Company's common stock were excluded from the
1996 computations because of their antidilutive effect.

     Pursuant to Securities and Exchange Commission ("SEC") rules, common stock
and dilutive securities issued by the Company at prices below the initial public
offering price during the 12-month period prior to the offering ("cheap stock")
were previously included in the calculation as if they were outstanding for the
entire fiscal year, regardless of whether or not they were antidilutive.  In
Staff Accounting Bulletin 98, the SEC redefined cheap stock as "nominal
issuances."  As a result, shares and dilutive Company securities that were
originally treated as cheap stock and included in the 1996 computations have
been adjusted in the restated 1996 weighted average shares outstanding.  In
1996, basic earnings per share increased from $0.28 to $0.29 and diluted
earnings per share increased from $0.25 to $0.27.

     Advertising Costs.  Advertising costs are expensed in the period incurred.
Advertising expenses were $0.9 million, $2.2 million and $13.3 million in 1996,
1997 and 1998, respectively.  See Note 8.

     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 11.

     Employee Benefit Plan.  The Company has a 401(k) plan to which the Company
made no contribution in 1996, 1997 or 1998.  In 1999, the Company will
contribute an amount equal to 10% of the contributions of each employee until
such employee contributions reach 6% of such employee's compensation.

     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 1996
and 1997 amounts to conform with the 1998 presentation.

                                      28
<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 $0.8
million at December 28, 1997 and December 27, 1998.

<TABLE>
<CAPTION>
                                                                      December 28,   December 27,
                                                                          1997           1998
                                                                      -------------  -------------
<S>                                                                   <C>            <C>
     Property and equipment consists of (in thousands of dollars):
         Land, buildings and improvements...........................      $  1,143       $      -
         Leasehold improvements.....................................       101,790         73,790
         Furniture, fixtures and equipment..........................        93,850         76,339
         Pre-opening expense........................................         1,335              -
                                                                          --------       --------
                                                                           198,118        150,129
         Less:  Accumulated depreciation and amortization...........        (3,966)       (27,726)
                                                                          --------       --------
             Total property and equipment, net......................      $194,152       $122,403
                                                                          ========       ========
</TABLE>

     Included in furniture, fixtures and equipment are assets leased to others
of $8.5 million (net of accumulated depreciation of approximately $0.7 million)
at December 28, 1997 and $13.5 million (net of accumulated depreciation of
approximately $1.2 million) at December 27, 1998.

<TABLE>
<CAPTION>
                                                               December 28,  December 27,
                                                                   1997          1998
                                                               ------------  ------------
<S>                                                            <C>           <C>
     Accumulated amortization of intangibles consists
         of the following (in thousands of dollars):
     Goodwill................................................       $ 4,836       $10,980
     Trademarks..............................................         1,258            99
     Recipes.................................................         1,087           376
                                                                    -------       -------
         Total accumulated amortization......................       $ 7,181       $11,455
                                                                    =======       =======
 
                                                                   December 28,  December 27,
                                                                       1997          1998
                                                                   ------------  ------------
     Accrued expenses consist of (in thousands of dollars):
         Accrued payroll and related benefits................       $ 7,997       $ 8,926
         Accrued interest....................................         1,017           892
         Accrued store closure costs.........................         4,716         3,156
         Accrued purchase price obligation...................         4,500             -
         Accrued vendor loss contracts.......................         3,425           820
         Accrued real property tax...........................         1,051         3,314
         Accrued other.......................................        15,663         6,176
                                                                    -------       -------
             Total accrued expenses..........................       $38,369       $23,284
                                                                    =======       =======
</TABLE>
4.  Acquisitions


     In December 1997, the Company converted its outstanding loans to its area
developers into a majority equity interest in the area developers and purchased
additional area developer equity interests by exercising its option under each
of the loan agreements to purchase the amount of equity available under the
unfunded portion of the area developer loans, and the area developers merged
into a single entity now known as Einstein/Noah Bagel Partners, L.P. ("Bagel
Partners").  The Company owns an approximately 78% interest in Bagel Partners.
The acquisitions have been accounted for as a purchase and, accordingly, the
purchase price was allocated to assets (both 

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued 

tangible and intangible) and liabilities to third parties based upon an estimate
of fair values at the date of acquisition. The following is a summary of each
area developer acquisition (in thousands of dollars):

<TABLE>
<CAPTION>
                                   Loan      Options   Liabilities
        Area Developer           Converted  Exercised    Assumed    Goodwill
-------------------------------  ---------  ---------  -----------  --------
<S>                              <C>        <C>        <C>          <C>
     Colonial Bagels, L.P.         $46,000    $     -      $16,120   $56,252
     Great Lakes Bagels, L.P.       87,812      8,688       19,519    76,596
     Gulfstream Bagels, L.P.        69,927     16,373        6,743    54,535
     Noah's Pacific, L.L.C.         76,862      3,738       19,785    61,591
     Sunbelt Bagels, L.L.C.         50,200          -        5,426    47,356
</TABLE>

     The goodwill resulting from each acquisition was amortized over a 35-year
life through 1998; thereafter, goodwill is being amortized over 20 years.  See
Note 13.  In connection with the acquisitions, the Company committed to issue
options to purchase 2,516,829 shares of the Company's common stock in exchange
for options to purchase units of limited partnership interest in Bagel Partners
at an exchange rate of one share of common stock for every 15 units of Bagel
Partners limited partnership interest.  Such options were granted in January
1998 at an exercise price of $6.00 per share, with an estimated fair value of
$7.8 million.

