U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                   FORM 10-QSB

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

               For the quarterly period ended September 27, 1998

                                       OR

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

                         Commission File Number 0-27148

                         New World Coffee & Bagels, Inc.
           (Name of small business issuer as specified in its charter)

                Delaware                                     13-3690261
     (State or other jurisdiction                         (I.R.S. Employer
   of Incorporation or organization)                     Identification No.)

                                379 West Broadway
                                    4th Floor
                               New York, NY 10012
          (Address of principal executive offices, including zip code)

                                 (212) 343-0552
                           (Issuer's telephone number)

Check whether the registrant  (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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 _____

Transitional small business disclosure format (check one): Yes _____   No __X__


    Number of shares of common stock, $.001 par value per share, outstanding:
                      As of September 27, 1998: 14,795,689.

<PAGE>


                         NEW WORLD COFFEE & BAGELS, INC.

              INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES

                               September 27, 1998

<TABLE>
<CAPTION>
                                                                                     Page
<S>                                                                                  <C>
PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

     Condensed Consolidated Balance Sheets as of September 27, 1998 and
        December 28, 1997...........................................................  -3-

     Condensed Consolidated Statements of Operations for the fiscal quarter
        and year to date period ended September 27, 1998 and
        September 28, 1997..........................................................  -4-

     Condensed Consolidated Statements of Cash Flows for the year to date
        period ended September 27, 1998 and September 28, 1997......................  -5-

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


Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED SEPTEMBER 27,
          1998...................................................................... -10-

Item 3.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS FOR THE YEAR TO DATE PERIOD ENDED SEPTEMBER 27,
          1998...................................................................... -11-


PART II:  OTHER INFORMATION......................................................... -13-

          SIGNATURES................................................................ -14-
</TABLE>


                                      -2-

<PAGE>


                         NEW WORLD COFFEE & BAGLES, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                September 27,      December 28,
                                                                    1998               1997
                                                                ------------       ------------
                                                                 (Unaudited)
<S>                                                             <C>                <C>         
ASSETS
Current Assets:
    Cash .................................................      $  1,016,698       $  1,149,013
    Receivables ..........................................         2,602,777            936,015
    Inventories ..........................................           579,128            632,606
    Prepaid expenses .....................................           165,021             33,914
                                                                ------------       ------------
       Total current assets ..............................         4,363,624          2,751,548

Property and Equipment, net ..............................         4,776,568          6,686,807
Deposits and Other Assets, net ...........................         1,119,410            888,959
Goodwill, net of accumulated amortization ................         3,123,399          3,274,059
Long Term Receivables ....................................         1,239,391            374,733
                                                                ------------       ------------
       Total assets ......................................      $ 14,622,392       $ 13,976,106
                                                                ============       ============


LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
    Accounts payable .....................................      $    982,990       $  1,001,123
    Accrued expenses .....................................           511,179          1,071,197
    Current portion of notes payable .....................           192,500            318,750
    Current portion of obligations under capital leases ..           230,869            230,869
    Other Current Liabilities ............................           177,314            227,314
                                                                ------------       ------------
       Total current liabilities .........................         2,094,852          2,849,253
                                                                ------------       ------------

Deferred Rent ............................................           254,123            444,785
                                                                ------------       ------------
Long Term Notes Payable ..................................         1,364,203          2,407,953
                                                                ------------       ------------
Obligations Under Capital Leases .........................            25,976            367,926
                                                                ------------       ------------
Stockholders' Equity:
    Preferred stock, $.001 par value; 2,000,000
        Shares Authorized ................................              --                 --
    Series B Convertible Preferred Stock, $.001 par value;
        225 Shares Authorized, 137.5 Shares Issued, 58.5
        and 109.75 Shares Outstanding ....................              --                 --
    Common stock, $.001 par value; 20,000,000 Shares
       Authorized; 14,795,689 and  11,634,143 Shares
       Issued and Outstanding ............................            14,796             11,634
    Additional Paid-In Capital ...........................        27,931,357         25,173,440
    Accumulated Deficit ..................................       (17,062,915)       (17,278,885)
                                                                ------------       ------------
       Total Stockholders' Equity ........................        10,883,238          7,906,189
                                                                ------------       ------------
       Total Liabilities and Stockholders' Equity ........      $ 14,622,392       $ 13,976,106
                                                                ============       ============
</TABLE>


