<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[X]      Quarterly report pursuant to Section 13 or 15(d) of the Securities and
         Exchange Act of 1934 For the quarterly period ended March 31, 2001

                                       or

[ ]      Transition report pursuant to Section 13 or 15(d) of the Securities and
         Exchange Act of 1934 For the transition period from          to
                                                             --------    -------

                           Commission File No. 0-11271
                                               -------

                             WALL STREET DELI, INC.
             (Exact name of registrant as specified in its Charter)


                 DELAWARE                             63-0514240
         (State of Incorporation)               (IRS Employer I.D. No.)

                        One Independence Plaza, Suite 100
                            Birmingham, Alabama 35209
                    (Address of principal executive offices)

                                 (205) 870-0020
                         (Registrant's telephone number)

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

         Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X]  No [ ]

         Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
               Class                             Outstanding at  May 10, 2001
   ----------------------------                  ----------------------------
   <S>                                           <C>
   Common Stock, $.05 Par Value                            2,908,477
</TABLE>
<PAGE>   2

                                      INDEX


<TABLE>
<CAPTION>
                                                                                             Page No.
                                                                                             --------
<S>      <C>                                                                                 <C>
PART I:  FINANCIAL INFORMATION

         ITEM 1:  Financial Statements (unaudited)........................................       1

                      Consolidated Balance Sheets.........................................       2

                      Consolidated Statements of Operations...............................       4

                      Consolidated Statements of Stockholders' Equity.....................       5

                      Consolidated Statements of Cash Flows...............................       6

                      Notes to Consolidated Financial Statements..........................       7

         ITEM 2:   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations....................................      12


PART II: OTHER INFORMATION

         ITEM 6:   Exhibits and Reports on Form 8-K ......................................      19

         SIGNATURES.......................................................................      19
</TABLE>
<PAGE>   3


                                  INTRODUCTION

         As indicated in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Notes 1, 8 and 13 of the financial
statements, the Company has experienced net losses aggregating in excess of $10
million from 1996 through 2000 and is continuing to experience increasing losses
and liquidity issues through the first three quarters of fiscal 2001. In
particular, the Company is currently heavily dependent on its short-term bank
financing to fund negative cash flows, and it is not known whether or how long
the lender will continue to grant additional extensions and/or waivers of
noncompliance with financial covenants. See Note 8 to the financial statements.

         As described in Note 1 to the financial statements, the Company is
actively pursuing alternatives to improve liquidity, including the sale,
franchising or closing of up to twenty additional restaurants, and other
strategic alternatives. However, if these initiatives are not successful, the
Company may be unable to continue as a going concern.

                        PART I:   FINANCIAL INFORMATION

ITEM I:  FINANCIAL STATEMENTS

         The financial statements listed below are included on the following
         pages of this Report on Form 10-Q:

                  Consolidated Balance Sheets at March 31, 2001 (unaudited) and
                  July 1, 2000.

                  Consolidated Statements of Operations (unaudited) for the
                  thirteen week and thirty-nine week periods ended March 31,
                  2001 and April 1, 2000.

                  Consolidated Statements of Stockholders' Equity (unaudited)
                  for the thirteen week and thirty-nine week periods ended March
                  31, 2001 and April 1, 2000.

                  Consolidated Statements of Cash Flows (unaudited) for the
                  thirty-nine week periods ended March 31, 2001 and April 1,
                  2000.

                  Notes to Consolidated Financial Statements (unaudited).


                                       1
<PAGE>   4

                             WALL STREET DELI, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       March 31, 2001        July 1, 2000
                                                                                        (unaudited)
                                                                                       --------------        ------------
<S>                                                                                    <C>                   <C>
Assets
Current
     Cash and cash equivalents                                                          $    564,090         $    761,380
     Accounts and notes receivable, net (Notes 3 & 6)                                      1,274,101            1,341,829
     Inventories (Note 4)                                                                    500,818              549,009
     Deferred tax assets (Note 7)                                                            296,000              296,000
     Prepaid rent                                                                            676,509               53,580
     Assets held for sale (Note 10)                                                          393,759                   --
     Other                                                                                   150,118              153,328
                                                                                        ------------         ------------
Total current assets                                                                       3,855,395            3,155,126
                                                                                        ------------         ------------
Equipment and improvements
     Equipment and fixtures                                                               12,342,540           15,774,120
     Leasehold improvements                                                                9,613,669           12,462,075
                                                                                        ------------         ------------
                                                                                          21,956,209           28,236,195
Less accumulated depreciation and amortization                                           (17,073,903)         (20,918,060)
                                                                                        ------------         ------------
Net equipment and improvements                                                             4,882,306            7,318,135
                                                                                        ------------         ------------
Other
     Long-term portion of notes receivable (Notes 3 & 6)                                     782,649              891,769
     Deferred tax assets (Note 7)                                                          2,218,900            2,580,000
                                                                                        ------------         ------------
Total other assets                                                                         3,001,549            3,471,769
                                                                                        ------------         ------------
                                                                                        $ 11,739,250         $ 13,945,030
                                                                                        ------------         ------------
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).


                                       2
<PAGE>   5

                             WALL STREET DELI, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       March 31, 2001        July 1, 2000
                                                                                        (unaudited)
                                                                                       --------------        ------------
<S>                                                                                    <C>                   <C>
Liabilities and Stockholders' Equity
Current Liabilities
     Bank overdrafts                                                                    $  3,032,558         $  1,075,620
     Notes payable (Note 8)                                                                2,275,000            1,427,392
     Accounts payable                                                                      1,118,337            1,405,267
     Accruals:
          Taxes other than income                                                            536,222              672,405
          Compensation                                                                       394,782              463,639
          Rent                                                                               358,559              487,019
          Workers' compensation                                                             (260,988)              29,962
          Other insurance                                                                    225,000              225,000
          Miscellaneous                                                                      114,117              120,876
                                                                                        ------------         ------------
Total current liabilities                                                                  7,793,587            5,907,180
                                                                                        ------------         ------------
Commitments and contingencies (Note 12)
Stockholders' equity
     Common stock, $.05 par - shares authorized
          20,000,000 shares; issued 3,426,802                                                171,341              171,341
     Additional paid-in capital                                                           10,805,322           10,805,322
     Accumulated deficit                                                                  (4,783,909)            (691,722)
                                                                                        ------------         ------------
                                                                                           6,192,754           10,284,941
Treasury stock, at cost, 518,325 shares                                                   (2,247,091)          (2,247,091)
                                                                                        ------------         ------------
Total stockholders' equity                                                                 3,945,663            8,037,850
                                                                                        ------------         ------------
                                                                                        $ 11,739,250         $ 13,945,030
                                                                                        ============         ============
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).