     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 period presented (in
thousands of dollars, except per share data):

                                                December 28,
                                                    1997
                                                ------------
          Revenue...........................      $307,035
          Net loss..........................       (83,729)
          Basic loss per share..............         (2.54)
          Diluted loss per share............         (2.54)

     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 period 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.

     Convertible Debt.  The estimated fair value of convertible debt, including
the conversion option, is based on the quoted market price of the convertible
debt.

     Revolving Credit Facility.  The estimated fair value of the revolving
credit facility is based on the discounted value of future payments using the
Company's current borrowing rate.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 

     Senior Term Loan.  The estimated fair value of the senior term loan is
based on the discounted value of future payments using the Company's current
borrowing rate.

     The estimated fair values of the Company's financial instruments are as
follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                       December 28, 1997                       December 27, 1998
                                             -----------------------------------     -----------------------------------
                                                 Carrying              Fair              Carrying              Fair
                                                  Amount               Value              Amount               Value
                                             ---------------     ---------------     ---------------     ---------------
<S>                                            <C>                 <C>                 <C>                 <C>
Cash and cash equivalents....................       $ 34,148             $34,148            $  3,766             $ 3,766
Convertible debt.............................        125,000              82,188             125,000              58,750
Revolving credit facility....................              -                   -               5,625               5,625
Senior term loan.............................         30,000              30,000              24,000              24,000
</TABLE>

6.  Debt

     The Company has a secured credit facility, consisting of a term loan
facility (originally in the amount of $30.0 million) and a $25.0 million
revolving credit facility, providing for borrowings through October 31, 2000.
Borrowings under the credit facility may be either floating rate loans with
interest at the lenders' reference rate (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 .50% of the average daily
unused portion of the loan is required.  The credit facility contains covenants
that, among other things, restrict other borrowings, prohibit cash dividends and
require maintaining certain minimum average weekly net sales levels and to
comply with ratios of system cash flow to senior indebtedness and pro forma
fixed charges.  The credit facility is collateralized by substantially all of
the assets of the Company.  As of December 27, 1998, $24.0 million was
outstanding under the term loan facility, bearing an interest rate of 7.75%.
The term loan facility requires principal payments of $1.5 million on March 1,
June 1, September 1 and December 1 of each year, continuing through October
2000, at which time the outstanding balance is due.  As of December 27, 1998,
the Company had $25.0 million available from its revolving credit facility of
which $5.6 million was outstanding.

     In May 1997, the Company issued $125.0 million of 7 1/4% convertible
subordinated debentures due June 1, 2004.  Interest is payable semi-annually on
June 1 and December 1 of each year.  The debentures are convertible at any time
prior to maturity into shares of the Company's common stock at a conversion rate
of $21.25 per share, subject to adjustment under certain conditions.  After June
1, 2000, the debentures may be redeemed at the option of the Company initially
at 104.14% of their principal amount and at declining prices thereafter, plus
accrued interest.  In addition, the Company is required, as of 40 business days
after the occurrence of a Change in Control (as defined in the indenture related
to the debentures), to purchase all or any part of any debenture at the option
of the debenture holder.

7.  Income Taxes

     As of December 27, 1998, the Company had cumulative federal and state tax
operating loss carryforwards available to reduce future taxable income of
approximately $63.9 million that begin to expire in 2010.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued

 
     The primary components of deferred tax assets and liabilities are as
follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                              December 28,     December 27,
                                                                                  1997             1998
                                                                           ------------------  -------------
<S>                                                                        <C>                 <C>
 
Deferred tax assets:
 Accounts payable and accrued expenses...................................            $ 3,180       $  1,440
 Other noncurrent liabilities............................................                  -          3,154
 Property and equipment..................................................                  -         75,097
 Intangible assets.......................................................              4,950              -
 Net operating loss carryforwards........................................              2,410         25,009
 Other...................................................................                862         14,972
                                                                                     -------       --------
  Total deferred tax assets..............................................             11,402        119,672
 
Deferred tax liabilities:
 Property and equipment..................................................               (280)             -
 Intangible assets.......................................................                  -        (30,242)
 Other assets............................................................             (1,318)        (1,318)
                                                                                     -------       --------
  Total deferred tax liabilities.........................................             (1,598)       (31,560)
                                                                                     -------       --------
  Net deferred tax assets................................................              9,804         88,112
 Valuation allowance.....................................................             (9,804)       (88,112)
                                                                                     -------       --------
 Net deferred tax assets.................................................            $     -       $      -
                                                                                     =======       ========
 
Income tax expense consists of the following (in thousands of dollars):
                                                                                        Fiscal Year Ended
                                                                                    --------------------------
                                                                                    December 28,  December 27,
                                                                                       1997          1998
                                                                                    -----------   -----------
Current:
 Federal.................................................................            $ 4,208       $      -
 State...................................................................                765            221
                                                                                     -------       --------
                                                                                       4,973            221
 
Deferred:
 Federal.................................................................            $     -       $      -
 State...................................................................                  -              -
                                                                                     -------       --------
                                                                                     $ 4,973       $    221
                                                                                     =======       ========
</TABLE>