                                      -3-

<PAGE>


                         NEW WORLD COFFEE & BAGELS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

     FOR THE FISCAL QUARTER ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997

     AND YEAR TO DATE PERIOD ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997

                                    UNAUDITED

<TABLE>
<CAPTION>
                                                               Fiscal Quarter Ended               Year to Date Period Ended
                                                         -------------------------------       -------------------------------
                                                         September 27,      September 28,      September 27,      September 28,
                                                             1998               1997               1998               1997
                                                         ------------       ------------       ------------       ------------
<S>                                                      <C>                <C>                <C>                <C>         
Revenues:
    Store Sales ...................................      $  3,157,167       $  3,855,914       $  9,539,291       $ 11,542,708
    Franchise Related Income ......................           885,942            678,369          2,304,232            678,369
                                                         ------------       ------------       ------------       ------------
Total Revenues ....................................         4,043,109          4,534,283         11,843,523         12,221,077

Costs and Expenses:
    Cost of Sales and Related Occupancy Costs .....         1,631,599          1,996,502          5,007,447          6,229,461
    Store Operating Expenses ......................         1,135,683          1,191,786          3,227,570          3,704,583
                                                         ------------       ------------       ------------       ------------
Total Costs and Expenses ..........................         2,767,282          3,188,288          8,235,017          9,934,044

Income from Store/Franchise Operations ............         1,275,827          1,345,995          3,608,506          2,287,033

    Depreciation and Amortization .................           321,701            518,240          1,006,085          1,588,715
    General and Administrative Expenses ...........           805,442            747,991          2,228,545          2,263,249
    Provision for Store Closings ..................              --              300,000               --              300,000
                                                         ------------       ------------       ------------       ------------
Operating Income/(Loss) ...........................           148,684           (220,236)           373,876         (1,864,931)

    Interest Expense, Net .........................           (66,660)           (26,660)          (157,906)          (218,207)
                                                         ------------       ------------       ------------       ------------

Net Income/(Loss) .................................      $     82,024       $   (246,896)      $    215,970       $ (2,083,138)
                                                         ============       ============       ============       ============
Basic and Diluted Net Income/(Loss) Per Common
    Share .........................................      $        .01       $       (.02)      $        .02       $       (.28)
                                                         ============       ============       ============       ============
Basic and Diluted Weighted Average Number of Common
    Shares Outstanding ............................        14,662,391         10,074,821         12,872,019          7,483,076
                                                         ============       ============       ============       ============
</TABLE>


                                      -4-

<PAGE>


                         NEW WORLD COFFEE & BAGELS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

   FOR THE YEAR TO DATE PERIOD ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997