                                       3
<PAGE>   6

                             WALL STREET DELI, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  For the thirteen week               For the thirty-nine week
                                                                      periods ended                         periods ended
                                                             -------------------------------       -------------------------------
                                                               March 31,          April 1,          March 31,           April 1,
                                                                 2001               2000               2001               2000
                                                             ------------       ------------       ------------       ------------
<S>                                                          <C>                <C>                <C>                <C>
Revenues
     Net sales                                               $ 10,469,706       $ 12,557,332       $ 32,147,523       $ 37,583,673
     Franchise revenues                                            74,298             42,633            203,486            210,534
                                                             ------------       ------------       ------------       ------------
Total revenues                                                 10,544,004         12,599,965         32,351,009         37,794,207
                                                             ------------       ------------       ------------       ------------
Costs of restaurant operations
     Food and paper costs                                       3,668,375          4,178,310         11,090,794         13,136,330
     Labor                                                      2,807,967          3,269,509          8,467,082          9,587,078
     Store expenses                                             3,242,974          3,782,136          9,788,958         10,688,283
     Restaurant depreciation                                      456,356            561,837          1,531,046          1,813,176
     Franchise expenses                                           101,624             35,960            342,890            113,928
                                                             ------------       ------------       ------------       ------------
Total cost of restaurant operations                            10,277,296         11,827,752         31,220,770         35,338,795
                                                             ------------       ------------       ------------       ------------
Restaurant operating income (loss)                                266,708            772,213          1,130,239          2,455,412
                                                             ------------       ------------       ------------       ------------
Administrative expenses
     Division level                                               347,923            323,575          1,130,234            994,724
     Catering sales                                               136,213            137,240            383,807            471,566
     Corporate                                                    852,149            680,701          2,681,658          1,943,733
                                                             ------------       ------------       ------------       ------------
Total general and administrative                                1,336,285          1,141,516          4,195,699          3,410,023
Impairment of long-lived assets (Note 1)                          282,531                 --            581,570                 --
                                                             ------------       ------------       ------------       ------------
Operating loss                                                 (1,352,108)          (369,303)        (3,647,030)          (954,611)
Other income (expense)
     Interest expense                                             (56,952)           (19,464)          (135,013)           (55,173)
     Gain (loss) from sale of assets                              (19,375)            (3,164)            50,956            (33,476)
                                                             ------------       ------------       ------------       ------------
Total other income (expense)                                      (76,327)           (22,628)           (84,057)           (88,649)
                                                             ------------       ------------       ------------       ------------
Loss before taxes                                              (1,428,435)          (391,931)        (3,731,087)        (1,043,260)
Taxes on income (Note 7)                                          361,100                 --            361,100                 --
                                                             ------------       ------------       ------------       ------------
Net loss                                                     $ (1,789,535)      $   (391,931)      $ (4,092,187)      $ (1,043,260)
                                                             ============       ============       ============       ============
Basic and diluted loss per share                             $       (.62)      $      (0.14)      $      (1.41)      $      (0.36)
                                                             ============       ============       ============       ============
Weighted average number of common
     shares outstanding (Note 5)                                2,908,477          2,902,770          2,908,477          2,898,598
                                                             ------------       ------------       ------------       ------------
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).


                                       4
<PAGE>   7


                             WALL STREET DELI, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                               Common Stock                                                     Treasury Stock
                                         -------------------------                                         ------------------------
                                             Number                      Additional                         Number
                                                 of                         Paid-in      Accumulated            of
                                             Shares         Amount          Capital          Deficit        Shares           Amount
                                          ---------       --------      -----------      -----------       -------      -----------
<S>                                       <C>             <C>           <C>              <C>               <C>          <C>
Balance, July 3, 1999 .............       3,414,802       $170,740      $10,787,369      $ 1,189,940       518,325      $(2,247,091)
Net loss for the quarter ..........              --             --               --         (201,228)           --               --
                                          ---------       --------      -----------      -----------       -------      -----------

Balance, October 2, 1999 ..........       3,414,802       $170,740      $10,787,369      $   988,712       518,325      $(2,247,091)
Net loss for the quarter ..........              --             --               --         (450,101)           --               --
                                          ---------       --------      -----------      -----------       -------      -----------

Balance, January 1, 2000 ..........       3,414,802       $170,740      $10,787,369      $   538,611       518,325      $(2,247,091)
Options exercised .................           8,750            438            9,362
Shares issued under stock
      purchase plan ...............           3,250            163            8,591
Net loss for quarter ..............                                                         (391,931)
                                          ---------       --------      -----------      -----------       -------      -----------
Balance, April 1, 2000 ............       3,426,802       $171,341      $10,805,322      $   146,680       518,325      $(2,247,091)
                                          =========       ========      ===========      ===========       =======      ===========

Balance, July 1, 2000 .............       3,426,802       $171,341      $10,805,322      $  (691,722)      518,325      $(2,247,091)
Net loss for the quarter ..........              --             --               --         (176,390)           --               --
                                          ---------       --------      -----------      -----------       -------      -----------

Balance, September 30, 2000 .......       3,426,802       $171,341      $10,805,322      $  (868,112)      518,325      $(2,247,091)
Net loss for the quarter ..........              --             --               --       (2,126,262)           --               --
                                          ---------       --------      -----------      -----------       -------      -----------

Balance, December 30, 2000 ........       3,426,802       $171,341      $10,805,322      $(2,994,374)      518,325      $(2,247,091)
Net loss for the quarter ..........              --             --               --       (1,789,535)           --               --
                                          ---------       --------      -----------      -----------       -------      -----------

Balance, March 31, 2001 ...........       3,426,802       $171,341      $10,805,322      $(4,783,909)      518,325      $(2,247,091)
                                          =========       ========      ===========      ===========       =======      ===========
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).