     For the year ended December 28, 1997, the Company recognized income tax
benefits pertaining to the exercise of stock options of $1.6 million, which was
accounted for as a direct increase in additional paid-in capital and did not
reduce reported income tax expense.  For the year ended December 27, 1998, the
Company did not have any tax benefit from the exercise of stock options.  As a
result of the utilization of deferred tax assets, during 1996 and 1997, the
Company recognized $0.8 million and $2.9 million, respectively, of the change in
the valuation allowance as a reduction of goodwill from prior acquisitions.  The
Company did not utilize any such deferred tax assets during 1998.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued

 
     The increase in the valuation allowance of $39.7 million from December 28,
1997 to December 27, 1998 is due to net operating losses created during 1998,
which may not be realizable.  The decrease in the valuation allowance of $0.5
million from December 29, 1996 to December 28, 1997 is due to the utilization of
a portion of the Company's operating loss carryforwards offset by allowances on
deferred tax assets added during 1997.  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,        December 28, December 27,
                                                                                          1996                1997          1998
                                                                                      --------------       ------------  -----------

<S>                                                                                  <C>                  <C>            <C>
     Income tax expense (benefit) at statutory rate.......                               $ 1,997              $ (163)      $(87,438)

     State tax expense (benefit), net of federal benefit..                                   228                 (38)        (9,858)

     Permanent difference related to goodwill.............                                 1,138               1,138          1,124
     Other permanent differences..........................                                     -                  57            100
     Tax attributes of minority interest in
       losses of subsidiary...............................                                     -               1,574         17,985
     Change of valuation allowance........................                                (3,363)              2,405         78,308
                                                                                         -------              ------       --------
     Provision for income taxes...........................                               $     -              $4,973       $    221
                                                                                         =======              ======       ========
</TABLE> 
8.  National and Local Advertising Funds

     Prior to the Company's acquisition of its area developers in December 1997
(see Note 4), the Company administered a National Advertising Fund and Local
Advertising Funds (the "Funds") that provided comprehensive advertising and
sales promotion support for stores.  Contributions were made by all stores.
Consistent with SFAS No. 45, such funds were accounted for separately and were
not included in the financial statements of the Company because the Company
acted only as an agent for its franchisees in placing orders for advertising and
paying related invoices out of such accounts.  Since the Company converted its
loans to its area developers, the Company no longer maintains the Funds.

9.  Commitments and Contingencies

     The Company leases sites for its stores, commissaries and office space.
Lease terms are generally five to ten years with two or three five-year renewal
options.  Most of the leases contain escalation clauses and common area
maintenance charges.  The Company leases certain equipment to a vendor of frozen
bagel dough pursuant to an operating lease.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued

 
     The following is a schedule of future minimum rental payments that are
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 27, 1998 (in thousands of
dollars):

<TABLE>
<CAPTION>
                        Minimum             Net Minimum
                         Rental   Sublease    Rental
                        Payments  Proceeds   Payments
                        --------  --------  -----------
<S>                     <C>       <C>       <C>
          1999........  $ 27,349    $  846     $ 26,503
          2000........    26,422       659       25,763
          2001........    23,654       534       23,120
          2002........    19,751       432       19,319
          2003........    17,083       375       16,708
          Thereafter..    54,465     1,186       53,279
                        --------    ------     --------
                        $168,724    $4,032     $164,692
                        ========    ======     ========
</TABLE>

     Rental expense, net of sublease income, under operating leases was
approximately $1.6 million, $3.7 million and $28.8 million for fiscal 1996, 1997
and 1998, respectively.

     The Company has entered into agreements with certain vendors which provide
for minimum purchases over specified terms.  Such agreements call for
retroactive rate adjustments or cash settlement in the event of purchase
shortfalls.  Management believes that the ultimate settlement of such
commitments will not have a material impact on the consolidated financial
position or results of operations of the Company.

     Bagel Store Development Funding, L.L.C. ("Bagel Funding") has invested a
total of approximately $89.6 million, representing an approximately 21% equity
interest, in Bagel Partners.  The Company is the manager of Bagel Funding.
Bagel Funding has the right to require Bagel Partners or the Company to redeem
Bagel Funding's equity interest in Bagel Partners at a pre-determined formula
price based on store level cash flow of Bagel Partners in the event that, at any
time after December 5, 1999 and prior to June 5, 2001, the Company does not
consent to a public offering of such equity interests or the termination of
certain rights and obligations under franchise and license agreements between
the Company and Bagel Partners.  Such right becomes exercisable prior to
December 5, 1999 if there is a Change in Control (as defined in the Bagel
Partners partnership agreement) of the Company.  The Company or Bagel Partners
may pay the purchase price for such equity interests in cash, shares of the
Company's common stock or any combination thereof.

     The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business.  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.

     The Company and certain of its current and former officers and directors
have entered into an agreement to settle a class action lawsuit brought against
them in the United States District Court for the District of Colorado and in
state court in Jefferson County, Colorado.  The complaints allege, among other
things, that the Company and the other defendants violated Sections 11, 12(2)
and 15 of the Securities Act of 1933, as amended, and Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
thereunder, as well as certain similar provisions of Colorado state law.  The
settlement does not include the claims pending in the lawsuit against the
underwriters in the Company's public offerings of common stock in August 1996
and November 1996 (the "Underwriters") and against the Company's independent
public accountants.

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued

 
     The settlement of the litigation is being funded with proceeds of director
and officer liability insurance policies and is subject to certain customary
conditions, including final approval of the United States District Court for the
District of Colorado where the lawsuit is pending. As also required by the
settlement agreement, the United States Bankruptcy Court for the District of
Arizona which has jurisdiction over the Chapter 11 bankruptcy case of Boston
Chicken has granted relief from the automatic stay in effect in the Boston
Chicken bankruptcy case to permit the settlement to be funded with proceeds of
the insurance policies, which cover directors and officers of both Boston
Chicken and the Company.