                                    UNAUDITED

<TABLE>
<CAPTION>
                                                                                         September 27,     September 28,
                                                                                             1998              1997
                                                                                          -----------       -----------
<S>                                                                                       <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net Income/(Loss) ..............................................................      $   215,970       $(2,083,138)
    Adjustments to Reconcile Net Income/(Loss) to Net Cash Provided by/(Used in)
       Operating Activities-
          Depreciation and Amortization ............................................        1,006,085         1,588,715
          Gain on Sale of Fixed Assets .............................................       (1,798,312)             --
          Provision for Store Closing Costs ........................................             --             300,000
          Increase/(Decrease) in Cash Resulting from Changes in Operating Assets and
              Liabilities-
                 Receivables .......................................................          677,776        (1,311,800)
                 Inventories .......................................................           53,478          (253,186)
                 Prepaid Expenses ..................................................         (131,107)          (51,168)
                 Deposits and Other Assets .........................................         (230,451)            6,545
                 Accounts Payable ..................................................          (18,133)          257,327
                 Accrued Expenses ..................................................         (610,016)       (1,048,114)
                 Deferred Rent .....................................................         (190,662)           53,971
                                                                                          -----------       -----------
                    Net Cash Provided by/(Used in) Operating Activities ............       (1,025,372)       (2,540,848)
                                                                                          -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital Expenditures ...........................................................         (324,686)       (1,459,839)
    Cash Received/(Paid) from Dispositions and Acquisitions ........................             --             611,203
    Capitalized Leases .............................................................          (15,332)          (15,188)
                                                                                          -----------       -----------
                    Net Cash Provided by/(Used in) Investing Activities ............         (340,018)         (863,824)
                                                                                          -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of Common Stock, Net of Issuance Costs ................................        2,761,079         4,405,322
    Repayment of Capitalized Leases ................................................         (358,004)         (552,266)
    Repayment of Notes Payable .....................................................       (1,170,000)         (261,914)
                                                                                          -----------       -----------
                    Net Cash Provided by/(Used in) Financing Activities ............        1,233,075         3,591,142
                                                                                          -----------       -----------
                    Net Increase/(Decrease) in Cash ................................         (132,315)          186,470

CASH, Beginning of Period ..........................................................        1,149,013         1,419,786
                                                                                          -----------       -----------

CASH, End of Period ................................................................      $ 1,016,698       $ 1,606,256
                                                                                          ===========       ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash Paid During the Period for:
    Interest .......................................................................           79,105            95,867
    Non-Cash Investing and Financing Activities:
    Notes Received from Sale of Fixed Assets .......................................        2,733,500              --
    Equipment Purchased Under Capital ..............................................           16,054           377,458
    Leases
    Issuance of Common Stock as Repayment of Promissory Note .......................        1,100,000              --
</TABLE>


                                      -5-

<PAGE>


                         NEW WORLD COFFEE & BAGELS, INC.

                   Notes to Consolidated Financial Statements
                                   (Unaudited)


1.   The September 27, 1998  consolidated  balance  sheet  presented  herein was
     derived  from  the  audited  December  28,  1997   consolidated   financial
     statements of the Company.

2.   These  consolidated  financial  statements have been prepared in accordance
     with  generally  accepted  accounting   principles  for  interim  financial
     information  and with the  instructions  to Form 10-QSB.  The  consolidated
     financial  statements  should  be  read in  conjunction  with  the  audited
     consolidated  financial  statements  of the  Company  for  the  year  ended
     December 28, 1997 for a description of the significant accounting policies,
     which have continued without change, and other note information.

3.   All  adjustments  (recurring  in  nature)  which  are,  in the  opinion  of
     management, necessary for a fair presentation of the results of the interim
     periods  have been  included.  The results of the  interim  periods are not
     necessarily indicative of the results for the full year.

4.   During  1997,  320  shares of Series A  Convertible  Preferred  Stock  were
     exchanged for 137.5 shares of Series B  Convertible  Preferred  Stock,  par
     value $.001 and 1,606,094 shares of Common Stock. In addition, 27.75 shares
     of Series B Convertible  Preferred  Stock were exchanged for 213,425 shares
     of Common Stock.  During the first quarter of 1998, 20.5 shares of Series B
     Convertible  Preferred  Stock were  exchanged for 196,193  shares of Common
     Stock.  During  the  second  quarter  of 1998,  15.75  shares  of  Series B
     Convertible  Preferred  Stock were  exchanged for 146,165  shares of Common
     Stock.  During the third quarter of 1998, 15 shares of Series B Convertible
     Preferred Stock were exchanged for 138,753 shares of Common Stock.

5.   On  February  27,  1997,  the  Company  completed  a private  placement  of
     1,000,000 shares of Common Stock and realized net proceeds of $1,153,000.