                                       5
<PAGE>   8

                             WALL STREET DELI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            For the thirty-nine week
                                                                                                  periods ended
                                                                                        ---------------------------------
                                                                                          March 31,            April 1,
                                                                                            2001                 2000
                                                                                        ------------         ------------
<S>                                                                                     <C>                  <C>
Operating activities
     Net loss                                                                           $ (4,092,187)        $ (1,043,260)
     Adjustments to reconcile net loss
          to net cash used in operating activities:
               Depreciation and amortization                                               1,632,864            1,890,471
               Loss (gain) on sale of property and equipment                                 (50,956)              33,476
               Change in allowance for doubtful accounts                                     (45,195)                  --
               Impairment for long-lived assets                                              581,570                   --
               Provision for deferred income taxes                                           361,100                   --
               Changes in operating assets and liabilities:
                        Receivables (Note 3)                                                 (42,953)             (11,879)
                        Inventories                                                           48,191               12,331
                        Prepaid expenses and other                                          (619,719)             540,013
                        Accounts payable                                                    (286,930)            (872,210)
                        Deferred revenue                                                          --               43,085
                        Accruals                                                            (631,209)             (38,307)
                                                                                        ------------         ------------
Cash (used in) provided by operating activities                                           (3,145,424)             553,720
                                                                                        ------------         ------------
Investing activities
     Payments for purchase of equipment and improvements                                    (172,221)            (424,186)
     Proceeds from sale of equipment and improvements                                         86,813                1,571
     Proceeds from notes receivable                                                          158,996              133,479
     Increase (decrease) in officer loans for split-dollar life
          insurance policies                                                                  70,000              (70,000)
                                                                                        ------------         ------------
Cash provided by (used in) investing activities                                              143,588             (359,136)
                                                                                        ------------         ------------
Financing activities
     Proceeds from employee stock purchase plan                                                   --               18,554
     Net borrowings (payments) under line of credit                                          847,608              (34,130)
     Increase (decrease) in bank overdraft, net                                            1,956,938             (180,337)
                                                                                        ------------         ------------
Cash provided by (used in) financing activities                                            2,804,546             (195,913)
                                                                                        ------------         ------------
Net decrease in cash for the period                                                         (197,290)              (1,329)
     Cash and cash equivalents, beginning of period                                          761,380            1,305,662
                                                                                        ------------         ------------
     Cash and cash equivalents, end of period                                           $    564,090         $  1,304,333
                                                                                        ------------         ------------
Supplemental disclosures of cash flow information
     Cash paid during the period for:
          Interest                                                                      $    135,013         $     55,173
          Income taxes                                                                  $         --         $         --
</TABLE>

See accompanying notes to consolidated financial statements (unaudited).


                                       6
<PAGE>   9

                             WALL STREET DELI, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       The accompanying financial statements have been prepared on a going
         concern basis, which contemplates the realization of assets and the
         satisfaction of liabilities in the normal course of business. From 1996
         through 2000, the Company experienced net losses aggregating
         approximately $10.4 million, which included restructuring charges and
         asset impairment losses of $8.7 million. For the first three quarters
         of fiscal 2001, there was a net loss of approximately $4.1 million,
         which includes a write-down for impaired assets of approximately $0.6
         million and a valuation allowance of approximately $0.4 million
         provided against deferred tax assets. As a result, at March 31, 2001
         current liabilities exceeded current assets by $3.5 million, excluding
         $0.4 million of assets held for resale. These factors, among others,
         may indicate that the Company will be unable to continue as a going
         concern.

         The financial statements do not include any adjustments relating to the
         recoverability and classification of recorded asset amounts or the
         amounts and classification of liabilities that might be necessary
         should the Company be unable to continue as a going concern. The
         Company's continuation as a going concern depends upon its ability to
         generate sufficient cash flow to meet its obligations on a timely
         basis, comply with the terms and covenants of its financing agreements,
         obtain additional financing or refinancing as may be required, and
         ultimately to attain profitable operations. The Company is continuing
         its efforts to obtain additional funds so that it can meet its
         obligations and sustain operations, including the sale of or
         franchising of eight restaurants (Note 10). There can be no assurance
         the eight stores reported as held for sale will be sold or sold on
         satisfactory terms or that additional financing or refinancing will
         have acceptable and/or favorable terms.

         In light of the factors discussed above, the Company is actively
         pursuing all of its strategic alternatives, including additional
         closings of unprofitable units, sales of certain of the Company's
         assets and/or a potential restructuring, or recapitalization of the
         Company.

         In the opinion of the management of the Company, the accompanying
         unaudited consolidated financial statements contain all normal
         recurring adjustments necessary to present fairly the financial
         position as of March 31, 2001, and the results of operations, changes
         in stockholders' equity and cash flows for the thirteen week periods
         and thirty-nine week periods ended March 31, 2001 and April 1, 2000,
         respectively.

         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. Estimates also affect the reported
         amounts of revenues and expenses during the reporting period. Actual
         results could differ from those estimates.


                                       7
<PAGE>   10

2.       The results of operations for the thirty-nine week periods ended March
         31, 2001 and April 1, 2000 are not necessarily indicative of the
         results to be expected for the full year. Certain amounts during the
         first three quarters of fiscal 2000 have been reclassified to conform
         to the current year presentation.