     The Underwriters have requested that the Company indemnify them against any
damages, costs and expenses they may incur in the litigation (including amounts
paid in settlement thereof).  The Company's director and officer liability
insurance policies do not cover any amounts the Company may be obligated to pay
in connection with the indemnification claim.  Although the Company cannot
predict the outcome of the lawsuits against the Underwriters and the independent
public accountants, the Company believes that the complaints are without merit.

10.  Area Developer Financing

     Prior to the conversion of its loans to its area developers, the Company
offered partial financing to its area developers for use in expansion of their
operations.  Area developers were required to expend at least 75% of their
contributed capital toward developing stores prior to drawing on the revolving
loan facilities provided by the Company, up to a predetermined maximum amount
generally equal to four times the amount of the area developer's equity capital.
Interest on the area developer loans was set at the Reference Rate from time to
time (an average of 8.27% for 1996 and 8.44% for 1997, until consummation of the
loan conversions) plus 1%, and was payable each four-week period.  The area
developer loans were secured by a pledge of substantially all of the assets of
the area developer.

     The following table summarizes area developer financing activity of the
Company during 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
                                                        Fiscal Year Ended
                                                           December 28,
                                                               1997
                                                        ------------------
<S>                                                     <C>
     Area developer loan balances, beginning of year..          $ 140,754
     Loan advances....................................            359,218
     Loan repayments..................................           (169,171)
     Loan conversions.................................           (330,801)
                                                                ---------
     Area developer loan balances, end of year........          $       -
                                                                =========
</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.

11.  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.

                                       35
<PAGE>
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued

 
     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 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 raising
aggregate net proceeds of approximately $86.0 million.

     In December 1996, the Company completed an additional underwritten public
offering of 2,640,000 shares of its common stock 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.

     In February 1997, the Company sold 231,023 shares of common stock to one of
its area developers for an aggregate purchase price of $5,599,998.

     In April 1998, the Company sold 750,000 shares of common stock to Bagel
Partners for an aggregate purchase price of $2,924,500.  Such shares were
delivered by Bagel Partners to a third party in satisfaction of an obligation
incurred by a former area developer of the Company and predecessor of Bagel
Partners in connection with an acquisition by such entity.

     Preferred Stock.  In connection with the acquisition of the net assets of
Baltimore Bagel, Inc. in 1995, 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.

     Warrants.  In 1996, 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.  The Company has issued 345,300
shares of common stock in connection with the exercise of such warrants.  Also
in 1996, the Company 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.  The Company has issued 1,237,050 shares of common
stock in connection with the exercise of such warrants, all of which were
exercised at a price of $6.47 per share.

     In 1997, the Company issued warrants to purchase an aggregate of 100,000
shares of common stock of the Company to third parties at an exercise price of
$9.47 per share.  Such warrants expire on November 21, 2000.

     Stock Option Plans.  The Company has an amended and restated 1995 stock
option plan (the "1995 Plan"), under which options to purchase up to 3,650,000
shares of common stock may be granted to certain employees and officers of, and
consultants to, the Company and its subsidiaries.  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 1995 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.

     In addition, the Company has an amended and restated 1997 stock option plan
(the "1997 Plan"), under which options to purchase up to 7,350,000 shares of
common stock may be granted to employees and officers of, 

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 
and consultants to, the Company and its subsidiaries and affiliated companies.
The administrators of the 1997 Plan, consisting of certain members of the board
of directors (or, in the case of grants to "reporting persons" under Section
16(a) of the Exchange Act, the entire board of directors), have discretion with
respect to the terms of options granted under the 1997 Plan, including price,
term and vesting.

     The Company also maintains a restated 1997 ENBP stock option plan (the
"ENBP Plan"), under which options to purchase up to 813,146 shares of common
stock of the Company may be granted to employees and officers of, and
consultants to, the Company and its subsidiaries and affiliated companies.  The
shares subject to the ENBP Plan are shares of common stock previously issued and
sold by the Company to its area developers.  Pursuant to the loan conversions,
the Company assumed the obligations of the area developers with respect to
options granted on such shares and the shares are reflected as treasury stock in
the Company's consolidated financial statements.  The terms and provisions of
the ENBP Plan are substantially the same as those of the 1997 Plan.

     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 (but in no event more than
15,000 shares).  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 27, 1998, 29,224 shares had been granted
under the Directors Plan at a weighted average exercise price of $6.84 per
share.

     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 1996, 1997 and 1998 consistent with the provisions of SFAS No. 123,
the Company's net income (loss) and basic and diluted earnings (loss) per share
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended
                                                        -----------------------------------------------
                                                        December 29,     December 28,     December 27,
                                                            1996             1997             1998
                                                        ------------  ------------------  -------------
<S>                                                     <C>           <C>                 <C>
     Net income (loss) - as reported..................        $5,707            $(1,402)     $(203,927)
     Net income (loss) - pro forma....................         3,188             (5,161)      (208,825)
     Basic earnings (loss) per share - as reported....          0.29              (0.04)         (6.18)
     Basic earnings (loss) per share - pro forma......          0.16              (0.16)         (7.28)
     Diluted earnings (loss) per share - as reported..          0.27              (0.04)         (6.18)
     Diluted earnings (loss) per share - pro forma....          0.15              (0.16)         (7.28)
</TABLE>