6.   In April 1997, the Company filed its Uniform  Franchise  Offering  Circular
     ("UFOC") with the Federal Trade  Commission  and the Office of the Attorney
     General  of the State of New York.  On May 6,  1997,  the State of New York
     approved the UFOC.

7.   On May 23, 1997, the Company  completed a secondary  public  offering and a
     subsequent  filing to register and issue additional shares of Common Stock.
     1,898,806 and 521,864 shares of Common Stock were issued, respectively,  at
     a purchase price of $1.25 per share, realizing approximately  $2,347,000 in
     net proceeds after expenses of approximately $679,000.  308,000 and 307,000
     shares of Common Stock, respectively, were issued to vendors as payment for
     the fair value of property,  equipment and other  services  received by the
     Company.  In  addition,  58,526  and  205,000  of shares  of Common  Stock,
     respectively,  were  issued as  payment  for  notes  payable  and  employee
     compensation.

8.   On August 29,  1997 the  Company  completed  a private  placement,  with an
     institutional  investor,  of 1,142,857  shares of Common  Stock,  realizing
     approximately  $845,000 in net  proceeds.  These  unregistered  shares were
     subject to a lockup of six months with respect


                                      -6-

<PAGE>


     to fifty percent of the shares,  and a lockup of twelve months with respect
     to the remainder.

9.   On  November 4, 1997 the  Company  changed  its name to New World  Coffee &
     Bagels, Inc. This action was approved at the annual shareholder meeting.

10.  Pursuant to Modification  Agreements  dated March 30, 1998 and November 12,
     1998,  the payment  terms of the  remaining  principal  amounts  payable of
     $2,100,000  related  to  the  Willoughby's  acquisition  were  amended.  In
     accordance with the Modification  Agreement,  all payments of principal may
     be  effected  through  the  conversion  of these  notes into  common  stock
     commencing on certain dates through  September 1999. The conversions of the
     notes into Common Stock, and sales of such shares, will be effected at such
     time as shall be determined by the holder of the notes,  subject to certain
     limitations.  During  the  second  quarter  of 1998,  $1.0  million  of the
     principal  related  to the  Willoughby's  acquisition  was  converted  into
     862,068 shares of Common Stock.

11.  On June 22, 1998 the Company  completed a private  placement  of  1,208,518
     shares  of  Common  Stock,  realizing  approximately  $1.6  million  in net
     proceeds.

12.  In June 1997, the FASB issued Statement of Financial Accounting  Standards,
     No.  130  "Reporting   Comprehensive   Income"  ("SFAS  No.  130"),   which
     establishes standards for reporting and display of comprehensive income and
     components (revenue,  expenses,  gains and losses) in a full set of general
     purpose financial statements. The Company does not anticipate that SFAS No.
     130 will have a material impact on its financial statements.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain  statements  in this Form  10-QSB  under  "Management's  Discussion  and
Analysis  of  Financial   Condition  and  Results  of   Operations"   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of 1996 with  respect  to the  financial  condition  and
business of the Company.  The words  "forecast,"  "estimate,"  "plan," "intend,"
"believes," "expect," "should," "project," "would," similar expressions, and all
references to the Manhattan  Bagel  Company,  Inc.  acquisition  are intended to
identify forward-looking statements. Such forward-looking statements involve and
are subject to known and unknown risks,  uncertainties,  and other factors which
could cause the actual results,  performance, and achievements of the Company to
be  materially  different  from any future  results,  performance  (financial or
operating),  or  achievements  expressed  or  implied  by  such  forward-looking
statements.  Such factors  include,  among others,  the following:  competition;
success  of  operating  and  franchising  initiatives;   development  schedules;
advertising  and  promotional  efforts;  adverse  publicity;  acceptance  of new
product offerings;  availability of new locations,  and terms of sites for store
development; changes in business strategy or development plans; availability and
terms of capital; food, labor, and employee benefit costs; changes in government
regulations;  regional weather conditions;  and other factors referenced in this
Form 10-QSB or in the Company's other SEC filings. In addition, the terms of the
acquisition are subject to change in advance of approval of


                                      -7-

<PAGE>


the definitive  plan of  reorganization,  and the  effectiveness  of the plan of
reorganization is subject to, among other things,  the Bankruptcy  court's prior
approval of such plan.