3.       Accounts and notes receivable consists of:

<TABLE>
<CAPTION>
                                                                      March 31,            July 1,
                                                                        2001                 2000
                                                                    ------------         ------------
<S>                                                                 <C>                  <C>
Accounts receivable                                                 $    527,054         $    559,097
Notes receivable                                                         462,566              498,566
Assets of business transferred under contractual arrangement             572,000              656,000
Other receivables                                                        758,804              828,804
                                                                    ------------         ------------
                                                                       2,320,424            2,542,467
Less allowance for doubtful accounts                                    (263,674)            (308,869)
                                                                    ------------         ------------
                                                                       2,056,750            2,233,598
Less non-current portion of notes receivable                            (782,649)            (891,769)
                                                                    ------------         ------------
                                                                    $  1,274,101         $  1,341,829
                                                                    ============         ============
</TABLE>

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

5.       Earnings per share ("EPS") have been computed in accordance with the
         provisions of SFAS 128. Basic EPS excludes dilution and is computed by
         dividing income available to common stockholders by the weighted
         average number of shares outstanding during the respective periods.
         Diluted EPS reflects the potential dilution that could occur if
         securities or other contracts to issue common stock are exercised or
         converted into common stock or result in the issuance of common stock
         that shares in the earnings of the Company.

         The effect of shares issuable under the Company's stock option plan are
         excluded for the thirteen week periods and thirty-nine week periods
         ended March 31, 2001 and April 1, 2000 as the effect would be
         anti-dilutive. The assumed exercise of the common stock options is not
         included in the computation of common stock equivalents for the
         thirteen week period and thirty-nine week periods ended March 31, 2001
         because all the common options outstanding were at prices which exceed
         the common stock market price.


                                       8
<PAGE>   11

         Earnings per share has been calculated using the following:

<TABLE>
<CAPTION>
                                                                                              For the Thirteen
                                                                                              Week Periods Ended
                                                                                        ------------------------------
                                                                                        March 31,             April 1,
                                                                                          2001                  2000
                                                                                        ---------            ---------
<S>                                                                                     <C>                  <C>
 Weighted average number of common
         shares used for basic EPS                                                      2,908,477            2,902,770
 Effect of dilutive stock options                                                              --                   --
Weighted average number of common shares and
     dilutive potential common stock used in diluted EPS
                                                                                        ---------            ---------
                                                                                        2,908,477            2,902,770
                                                                                        =========            =========
<CAPTION>
                                                                                              For the Thirteen
                                                                                              Week Periods Ended
                                                                                        ------------------------------
                                                                                        March 31,             April 1,
                                                                                          2001                  2000
                                                                                        ---------            ---------
<S>                                                                                     <C>                  <C>
 Weighted average number of common
         shares used for basic EPS                                                      2,908,477            2,898,598
 Effect of dilutive stock options                                                              --                   --
Weighted average number of common shares and
     dilutive potential common stock used in diluted EPS
                                                                                        ---------            ---------
                                                                                        2,908,477            2,898,598
                                                                                        =========            =========
</TABLE>

6.       Effective December 31, 1998, the Company transferred leasehold
         improvements and equipment and subleased five stores in the Los
         Angeles, California area to California Fresh Deli, Inc. ("CFD"). CFD
         entered into a franchise agreement with the Company to operate the five
         stores and a management agreement to manage for the Company a sixth
         store also in the Los Angeles area for the remainder of the lease term
         which ended in September 1999.

         The Company received approximately $41,000 in cash and a $800,000
         non-interest bearing note, payable in monthly installments of $12,000
         from June 1999 through November 2000, then at the greater of $13,333 or
         eight percent of monthly revenues thereafter until the note is repaid.
         The realization of the note is dependent on future operations of the
         five stores and has been reported as "Assets of business transferred
         under contractual arrangement" excluding a valuation allowance of
         approximately $129,000 which is classified as part of the allowance for
         doubtful accounts. Franchise fees payable by CFD under the franchise
         agreement have been deferred until the note has been paid in full.

7.       The effective tax rate for the thirteen weeks and thirty-nine weeks
         ended March 31, 2001 was 25.3% and 9.7%, respectively.

         The Company's net deferred tax asset was reduced by approximately
         $361,000 to approximately $2,515,000 during the current quarter due to
         write-downs of job tax credits which management believes will not be
         recovered through taxable income or the reversal of


                                       9
<PAGE>   12

         temporary differences. The deferred tax assets consist of $296,000 of
         current deferred tax assets and $2,218,900 of noncurrent deferred tax
         assets as of March 31, 2001, and include principally the anticipated
         benefit of net operating loss carryforwards ("NOLs") and basis
         differences in equipment and improvements. Realization of those assets
         is dependent upon the Company's ability to generate taxable income in
         future years including tax gains or losses associated with asset sales.
         The recognition of benefits in the financial statements is based upon
         projections by management of future operating income, sales of assets,
         and the anticipated reversal of temporary differences that will result
         in taxable income. Should the Company be unable to meet these
         projections or to continue as a going concern, management anticipates
         that a valuation allowance will be required for all deferred tax assets
         not assured of realization by offsetting taxable temporary differences.