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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 
     The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
                                               Fiscal Year Ended
                                ------------------------------------------------
                                December 29,      December 28,     December 27,
                                    1996              1997             1998
                                -------------  ------------------  -------------
<S>                             <C>            <C>                 <C>
     Expected volatility......          37.1%               45.0%          75.0%
     Risk-free interest rate..           6.3%                6.2%           5.6%
     Expected lives...........       5 years             5 years        5 years
     Dividend yield...........             0                   0              0
</TABLE>
     Activity under the option plans through December 27, 1998 was as follows:

<TABLE>
<CAPTION>
                                                                                               Weighted
                                                                                                Average
                                                                                                Option
                                                                         Number of               Price
                                                                          Shares               Per Share
                                                                   ------------------     -----------------
<S>                                                                  <C>                    <C>
 
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
  Granted..........................................................         2,327,327                 11.48
  Exercised........................................................          (269,904)                 6.20
  Canceled or Forfeited............................................          (579,611)                11.44
 
Outstanding as of December 28, 1997................................         4,955,887                  8.58
  Granted..........................................................         3,616,159                  3.69
  Exercised........................................................              (435)                 5.88
  Canceled or Forfeited............................................        (3,671,651)                 8.77
                                                                   ------------------     -----------------
Outstanding as of December 27, 1998................................         4,899,960                $ 4.82
                                                                   ==================     =================
Exercisable as of December 27, 1998................................         1,037,219                $ 6.49
                                                                   ==================     =================
</TABLE>

     In May 1998, the Stock Option Committee of the board of directors
authorized a stock option exchange program to provide employees the opportunity
to exchange existing options for new options priced at fair market value on the
date of exchange.  Approximately 2.4 million vested and unvested outstanding
options with original exercise prices ranging from $4.56 to $33.13 per share
were cancelled in exchange for the grant of the same number of new options with
an exercise price of $3.65 per share.  New options issued upon cancellation of
options originally granted in 1995 vest 50% on each of November 11, 1999 and May
11, 2000.  New options issued upon cancellation of options originally granted
after 1995 vest 33-1/3% on each of November 11, 1999, May 11, 2000 and May 11,
2001.

                                       38
<PAGE>
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 
     Information on options outstanding at December 27, 1998 is as follows:

<TABLE>
<CAPTION>
                                       
                                       Weighted                       Options Exercisable
                                       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>
      $0.01 - $3.00          75,000         9.93           $ 2.00           -          $    -
      $3.01 - $6.00       3,952,369         7.16             4.25     657,129            5.65
      $6.01 - $9.00         691,015         3.05             6.58     276,498            6.58
      $9.01 - $12.00        170,453         3.43            10.83      98,377           10.89
      $18.01 - $21.00         2,684         8.38            18.63       2,684           18.63
      $27.01 - $30.00         8,439         7.96            29.63       2,531           29.63
                          ---------         ----           ------   ---------          ------
      Total               4,899,960         6.49           $ 4.82   1,037,219          $ 6.49
                          =========         ====           ======   =========          ======
</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 the BCI Option.  As of December 27, 1998, Boston
Chicken had the right under the BCI Option to purchase 2,124,579 shares of the
Company's common stock at a weighted average price of $18.61.

     As of December 27, 1998, the Company had 14,196,865 shares of common stock
reserved for issuance upon exercise of options and warrants.

12.  Related Party Transactions

     Boston Chicken is the majority stockholder of the Company.  Boston Chicken
charged the Company amounts aggregating approximately $10.2 million, $4.2
million and $6.9 million in fiscal 1996, 1997 and 1998, respectively, for
software license, software maintenance, real estate, financial advisory and
accounting fees, and interest.

     Pursuant to Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," all of the Company's former area developers may have been
deemed to be related parties as a result of the parties' lending and franchise
relationships.  In addition, certain directors and officers and members of their
families had a direct or indirect equity interest in the Company's area
developers.  Total royalties and franchise-related fees earned from all area
developers were $19.9 million and $28.3 million in 1996 and 1997, respectively.
Total interest income earned from all area developers was $6.0 million and $21.6
million in 1996 and 1997, respectively.  The Company also sold to these
entities, stores, inventory, equipment and other miscellaneous net assets for
which it received approximately $49.9 million and $3.6 million in fiscal 1996
and 1997, respectively.

     Certain officers and directors of the Company are investors in Bagel
Funding and had invested an aggregate of approximately $1.7 million in Bagel
Funding at December 27, 1998.  The Company is the manager of Bagel Funding but
has no equity interest in Bagel Funding.  Bagel Funding paid $0.5 million during
1996 to the Company in its capacity as manager.

                                       39
<PAGE>
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 
     Certain directors and officers of the Company and members of their families
acquired equity interests in the Company's area developers in exchange for
promissory notes.  These equity interests were converted into equity interests
in Bagel Partners in December 1997 and were redeemed in exchange for
cancellation of such promissory notes (having an aggregate principal amount of
approximately $2.1 million) in January 1998.

     The Company holds notes receivable from a stockholder of $3.4 million.  The
notes receivable bear interest at the applicable Reference Rate plus 1%.
Principal and interest are due April 2001.  The notes are collateralized by
various assets.  The notes, which were carried on the Company's books at $3.4
million as of December 28, 1997, were written off in the second quarter of 1998.