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

General

     New World Coffee & Bagels,  Inc. currently operates 29 Company owned and 15
franchised stores, consisting of 28 in New York, seven in Connecticut,  three in
Pennsylvania, five in New Jersey and one in Germany. In the fiscal quarter ended
September 27, 1998, the Company signed eleven franchise agreements.

     The  Company  has  incurred  losses  in each  fiscal  year  from  inception
primarily  due  to  the  cost  of  retail  store  expansion  and  developing  an
infrastructure to support future growth.

     On July 28, 1998, the Company  entered into an  acquisition  agreement (the
"Agreement")  for the  purchase of  Manhattan  Bagel  Company,  Inc.,  Debtor in
Possession,  a  New  Jersey  Corporation  ("MBC").  MBC  filed  a  petition  for
reorganization  under Chapter 11 of the  Bankruptcy  Code in 1997. MBC presently
franchises, licenses or operates approximately 290 bagel stores and manufactures
bagel dough and cream cheese products at plants in Eatontown, New Jersey and Los
Angeles, California.

     The acquisition  would  represent a substantial  expansion of the Company's
operations and would increase the Company's  store base by  approximately  600%,
while generating  approximately $120 million in annual sales. As a result of the
addition of this franchise  base,  the Company  should  experience a significant
increase in ongoing royalty income. In addition, the Company should experience a
significant increase in revenues from the addition of the company owned stores.

     The Company plans to integrate  its growing  franchise  operation  with the
existing franchise operation of MBC. The Company may experience  difficulties in
dealing with the MBC franchisee  base as to its current issues with MBC,  and/or
the upgrading of its reporting and control  equipment and the  introduction  and
promotion of the Company's premium coffees. The Company believes that it has the
resources,  including  personnel,  to manage these relationships in a successful
manner.

     The acquisition would also expand the Company's manufacturing facilities by
the addition of two operating bagel  dough/cream  cheese  production  facilities
located in New Jersey and in California,  which  primarily  supply the Manhattan
Bagel franchise base. As a result,  the Company should  experience a significant
increase in factory revenues of  approximately  $25 million  annually,  based on
historical  operations.  The Company  has not had  experience  concerning  bagel
dough/cream  cheese plant  operations,  but believes that management of MBC, who
will be  directly  in  charge  of these  operations,  will  provide  significant
expertise.

     Furthermore,  New World's coffee factory sales are projected to increase by
supplying coffee to the Manhattan Bagel  franchisees,  which currently  purchase
significant  amounts of coffee from third party  vendors.  The Company  believes
that the sale of its premium coffees


                                      -8-

<PAGE>


by the MBC  franchisees  and the  expansion  of their  coffee  product line will
enhance  their sales and  operations.  Similarly,  the Company also  anticipates
supplying  its coffee & bagel  stores with bagels and cream  cheese from the MBC
plants,  resulting  in a  corresponding  increase in Manhattan  Bagel's  factory
sales.

     The agreement  includes the  acquisition  of Manhattan  Bagel's  management
infrastructure.  The Company  expects to realize  significant  savings  from the
consolidation of general and administrative expenses of New World and MBC.

     The Company  projects the  acquisition  to be  accretive  to its  earnings.
Assuming the acquisition, the approval of a reorganization plan, the benefits of
cross selling and the consolidation of general and  administrative  overhead had
occurred  at the  beginning  of each  period,  the  transaction  would have been
significantly  accretive  on a pro forma  basis for the first,  second and third
quarters of 1998.  The pro forma  analysis  does not purport to be indicative of
the results that actually  would have been  obtained if the combined  operations
had been  conducted  during  the  periods  presented,  nor does it purport to be
indicative of future periods of the combined operations.