8.       The Company's short-term bank line of credit (the "Credit Agreement")
         was scheduled to expire November 1, 2000. Effective November 1, 2000,
         the Credit Agreement was extended to April 30, 2001. On January 5,
         2001, an additional amendment was executed to temporarily increase the
         line of credit from $1,750,000 to $2,350,000 through January 31, 2001
         and extend the expiration date to January 31, 2001 in anticipation of
         the sale of certain assets (Note 10). The Company was required to use
         the anticipated proceeds from sale of certain stores to repay the
         $600,000 increase in the amount available under the Credit Agreement
         and also secured the line with virtually all of the assets of the
         Company. On February 7, 2001, a further modification to the Credit
         Agreement was executed which extended the increased availability under
         the Credit Agreement to February 28, 2001 and required the $600,000
         principal repayment from the proceeds of the sale by that date as a
         condition to extension of the Credit Agreement through April 30. The
         closing of the sale occurred on April 6, the Company made a principal
         reduction payment in the amount of $600,000 on that date (Note 10), and
         the Credit Agreement was extended to April 30, 2001. During the period
         between February 28, 2001 and April 6, 2001, the lender could have, but
         did not, declare the loan in default. On May 1, 2001, the existing
         Credit Agreement was extended to May 17, 2001. The Company was not in
         compliance with its debt service coverage, current ratio and tangible
         net worth covenants as of March 31, 2001. The Company requested and was
         granted waivers on those covenants not in compliance as of March 31,
         2001. As of the date of this report, the Company was not in compliance
         with the financial covenants. On May 9, 2001, the Company requested
         additional waivers of noncompliance and additional extensions; as of
         the date of this report, these requests are pending.

9.       In March 2000, the Financial Accounting Standards Board issued FASB
         Interpretation No. 44, "Accounting for Certain Transactions involving
         Stock Compensation, an Interpretation of APB Opinion No. 25." The
         Company was required to adopt the Interpretation on July 1, 2000. The
         Interpretation requires that stock options that have been modified to
         reduce the exercise price be accounted for as variable. The Company
         cancelled certain stock options and reissued them at a lower price on
         December 15, 1999 and in accordance with generally accepted accounting
         principles accounted for the repriced stock options as fixed. As a
         result of adopting the Interpretation on July 1, 2000, the Company was
         required to apply variable


                                       10
<PAGE>   13

         accounting to these options at year-end and for each period going
         forward until they are exercised, forfeited or expire unexercised.
         There was no impact during the current quarter.

         In June 1998, the Financial Accounting Standards Board Issued SFAS No.
         133, "Accounting for Derivative Instruments and Hedging Activities
         ("SFAS 133"). SFAS 133 requires companies to recognize all derivatives
         contracts as either assets or liabilities in the balance sheet and to
         measure them at fair value. If certain conditions are met, a derivative
         may be specifically designated as a hedge, the objective of which is to
         match the timing of gain or loss recognition on the hedging derivative
         with the recognition of (i) the changes in the fair value of the hedged
         asset or liability that are attributable to the hedged risk or (ii) the
         earnings effect of the hedged forecasted transaction. For a derivative
         not designated as a hedging instrument, the gain or loss is recognized
         in income in the period of change.

         In June 2000, the FASB issued Statement of Financial Accounting
         Standards No. 138, "Accounting for Derivative Instruments and Certain
         Hedging Activities (an amendment of FASB Statement No. 133)." The
         adoption of Statement 138 did not have a material impact on the results
         of operations, financial position and liquidity of the Company. SFAS
         138 was effective for all fiscal quarters of all fiscal years beginning
         after June 15, 2000.

         In September 2000, the FASB issued SFAS No. 140, "Accounting for
         Transfers and Servicing of Financial Assets and Extinguishment of
         Liabilities ("SFAS 140"). SFAS 140 revises the standards for accounting
         for securitizations and other transfers of financial assets and
         collateral and is effective for fiscal years beginning after December
         15, 2000. Management believes that adopting SFAS 140 will not have a
         material impact on the financial position or results of operations.

10.      On April 6, 2001, the Company sold the inventory, equipment and
         leasehold improvements of six restaurants in the Chicago area for
         $750,000. The net book value of the equipment and leasehold
         improvements was approximately $298,000 on March 31, 2001 resulting in
         a pre-tax gain on sale of these assets of approximately $412,000. For
         the three quarters ending March 31, 2001 sales and restaurant operating
         income from the six restaurants sold were $2,926,000 and $52,000,
         respectively. In addition, the Company closed three additional negative
         cash flow restaurants in Chicago, one in Houston, and franchised an
         additional store in the Cleveland market during April. Management
         believes that it will have sales of or closure of additional stores
         during the fourth quarter of fiscal 2001 and during fiscal 2002. As of
         March 31, 2001, assets of an additional eight stores with a net book
         value of approximately $96,000 are the subject of negotiations to
         franchise or sell. While management believes it will be successful in
         selling or franchising these locations, there are no guaranties if or
         when such transactions may take place.

         The assets held for sale have been recorded at net book value, which
         approximates net realizable value.


                                       11
<PAGE>   14

11.      On January 24, 2001, the Company's stock began trading on the OTC
         Bulletin Board. This occurred because the Company's minimum bid price
         was below $1.00 over the previous thirty days, and the Company was
         therefore unable to meet the criteria for continued listing on NASDAQ.

12.      The Company is involved in various legal matters in the ordinary course
         of its business. None of these matters are expected to have a material
         adverse effect on the Company's consolidated financial statements.

13.      The accompanying consolidated financial statements have been prepared
         assuming that the Company will continue as a going concern, which
         contemplates the realization of assets and the satisfaction of
         liabilities in the normal course of business. As a result, the
         financial statements do not include any adjustments relating to the
         recoverability of assets including deferred taxes or classifications of
         liabilities should the Company be unable to continue as a going concern
         (Note 1).

ITEM 2:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying consolidated balance
sheets and statements of operations.

         Forward Looking Statements. The statements in this Form 10-Q that are
not historical fact are forward looking statements. Such statements appear in a
number of places in this report and include statements regarding the intent,
belief or expectations of the Company and its management with respect to, among
other things, the Company's operating performance, anticipated financing
arrangements and sales of assets, trends in the food service industry and other
trends that may affect the Company's financial condition or results of
operations. Such statements are subject to numerous risks and uncertainties
which could cause actual results to differ materially from those anticipated or
projected, including, among others, the continued availability of financing, the
ability to consummate additional asset sales and other possible transactions,
recent changes in management, weather conditions and seasonal effects,
franchising programs and other new products and programs, competition for
customers, labor force and store sites and the effects of changes in the economy
such as inflation and unemployment rates.