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

13.  Impairment of Long-Lived Assets

     In 1997, the Company recognized an impairment loss on various long-lived
assets of $10.8 million, resulting primarily from the closure of a bagel dough
production facility and the conversion to a Company-controlled system.  The
assets subject to the impairment loss had a net book value of $11.6 million
before the impairment loss.

     In 1998, as part of the Company's ongoing evaluation, management made an
assessment of the recoverability of certain long-lived assets.  The assessment
was made after the Company had operated and controlled the Einstein Bros. Bagels
and Noah's New York Bagels stores for a period of one year.  Based primarily
upon the assessment of realized operating results, which were below those
anticipated upon the acquisition of the Company's area developers in December
1997, and current revenue growth and cash flow projections, the Company
determined that certain of its long-lived assets may be impaired.

     The assessment of possible impairment of long-lived assets, including
goodwill, allocable to individual stores took into account current and
anticipated store cash flow of the Company's Einstein Bros. Bagels and Noah's
New York Bagels stores.  For those store-level assets that were deemed to be
impaired, the long-lived assets were written down to estimated fair value.  Fair
value of the long-lived assets was based upon the net present value of the
estimated future cash flows from the Einstein Bros. Bagels and Noah's New York
Bagels stores.

     Long-lived intangible assets that are not allocable to individual stores
were also assessed for possible impairment.  Such assessment took into account
current and anticipated cash flow generated by the Einstein Bros. Bagels and
Noah's New York Bagels concepts.  Based upon the limited growth expectations for
the Noah's New York Bagels concept, the cash flow generated by the Noah's New
York Bagels stores, the limited potential royalty income, and estimated current
market value of the Noah's New York Bagels concept, the unamortized intangible
long-lived assets allocable to the Noah's New York Bagels concept were written
off.  Based on a similar assessment, the long-lived intangible assets allocable
to the Einstein Bros. Bagels concept were not deemed to be impaired.

     As a result of the Company's assessment, the Company recorded an impairment
of intangible assets and identifiable long-lived assets aggregating $212.4
million in fiscal year 1998, consisting of the following amounts:  $125.5
million - goodwill, $20.4 million - trademarks and copyrights, $3.7 million -
capitalized recipes and $62.8 million - property and equipment.  Of these
amounts, $138.8 million of impairment of long-lived assets, including 

                                       40
<PAGE>
                  EINSTEIN/NOAH BAGEL CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
 
goodwill, is attributable to the store level assessment. The remaining $73.6
million of impairment is attributable to the goodwill and other intangibles
allocable to the Noah's New York Bagels concept.

                                       41
<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 29, 1996, December 28, 1997 and December 27, 1998, and for the
fiscal years ended December 29, 1996, December 28, 1997 and December 27, 1998
included in this Form 10-K, and have issued our report thereon dated February
17, 1999.  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
February 17, 1999

                                       42
<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 27, 1998:
  Allowance for Doubtful Accounts........           $810,000       $                             $(27,535)             $782,465
Fiscal year ended December 28, 1997:
  Allowance for Doubtful Accounts........                                   810,000*                    -               810,000
Fiscal year ended December 29, 1996:
  Allowance for Doubtful Accounts........             81,000                      -               (81,000)                    -
</TABLE>

*Of such amount, $0.8 million was charged to goodwill as the result of
acquisitions made by the Company.

                                       43
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                       44
<PAGE>
 
                                   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 1999 (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.

     Compliance with Section 16(a) of the Exchange Act.  The information
appearing under the caption "Principal Stockholders and Securities Ownership of
Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement is incorporated herein by reference.

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
"Relationship 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 to 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 28, 1997 and December 27, 1998;
      C. Consolidated Statements of Operations for the fiscal years ended
         December 29, 1996, December 28, 1997 and December 27, 1998;
      D. Consolidated Statements of Stockholders' Equity for the fiscal years
         ended December 29, 1996, December 28, 1997 and December 27, 1998;
      E. Consolidated Statements of Cash Flows for the fiscal years ended
         December 29, 1996, December 28, 1997 and December 27, 1998; and
      F. Notes to Consolidated Financial Statements.

                                       45
<PAGE>
 
   2. 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.

   3. 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) The Company's Amended and Restated 1997 Stock Option Plan.
   (iv)  The Company's Restated 1997 ENBP Stock Option Plan.
   (v)   Letter Agreement dated March 25, 1998 between the Company and David G.
         Stanchak.
   (vi)  Termination Agreement dated as of May 1, 1998 between the Company and
         Jeffrey L. Butler.
   (vii) Employment Agreement dated September 11, 1998 between the Company and
         Robert M. Hartnett (the "Hartnett Agreement").
   (viii)Amendment to Hartnett Agreement dated January 14, 1999.
   (ix)  Severance Agreement dated May 8, 1998 between the Company and Paul J.B.
         Murphy III.
   (x)   Severance Agreement dated May 8, 1998 between the Company and W. Eric
         Carlborg.
   (xi)  Severance Agreement dated May 8, 1998 between the Company and Gail A.
         Lozoff.
   (xii) 1998 Staff Bonus Plan.

(b)  Reports on Form 8-K

     During the fourth quarter of fiscal 1998, the Company filed three reports
on Form 8-K dated October 5, 1998, October 13, 1998 and December 2, 1998.

     The report on Form 8-K dated October 5, 1998 reported under Item 5. (Other
Events) Boston Chicken's filing for protection under Chapter 11 of the federal
bankruptcy laws and Boston Chicken's termination of its engagement with Morgan
Stanley & Co., who had previously been engaged by Boston Chicken to advise and
assist Boston Chicken in connection with the sale of all or a portion of the
shares of common stock of the Company owned by Boston Chicken.