     Separately,  New World has  received  proxies,  exercisable  under  certain
circumstances,  for  approximately 2 million shares or approximately  27% of the
outstanding  voting  stock  of MBC  (prior  to  exercise  of  warrant  discussed
hereafter).  New World has also  received a warrant,  exercisable  under certain
circumstances, to purchase 4 million shares of newly issued shares, representing
approximately  35% of the outstanding  voting stock following such exercise,  of
MBC. Assuming exercise of the warrant, the above would give New World a right to
vote  the  majority  of  the  outstanding  common  stock  of MBC  under  certain
circumstances.

     The total cost of the acquisition is presently  estimated at  approximately
$20  million  including  a  combination  of cash  and  common  stock  to be made
available to the creditors of MBC, and the assumption of certain  liabilities to
MBC creditors.

     There is no assurance as to when such acquisition will be consummated or as
to the  final  terms of the  acquisition,  in that the  same may be  subject  to
changes by  interaction  between the Company,  MBC and the various  creditors of
MBC, and is subject to bankruptcy  court approval.  Accordingly,  it is possible
that the  Company  may agree to a final plan of  reorganization  which  involves
acquisition  costs in excess of those set forth in the  Agreement,  although the
Company has no obligation to do so.


                                      -9-

<PAGE>


Fiscal Quarter Ended September 27, 1998 Compared to Fiscal Quarter Ended
September 28, 1997

     Revenues.  Total  revenues  were  $4,043,109  for the fiscal  quarter ended
September  27, 1998  compared to  $4,534,283  for the  comparable  1997  period.
Revenues  from  company  stores  decreased  18.1% to  $3,157,167  for the fiscal
quarter ended  September 27, 1998 from $3,855,914 for the comparable 1997 period
primarily due to the  conversion  of company owned stores to franchised  stores.
Royalties and franchise related revenues increased to $885,942 or 21.9% of total
revenues for the fiscal quarter ended September 27, 1998 as compared to $678,369
or 15.0% of total  revenues for the  comparable  1997 period.  Comparable  store
sales for franchise and Company owned stores open for both periods  increased by
1.3% and (6.5%), respectively, over the comparable 1997 period.

     Costs  and  Expenses.  Cost of  sales  and  related  occupancy  costs  as a
percentage  of store  sales for the fiscal  quarter  ended  September  27,  1998
decreased  to 51.7% from  51.8% for the  comparable  1997  period.  The  primary
components  were a 0.2%  decrease  in  occupancy  costs  which was  offset by an
increase of 0.1% in cost of goods.

     Store  operating  expenses  as a  percentage  of store sales for the fiscal
quarter  ended  September  27,  1998  increased  to  36.0%  from  30.9%  for the
comparable 1997 period. The primary components were an increase of 2.5% in store
payroll and a 2.4% increase in miscellaneous store expenses,  both of which were
primarily related to training costs relating to the sale of company owned stores
to franchisees.

     Depreciation  and  amortization  expenses as a percentage of total revenues
for the fiscal quarter ended September 27, 1998 decreased to 8.0% from 11.4% for
the comparable  1997 period  primarily due to compliance with "SFAS No. 121" and
the sale of company owned stores to franchisees.

     General and  administrative  expenses as a percentage of total revenues for
the fiscal  quarter ended  September 27, 1998  increased to 19.9% from 16.5% for
the  comparable  1997 period due to the  addition of  marketing  and  operations
support  personnel.  The Company recorded a $300,000  non-cash  provision in the
fiscal quarter ended September 28, 1997 to provide for a shortfall in the second
quarter 1996 provision for store closings.

     Interest  expense,  net for the fiscal  quarter  ended  September  27, 1998
increased to $66,660,  or 1.6% of total revenues,  from $26,660, or 0.6% for the
comparable 1997 period.