         In addition, the Company has recently incurred significant losses and
expects that it will continue to incur losses for at least the last quarter of
fiscal 2001 and the first quarter of fiscal 2002. The Company is presently
dependent on short-term bank borrowings and sales of assets to fund negative
cash flows, and significant uncertainty exists with respect to whether or for
how long the lender will continue to grant additional extensions and/or waivers
of noncompliance with financial


                                       12
<PAGE>   15

covenants. Furthermore, if the Company does not become profitable when
anticipated, it may be unable to realize some or all of the tax benefits of net
operating loss carryforwards and future tax depreciation deductions on equipment
and improvements.

         Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available information.

         Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested parties of
the factors which affect the Company's business, including the disclosures made
in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, the
percentages of revenues represented by certain items in the Company's
consolidated statements of operations.

<TABLE>
<CAPTION>
                                                               Thirteen week period ended      Thirty-nine week period ended
                                                               --------------------------      -----------------------------
                                                               March 31,         April 1,        March 31,         April 1,
                                                                 2001              2000            2001              2000
                                                               ---------         --------      -----------         ---------
<S>                                                            <C>               <C>           <C>                 <C>
Net sales                                                         99.3%            99.7%           99.4%              99.4%
Franchise revenues                                                 0.7              0.3             0.6                0.6
                                                                 -----            -----           -----              -----
Total revenues                                                   100.0            100.0           100.0              100.0
Cost of restaurant operations                                     97.5             93.9            96.5               93.5
                                                                 -----            -----           -----              -----
Restaurant operating income                                        2.5              6.1             3.5                6.5
General and administrative                                        12.7              9.0            13.0                8.9
Impairment of long-lived assets                                    2.7               --             1.7                 --
                                                                 -----            -----           -----              -----
     Operating loss                                              (12.9)            (2.9)          (11.3)              (2.4)
Other income (expense)                                            (0.7)            (0.2)           (0.3)              (0.3)
                                                                 -----            -----           -----              -----
     Income loss before taxes                                    (13.6)            (3.1)          (11.6)              (2.7)
                                                                 -----            -----           -----              -----
Taxes                                                              3.4               --             1.1                 --
                                                                 -----            -----           -----              -----
Net loss                                                         (17.0)%           (3.1)%         (12.7)%             (2.7)%
                                                                 =====            =====           =====              =====
</TABLE>

NET SALES

         Net sales for company-owned restaurants for the thirteen weeks ended
March 31, 2001 declined 16.6% to approximately $10,470,000 from approximately
$12,557,000 recorded during the comparable prior year period. Comparable sales
per restaurant declined by 11.8% due to continuing operational problems,
increased competition and lower catering sales. In addition, the number of
company-owned restaurants declined from 100 at the end of the third quarter of
fiscal 2000 to 90 at


                                       13
<PAGE>   16

the end of the third quarter of fiscal 2001. During the current quarter, two
company-operated restaurants were franchised and a third restaurant closed.

         Net sales for company-owned restaurants for the thirty-nine weeks ended
March 31, 2001 declined by 14.5% to approximately $32,148,000 from approximately
$37,584,000 recorded during the comparable prior year period.

COST OF RESTAURANT OPERATIONS

         The components of cost of restaurant operations for the thirteen week
periods ended March 31, 2001 and April 1, 2000, respectively, as a percent of
net sales are shown in the following table:


<TABLE>
<CAPTION>
                                                                          For the thirteen week periods ended
                                                               -----------------------------------------------------------
                                                                    March 31, 2001                    April 1, 2000
                                                               ---------------------------      --------------------------
                                                                                   % of                             % of
Description                                                      Amount          Net Sales        Amount         Net Sales
-----------                                                    -----------       ---------      -----------      ---------
<S>                                                            <C>               <C>            <C>              <C>
Food and Paper                                                 $ 3,668,375         35.0%        $ 4,178,310         33.2%
Labor                                                            2,807,967         26.8           3,269,509         26.0
Store Expenses                                                   3,242,974         31.0           3,782,136         30.1
Restaurant Depreciation                                            456,356          4.4             561,837          4.6
                                                               -----------         ----         -----------         ----
                                                               $10,175,672         97.2%        $11,791,792         93.9%
                                                               ===========         ====         ===========         ====
</TABLE>

         Cost of restaurant operations declined 13.7% to approximately
$10,176,000 from approximately $11,792,000 incurred during the comparable prior
year quarter principally from a decrease in the number of company-owned
restaurants, and also reflects the effect of sales declines. Cost of food and
paper as a percent of net sales increased to 35.0%, from 33.2% during the
comparable prior year quarter due to higher food loss at low volume restaurants.
Labor increased as a percent of net sales to 26.8% from 26.0% during the prior
year quarter primarily due to increased staffing to enhance customer service at
the restaurants. Store expenses, which include mostly fixed expenses such as
rent, taxes and insurance, declined by 14.2% but increased as a percent of sales
to 31.0% compared to 30.1% during the comparable period. Depreciation and
amortization declined 18.8% to approximately $456,000 from approximately
$562,000 primarily due to impairment adjustments recorded in fiscal 2000 and
fiscal 2001 and ten fewer company-owned restaurants that were in operation at
the end of the third quarter of fiscal 2001 compared to the comparable quarter
in fiscal 2000. All of these factors resulted in an increase in the cost of
restaurant operations as a percent of net sales to 97.2% for the third quarter
of fiscal 2001 compared to 93.9% for the comparable prior year period.


                                       14
<PAGE>   17

         The components of cost of restaurant operations for the thirty-nine
week periods ended March 31, 2001 and April 1, 2000, respectively, as a percent
of net sales are shown in the following table.