     The report on Form 8-K dated October 13, 1998 reported under Item 5. (Other
Events) that the Company had been notified by the Nasdaq Stock Market that it
had determined that the Company was not in compliance with certain requirements
for continued listing of its common stock on the Nasdaq National Market.

     The report on Form 8-K dated December 2, 1998 reported under Item 5. (Other
Events) that the Company had entered into a memorandum of understanding setting
forth an agreement in principle to settle certain outstanding securities
litigation pending against the Company.

                                       46
<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 26, 1999

                                  EINSTEIN/NOAH BAGEL CORP.



                                  By:  /s/ Robert M. Hartnett
                                  --------------------------------------------
                                                   Robert M. Hartnett
                                                 Chairman of the Board,
                                         Chief Executive Officer and President
                                             (Principal Executive Officer)

     Pursuant to the requirements 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 on March 26, 1999.

<TABLE>
<CAPTION>
                       Signature                                                   Title
                       ---------                                                   -----
<S>                                                      <C>
          /s/ Robert M. Hartnett                         Chairman of the Board, Chief Executive Officer,
-------------------------------------------------------  President and Director
              Robert M. Hartnett                         (Principal Executive Officer)

          /s/ W. Eric Carlborg                           Chief Financial Officer
-------------------------------------------------------  (Principal Financial Officer)
              W. Eric Carlborg

          /s/ Paula E. Manley                            Vice President - Operations Finance and Controller
-------------------------------------------------------  (Principal Accounting Officer)
              Paula E. Manley

          /s/ Gail A. Lozoff                             Chief Marketing Officer and Director
-------------------------------------------------------
              Gail A. Lozoff

          /s/ J. Michael Jenkins                         Director
-------------------------------------------------------
              J. Michael Jenkins

          /s/ John H. Muehlstein, Jr.                    Director
-------------------------------------------------------
              John H. Muehlstein, Jr.

          /s/ David G. Stanchak                          Director
-------------------------------------------------------
              David G. Stanchak
</TABLE>

                                       47
<PAGE>
 
                                   EXHIBITS
                                        
<TABLE>
<CAPTION>
      Exhibit No.                                       Description of Exhibit +
-----------------------     -------------------------------------------------------------------------------
 
<S>                           <C>
   3.1                        Restated Certificate of Incorporation of the Company ("Certificate of
                              Incorporation") (incorporated by reference to Exhibit 3 to the Company's
                              Quarterly Report on Form 10-Q 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. 333-28941)).
 
   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).
 
   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).
 
   4.9                        Indenture dated as of May 29, 1997 by and between the Company and Bankers
                              Trust Company, as Trustee, which includes as Exhibits the forms of Debenture
                              for the Company's 7-1/4% Convertible Subordinated Debentures due 2004 (the
                              "Debenture Indenture") (incorporated by reference to Exhibit 4.1 to the
                              Company's Current Report on Form 8-K dated May 22, 1997).
 
   4.10                       Registration Rights Agreement dated May 22, 1997 by and between the Company
                              and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
                              Alex Brown & Sons Incorporated, and Morgan Stanley & Co. Incorporated
                              (incorporated by reference to Exhibit 4.2 to the Company's Current Report on
                              Form 8-K dated May 22, 1997).
</TABLE> 

+ In the 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 No.                                      Description of Exhibit +
--------------------------    ----------------------------------------------------------------------------
<S>                           <C> 
   10.1(a)                    Amended and Restated Secured Credit Agreement ("Secured Credit Agreement")
                              dated as of November 21, 1997 among the Company, Bank of America National
                              Trust and Savings Association ("Bank of America"), as Agent and Issuing
                              Lender, General Electric Capital Corporation, as Co-Agent and the Lenders
                              named therein (incorporated by reference to Exhibit 10.6 to the Company's
                              Current Report on Form 8-K dated November 21, 1997).
 
   10.1(b)                    First Amendment and Waiver dated March 27, 1998 to Secured Credit Agreement
                              (incorporated by reference to Exhibit 10.4 (b) to the Company's 1997 Annual
                              Report on Form 10-K.)

   10.1(c)                    Second Amendment and Waiver dated October 4, 1998 to Secured Credit
                              Agreement (incorporated by reference to Exhibit 10.1 to the Company's
                              Quarterly Report on Form 10-Q for the quarter ended October 4, 1998).
 
   10.1(d)                    Third Amendment and Waiver dated January 29, 1999 to Secured Credit
                              Agreement.
 
   10.2                       Amended and Restated 1995 Stock Option Plan of the Company.
 
   10.3                       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)).
 
   10.4                       Amended and Restated 1997 Stock Option Plan of the Company.
 
   10.5                       Restated 1997 ENBP Stock Option Plan of the Company (incorporated by
                              reference to Exhibit 4.12 to the Company's Registration Statement on Form
                              S-8 (Reg. No. 333-44353)).
 
   10.6(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)).
 
   10.6(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)).
 
   10.6(c)                    Second Amendment dated June 25, 1998 to Amended and Restated Accounting and
                              Administrative Services Agreement between Boston Chicken and the Company
                              (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report
                              on Form 10-Q for the quarter ended July 12, 1998).
</TABLE> 

+ In the 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 No.                                        Description of Exhibit +
--------------------------    ------------------------------------------------------------------------------
<S>                           <C> 
   10.7(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)).
 