     Net  Income/(Loss).  Net income for the fiscal quarter ended  September 27,
1998  increased to $82,024 from a net loss of $246,896 for the  comparable  1997
period.  Net income margins improved to a 2.0% profit from a loss of 5.4% in the
comparable 1997 period.


                                      -10-

<PAGE>


Year to Date Period Ended September 27, 1998 Compared to the Year to Date Period
Ended September 28, 1997

     Revenues. Total revenues decreased 3.1% to $11,843,523 for the year to date
period ended September 27, 1998 from $12,221,077 for the comparable 1997 period.
Revenues from company stores  decreased 17.4% to $9,539,291 for the year to date
period ended September 27, 1998 from  $11,542,708 for the comparable 1997 period
primarily due to the  conversion  of company owned stores to franchised  stores.
Royalties and  franchise  related  revenues  increased to $2,304,232 or 19.5% of
total  revenues  for the year to date  period  ended  September  27,  1998  from
$678,369 or 5.6% of total  revenues for the comparable  1997 period.  Comparable
store  sales for  franchise  and  company  owned  stores  open for both  periods
increased by 4.5% and (7.9%), respectively, over the comparable 1997 period.

     Costs  and  Expenses.  Cost of  sales  and  related  occupancy  costs  as a
percentage  of store sales for the year to date period ended  September 27, 1998
decreased  to 52.5% from  54.0% for the  comparable  1997  period.  The  primary
components  were a  decrease  of 1.1% in cost of  goods  due to  improved  store
purchasing  and waste  resulting  from the Company's  point of sale system and a
0.4% decrease in occupancy costs.

     Store  operating  expenses as a  percentage  of store sales for the year to
date  period  ended  September  27, 1998  increased  to 33.8% from 32.1% for the
comparable  1997 period.  Store payroll as a percentage of store sales increased
by 0.5%. Other operating  expenses as a percentage of store sales increased by a
1.2%.  These increases were primarily  related to training costs relating to the
sale of company owned stores to franchisees.

     Depreciation  and  amortization  expenses as a percentage of total revenues
for the year to date period  ended  September  27, 1998  decreased  to 8.5% from
13.0% for the comparable 1997 period  primarily due to compliance with "SFAS No.
121" and the sale of company owned stores to franchisees.

     General and  administrative  expenses as a percentage of total revenues for
the year to date period ended  September 27, 1998  increased to 18.8% from 18.5%
for the  comparable  1997 period due to the addition of marketing and operations
support  personnel.  The Company recorded a $300,000  non-cash  provision in the
year to date period ended  September  28, 1997 to provide for a shortfall in the
second quarter 1996 provision for store closings.

     Interest expense,  net for the year to date period ended September 27, 1998
decreased to $157,904, or 1.3% of total revenues, from $218,207, or 1.8% for the
comparable 1997 period.

     Net  Income/(Loss).  Net income for the year to date period ended September
27, 1998 increased to $215,972 from a loss of $2,083,138 for the comparable 1997
period. Net income margins improved to a 1.8% profit from a loss of 17.0% in the
comparable 1997 period.


                                      -11-

<PAGE>


Liquidity and Capital Resources

     The Company's  primary  capital  requirement is to support its  franchising
efforts.  The Company  currently  estimates  that capital  expenditures  through
fiscal 1998 will be  approximately  $100,000.  The  Company  expects to meet its
funding  requirements with cash on hand and internally  generated funds, as well
as prospective cash flow from franchising.

     At  September  27,  1998  the  Company  had  positive  working  capital  of
$2,268,772  compared to a working  capital  deficit of $97,705 at  December  28,
1997.

     The Company had net cash used in operating activities of $1,025,372 for the
year to date period  ended  September  27, 1998  compared  with net cash used in
operating activities of $2,540,848 for the comparable 1997 period.

     The Company had net cash used for investing  activities of $340,018 for the
year to date period ended  September  27, 1998  compared  with net cash used for
investing activities of $863,824 for the comparable 1997 period.