<TABLE>
<CAPTION>
                                                                           For the thirty-nine week periods ended
                                                               --------------------------------------------------------------
                                                                      March 31, 2001                     April 1, 2000
                                                               -----------------------------    -----------------------------
Description                                                       Amount      % of Net Sales       Amount      % of Net Sales
-----------                                                    -----------    --------------    -----------    --------------
<S>                                                            <C>            <C>               <C>            <C>
Food and Paper                                                 $11,090,794         34.5%        $13,136,330         34.9%
Labor                                                            8,467,082         26.3           9,587,078         25.5
Store Expenses                                                   9,788,958         30.4          10,688,283         28.4
Restaurant Depreciation                                          1,531,046          4.8           1,813,176          4.9
                                                               -----------         ----         -----------         ----
                                                               $30,877,880         96.0%        $35,224,867         93.7%
                                                               ===========         ====         ===========         ====
</TABLE>

         Food and paper costs as a percent of sales declined 0.4% to 34.5%
during the first thirty-nine weeks of fiscal 2001 compared to the comparable
prior year period. This decline was offset by a 0.8% increase in labor as a
percent of restaurant sales. Comparable sales per restaurant declined by 9.2% in
the first quarter, 11.0% in the second quarter and 11.8% for the third quarter
of fiscal 2001. Due to the semi-fixed nature of store expenses versus the
variable reduction in sales per restaurant, store expenses increased to 30.4% of
sales compared to 28.4% recorded in the comparable prior year period. Restaurant
depreciation declined as a percent of restaurant sales due to fewer restaurants
and impairment adjustments recorded in fiscal 2000 and fiscal 2001.

GENERAL AND ADMINISTRATIVE

         General and administrative expenses consist of overhead expenses
associated with each of the Company's operating divisions, expenses associated
with catering operations and corporate administration. For the thirteen weeks
ended March 31, 2001, division level administrative expenses increased 7.5% from
approximately $324,000 to approximately $348,000 due to higher levels of
restaurant supervision. Corporate expenses increased from approximately $681,000
to approximately $852,000 during the current quarter due to additional legal
expenses of approximately $70,000 associated with the settlement of several
legal actions, as well as expenses associated with the Company's sale of two
restaurants in Cleveland and six restaurants in Chicago. In addition, there was
also a nonrecurring favorable accrual adjustment of $72,624 to the rent reserve
for restaurants closed in the comparable prior year quarter that contributed to
the variance.

         For the thirty-nine weeks ended March 31, 2001 total general and
administrative expenses increased $786,000 or 23% from approximately $3,410,000
in the comparable quarter to approximately $4,196,000. Legal and professional
fees in general and administrative increased by $92,000 during the thirty-nine
weeks ended March 31, 2001, due to expenses associated with the sale of
restaurants, settlement of lawsuits and other corporate matters. There were also
several nonrecurring favorable adjustments in the prior year comparable period
to decrease insurance reserves and other accruals totalling approximately
$454,000. The majority of these adjustments were related to the insurance
reserves and were primarily due to lower workers compensation claims and medical
insurance reserves associated with the


                                       15
<PAGE>   18

Company's self-insurance programs. In addition, in the prior year comparable
quarter the allowance for doubtful accounts was decreased by approximately
$171,000 due to a decrease in accounts receivable balances from favorable
results of increased collection efforts. Furthermore, in the prior year
comparable quarter, the rent reserve for subleased stores was also reduced due
to increased collections on subleases and a decrease in the risk of default by
the lessees. Management expects that division level general and administrative
will continue to be above the prior year for the fourth quarter while catering
general and administrative will be below levels of the prior year. Management
expects that corporate administrative expenses will continue to be above the
prior year during the quarter due to the continuation of higher levels of legal
expenses associated with the disposals of property and other corporate matters.

FRANCHISE OPERATIONS

         A summary of franchise operations for the third quarter and first three
quarters of fiscal 2001 compared to the comparable prior year period follows:

<TABLE>
<CAPTION>
                                                                                For the thirteen weeks ended
                                                                                ----------------------------
                                                                                March 31,           April 1,
Description                                                                       2001                2000
-----------                                                                     ---------           --------
<S>                                                                             <C>                 <C>
Royalty income                                                                  $  54,298            $40,133
Initial franchise fees                                                             20,000              2,500
                                                                                ---------            -------
Total franchise revenues                                                           74,298             42,633
Franchise expenses                                                                101,624             35,960
                                                                                ---------            -------
Franchise income (loss)                                                         $ (27,326)           $ 6,673
                                                                                =========            =======
<CAPTION>
                                                                                For the thirteen weeks ended
                                                                                ----------------------------
                                                                                March 31,           April 1,
Description                                                                       2001                2000
-----------                                                                     ---------           --------
<S>                                                                             <C>                 <C>
Royalty income                                                                  $ 173,486           $158,034
Initial franchise fees                                                             30,000             52,500
                                                                                ---------           --------
Total franchise revenues                                                          203,486            210,534
Franchise expenses                                                                342,890            113,928
                                                                                ---------           --------
Franchise income (loss)                                                         $(139,404)          $ 96,606
                                                                                =========           ========
</TABLE>

         At the end of the third quarter of fiscal 2001 there were 20 franchised
restaurants in operation compared to 19 at the end of the third quarter of
fiscal 2000. As a result of more restaurants and higher sales, royalty income
increased 35% to approximately $54,000, compared to $40,000 recorded in the
comparable prior year quarter. During the current quarter, two Company operated
restaurants in Cleveland were franchised resulting in $20,000 of initial
franchise fees. Franchise expenses were higher during the thirteen and
thirty-nine week periods ended March 31, 2001 of fiscal 2001 primarily due to a
higher level of franchise administration costs and the costs of


                                       16
<PAGE>   19

disposing of real estate. Salary and other employee benefits for the Company's
Vice President of Development, who is responsible for franchise administration
and real estate administration, are also charged to franchise expense. This
position was added in June of 2000.

TAXES ON INCOME

         The effective tax rate for the thirty-nine weeks ended March 31, 2001
and April 1, 2000 was 9.7% and -0- percent, respectively.