   10.7(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)).
 
   10.7(c)                    Second Amendment to the Amended and Restated Computer and Communications
                              Systems Services Agreement between Boston Chicken and the Company
                              (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report
                              on Form 10-Q for the quarter ended July 12, 1998).

   10.8++                     Amended and Restated Project and Approved Supplier Agreement dated May 1,
                              1998 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 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
                              ended July 12, 1998).
 
   10.9                       Amended and Restated Option Agreement dated May 1, 1998 among Harlan Bagel
                              Supply, the Harlans and the Company (incorporated by reference to Exhibit
                              10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended
                              July 12, 1998).
 
   10.10                      Amended and Restated Right of First Refusal Agreement dated May 1, 1998
                              among Harlan Bakeries, the Harlans and the Company (incorporated by
                              reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
                              the quarter ended July 12, 1998).
 
   10.11                      Sixth Amended and Restated Limited Liability Company Agreement of Bagel
                              Store Development Funding, L.L.C. ("Bagel Funding") dated as of December 5,
                              1997 (incorporated by reference to Exhibit 10.16 to the Company's 1997
                              Annual Report on Form 10-K).
 
   10.12(a)                   Limited Partnership Agreement of Bagel Partners (incorporated by reference
                              to Exhibit 10.2 to the Company's Current Report on Form 8-K dated November
                              21, 1997).
 
 
   10.12(b)                   First Amendment dated March 25,1998 to Limited Partnership Agreement of
                              Bagel Partners (incorporated by reference to Exhibit 10.18(b) to the
                              Company's 1997 Annual Report on Form 10-K).
</TABLE> 
 
+ In the 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-3
<PAGE>
<TABLE> 
       Exhibit No.                                        Description of Exhibit +
-------------------------     --------------------------------------------------------------------------------
<S>                           <C> 
   10.13                      Loan Agreement dated December 5, 1997 by and between the Company and Bagel
                              Partners (incorporated by reference to Exhibit 10.3 to the Company's Current
                              Report on Form 8-K dated November 21, 1997).
 
   10.14                      Amended and Restated Development Agreement dated December 5, 1997 by and
                              between the Company and Bagel Partners ("Development Agreement")
                              (incorporated by reference to Exhibit 10.4 to the Company's Current Report
                              on Form 8-K dated November 21, 1997).
 
   10.15                      Addendum No. 2 to Development Agreement dated July 25, 1998.
 
   10.16                      Addendum No. 3 to Development Agreement dated February 3, 1989.
 
   10.17                      Services Agreement dated as of December 15, 1997 by and between the Company
                              and Bagel Partners (incorporated by reference to Boston Chicken's Current
                              Report on Form 8-K dated December 5, 1997).
 
   10.18                      Office Sublease dated as of December 20, 1996 between the Company and Boston
                              Chicken (incorporated by reference to Exhibit 10.23 to the Company's 1997
                              Annual Report on Form 10-K).
 
   10.19                      First Amendment to Office Sublease effective as of May 1, 1998 between the
                              Company and Boston Chicken (incorporated by reference to Exhibit 10.7 of the
                              Company's Quarterly Report on Form 10-K for the quarter ended July 12, 1998).
 
   10.20                      Letter Agreement dated March 25, 1998 between the Company and David G.
                              Stanchak (incorporated by reference to Exhibit 10.4 to the Company's
                              Quarterly Report on Form 10-Q for the quarter ended April 19, 1998.)
 
   10.21                      Termination Agreement dated as of May 1, 1998 between the Company and
                              Jeffrey L. Butler (incorporated by reference to Exhibit 10.5 to the
                              Company's Quarterly Report on Form 10-Q for the quarter ended April 19,
                              1998).
 
   10.22(a)                   Employment Agreement dated September 11, 1998 between the Company and Robert
                              M. Hartnett ("Hartnett Agreement") (incorporated by reference to Exhibit
                              10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
                              October 4, 1998).
 
   10.22(b)                   Amendment to Hartnett Agreement dated January 14, 1999.
 
   10.23                      Severance Agreement dated May 8, 1998 between the Company and Paul J.B.
                              Murphy III.
 
   10.24                      Severance Agreement dated May 8, 1998 between the Company and W. Eric
                              Carlborg (incorporated by reference to Exhibit 10.11 to the Company's
                              Quarterly Report on Form 10-Q for the quarter ended July 12, 1998).
</TABLE> 

+ In the 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-4
<PAGE>
<TABLE> 
<CAPTION>  
       Exhibit No.                                       Description of Exhibit +
-------------------------     -------------------------------------------------------------------------------
<S>                           <C> 
   10.25                      Severance Agreement dated May 8, 1998 between the Company and Gail A. Lozoff
                              (incorporated by reference to the Company's Quarterly Report on Form 10-Q
                              for the quarter ended July 12, 1998).
 
   10.26                      Concurrent Offering Purchase Agreement (included in Exhibit 4.7).
 
   10.27                      1999 Staff Bonus Plan.
 
   12                         Statement regarding Computation of Ratios.
 
   21                         Subsidiaries of the Company.
 
   23.1                       Consent of Arthur Andersen LLP with respect to the Audited Consolidated
                              Financial Statements of the Company and the Supplemental Schedules Contained
                              in Part IV.
 
   27.1                       Financial Data Schedule for Fiscal Year Ended December 27, 1998.
</TABLE>

+ In the 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