     The Company had net cash provided by financing activities of $1,233,075 for
the year to date period ended September 27, 1998. These funds were primarily the
result of a private placement of common stock. The Company had net cash provided
by financing activities of $3,591,142 for the comparable 1997 period as a result
of additional stock offerings.

     The  consummation  of the proposed  acquisition  of MBC currently  requires
delivery of approximately $7.3 million at the closing.  The Company has received
debt financing commitments over and above the $7.3 million required to close the
transaction from  institutional  sources.  The terms and conditions on which the
financings  are to be made  available  may  change.  Such  arrangements  must be
consummated prior to the effective date of a plan of reorganization. The Company
has  expended,  and will  expend,  a  significant  amount  of time and  funds in
connection with the proposed acquisition of MBC.

Seasonality and General Economic Trends

     The  Company  anticipates  that its  business  will be  affected by general
economic  trends that  affect  retailers  in general.  While the Company has not
operated  during a period of high  inflation,  it  believes,  based on  industry
experience, that it would generally be able to pass on increased costs resulting
from inflation to its customers. The Company's business may be affected by other
factors,   including   increases  in  the  commodity  prices  of  green  coffee,
acquisitions by the Company of existing  espresso bars,  existing and additional
competition,  marketing  programs,  weather,  special  or  unusual  events,  and
variations  in the  number  of store  openings.  The  Company  has few,  if any,
employees at the minimum wage level and  therefore  believes that an increase in
the minimum  wage would have  minimal  impact on its  operations  and  financial
condition.


                                      -12-

<PAGE>


                           PART II - OTHER INFORMATION

                         NEW WORLD COFFEE & BAGELS, INC.

                               SEPTEMBER 27, 1998

Item 1. Legal Proceedings

     Not applicable

Item 2. Changes in Securities

     On February 26, 1997, the Company sold 1,000,000  shares of Common Stock at
$1.375 per share. On June 22, 1998 the Company  completed a private placement of
1,208,518 shares of Common Stock,  realizing  approximately  $1.6 million in net
proceeds.  During the  second  quarter of 1998,  $1.0  million of the  principal
amount related to the Willoughby's acquisition was converted into 862,068 shares
of Common Stock. During 1997, 320 shares of Series A Convertible Preferred Stock
were  exchanged for 137.5 shares of Series B Convertible  Preferred  Stock,  par
value  $.001 and  1,606,094  shares of Common  Stock.  The Series B  Convertible
Preferred  Stock  bears no  dividend  and has limited  voting  rights  except as
provided under the General Corporation Law of the State of Delaware.  The Series
B Convertible  Preferred  Stock is convertible  into shares of Common Stock.  In
addition,  27.75 shares of Series B Convertible  Preferred  Stock were exchanged
for  213,425  shares of Common  Stock.  During the first  quarter of 1998,  20.5
shares of Series B Convertible Preferred Stock were exchanged for 196,193 shares
of Common  Stock.  During the second  quarter of 1998,  15.75 shares of Series B
Convertible  Preferred  Stock were exchanged for 146,165 shares of Common Stock.
During the third quarter of 1998,  15 shares of Series B  Convertible  Preferred
Stock were exchanged for 138,753 shares of Common Stock.

Item 3. Defaults upon Senior Securities

     Not applicable

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable

Item 5. Other Information

     Not applicable

Item 6. Exhibits and Reports on Form 8-K

     Not applicable


                                      -13-

<PAGE>


                                   SIGNATURES

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.

                                        NEW WORLD COFFEE & BAGELS, INC.


Date:  November 18, 1998                By:  /s/ R. Ramin Kamfar
                                             -----------------------------------
                                             R. Ramin Kamfar
                                             President and Chief Executive
                                             Officer



Date:  November 18, 1998                By:  /s/ Jerold E. Novack
                                             -----------------------------------
                                             Jerold E. Novack
                                             Chief Financial Officer


                                      -14-