         The Company did not recognize an income tax benefit from losses
incurred in both the thirteen weeks and thirty-nine weeks ended March 31, 2001
and April 1, 2000. Approximately $361,000 of expense was recorded due to the
write-down of job tax credits during the current quarter.

         Based on current tax law, the Company will need to generate
approximately $6.6 million of future taxable income prior to the expiration of
the Company's NOLs for full realization of the $2.5 million net deferred tax
asset reported at March 31, 2001.

         Realization of the deferred tax assets is dependent upon the Company's
ability to generate taxable income by significantly improving operations and the
continuation of sales of unprofitable stores and divisions. If the Company is
unable to generate sufficient taxable income in the future through operating
results, other tax strategies and sales of assets, a higher valuation allowance
may be required through a charge to income. Management will continue to review
this valuation allowance quarterly, including a more detailed forecast of the
Company's operations giving full effect to the sale/restructuring of
nonperforming restaurants and the reversal of existing temporary differences.
Management expects to complete this forecast and analysis during the fourth
quarter of fiscal 2001 and, if necessary, any additional provision for valuation
allowances will be recorded by the Company to reflect the results of the most
recent forecasts. However, management believes that it is more likely than not
that the required amount of such taxable income will be generated in years
subsequent to June 30, 2001 and prior to the expiration of the Company's NOLs to
realize the $2.5 million net deferred tax asset at March 31, 2001. In evaluating
the net deferred tax asset, management reviewed the components of the Company's
NOLs and determined that they primarily resulted from several nonrecurring
events, which were not indicative of the Company's ability to generate future
earnings. On this basis, it is management's belief that a valuation allowance of
$3.4 million at March 31, 2001 is adequate, and that it is more likely than not
that the net deferred tax assets of $2.5 million will be realized.

IMPAIRMENT OF LONG-LIVED ASSETS

         Impairment charges on long-lived fixed assets were approximately
$282,000 during the third quarter and $582,000 for the thirty-nine weeks ended
March 31, 2001. No impairment charges were recorded during the comparable prior
year periods. Management reviews long-lived fixed assets quarterly for possible
impairment.


                                       17
<PAGE>   20

INTEREST INCOME (EXPENSE), NET

         Interest expense was approximately $56,000 compared to approximately
$19,000 incurred during the comparable prior year quarter primarily due to
significantly higher average daily balances on the line of credit and a higher
interest rate. At the end of the third quarter of fiscal 2001 there was
approximately $2,275,000 balance on the line compared to approximately
$1,427,000, at the end of fiscal 2000 and approximately $364,000 at the end of
the comparable prior year quarter. See Note 8 of the Notes to Consolidated
Financial Statements for additional details and information concerning
developments subsequent to the end of the third fiscal quarter.

IMPACT OF INFLATION

         In most cases, management has been able to pass on the impact of wage
and food inflation through modest price increases, but there is no assurance
that it will be able to do so in the future.

LIQUIDITY AND CAPITAL RESOURCES

         The Company is presently dependent on its short-term bank borrowings
and sales of certain assets to fund negative cash flows. As of March 31, 2001
and the date of this report, the Company was not in compliance with the debt
service coverage, current ratio and tangible net worth covenants under its line
of credit (See Note 8 to the Consolidated Financial Statements). It is not known
whether or how long the lender will continue to grant additional extensions
and/or waivers of noncompliance with financial covenants. Management expects to
generate additional cash from the proceeds from the sale of certain restaurants
as described in Notes 1 and 11 to the Consolidated Financial Statements and to
reduce losses through closures of certain other restaurants. However, if the
Company is unable to generate cash from the sale of additional assets or other
alternatives, the Company may be unable to continue as a going concern.

         At the end of the third quarter liquidity declined versus year-end and
worsened compared to the end of the third quarter of fiscal 2000. The current
ratio was .49 to 1.00, compared to .53 to 1.00 at the end of fiscal 2000 and .65
to 1.00 at the end of the third quarter of fiscal 2000.

         The Company's principal capital requirements are for the remodeling of
Company stores. Capital expenditures for these purposes during the first three
quarters of fiscal 2001 were approximately $172,000 compared to approximately
$424,000 expended during the comparable three quarters of the prior year.

         Cash used by operations for the first three quarters of fiscal 2001 was
approximately $3.7 million compared to $.6 of cash provided by operations for
the comparable prior year period. The balance on the line of credit was
approximately $2,275,000 at March 31, 2001, compared to


                                       18
<PAGE>   21

approximately $1,587,000 at the end of the previous quarter, and was
substantially up from the balance at the end of the third quarter of fiscal 2000
of approximately $364,000. See Note 8 to the Consolidated Financial Statements
in this report for additional details about the line of credit, and Notes 8 and
10 concerning the sale of restaurants for $750,000 occurring subsequent to the
end of the quarter. The proceeds from the sale were used to repay $600,000 on
the line of credit subsequent to the end of the quarter.

                           PART II: OTHER INFORMATION

ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits. The following exhibits are filed as a part of this
                  report.

<TABLE>
                  <S>            <C>
                  Exhibit 4.10   Modification to Credit Agreement dated
                                 March 23, 2001, between Wall Street Deli, Inc.
                                 and AmSouth Bank                      Page 20

                  Exhibit 4.11   Modification to Credit Agreement dated May 1,
                                 2001, between Wall Street Deli, Inc., and
                                 AmSouth Bank                          Page 24
</TABLE>

         (b)      Reports on Form 8-K:

                  No reports on Form 8-K were filed during the quarter ended
                  March 31, 2001.

                                   SIGNATURES

         Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

DATE:                               WALL STREET DELI, INC.


May 14, 2001                        /s/ Jeffrey V. Kaufman
                                    -------------------------------------
                                    JEFFREY V. KAUFMAN
                                    President and Chief Executive Officer


May 14, 2001                        /s/ Thomas J. Sandeman
                                    -------------------------------------
                                    THOMAS J. SANDEMAN
                                    Chief Financial Officer


                                       19