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 30, 1997

                                       or

              ( )     Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1939

                    For the transition period from              to


Commission File Number:  1-13984


                                        CREATIVE BAKERIES, INC.
              (Exact name of small business issuer as specified in its charter)



          New York                              13-3832215
(State or other jurisdiction of            (I.R.S. Employer
incorporation or organization)             Identification Number)


                     20 Passaic Avenue, Fairfield, NJ 07004

                    (Address of principal executive offices)


Issuer's telephone number, including area code:         (973) 808-9292
                                                      -----------------

Former name:  William Greenberg Jr. Desserts and Cafes, Inc.

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  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 each of the  Issuer's  classes of
common stock, as of the latest practicable date.



            Class             Outstanding at November 12, 1997

Common Stock, par value $0.001
 per share              4,455,500




























<PAGE>




                                      INDEX



Part I.  Financial information


              Item 1.  Condensed consolidated financial statements:

                         Balance sheet as of September 30, 1997          F-2

                         Statement of operations for the nine and
                         three months ended September 30, 1997 and 1996  F-3

                         Statement of cash flows for the nine months
                         ended September 30, 1997 and 1996               F-4

                         Notes to condensed consolidated financial
                         statements                                 F-5 - F-17

              Item 2.    Management's discussion and analysis of
                         financial condition


Part II.  Other information


Signatures



<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

             CONDENSED CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 1997
                                   (Unaudited)




                                     ASSETS

Current assets:
  Cash                                                             $   221,027
  Accounts receivable, less allowance for doubtful
   accounts of $26,800                                                 508,092
  Notes receivable, related party                                       57,300
  Interest receivable                                                   14,326
  Inventory                                                            442,483
  Prepaid insurance                                                     43,547
  Prepaid expenses and other current assets                             90,068
                                                                    -----------
    Total current assets                                             1,376,843
                                                                     ---------

Property and equipment, net of accumulated depreciation              1,643,037
                                                                    -----------

Other assets:
  Covenant not to compete, net of amortization                          68,750
  Goodwill, net of amortization                                      1,215,086
  Security deposits and other assets                                   204,899
                                                                    -----------
                                                                     1,488,735
                                                                     ---------

                                                                   $ 4,508,615
                                                                   ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
  Current portion of long-term debt                                $    49,793
  Notes payable, shareholders                                          225,000
  Notes payable, bank                                                  149,379
  Notes payable, other                                                  39,586
  Accounts payable                                                     972,248
  Estimated liability for restructuring                                350,000
  Accrued payroll:
    Stockholders/officers                                              326,045
    Other                                                               25,335
  Accrued expenses nd other current liabilities                        369,186
                                                                     ----------
    Total current liabilities                                        2,506,572
                                                                     ----------

Long-term debt, net of current portion                                 234,740
                                                                    -----------

Deferred rent                                                           43,546
                                                                        ------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.001 par value, authorized 2,000,000
   shares, none issued
  Common stock, $.001 par value, authorized 10,000,000
   shares, issued and outstanding 4,455,500 shares in
   1997 and 3,060,000 in 1996                                            4,456
  Additional paid in capital                                        10,420,676
  Deficit                                                         (  8,701,375)
                                                                   -----------
                                                                     1,723,757
                                                                     ---------

                                                                   $ 4,508,615
                                                                   ===========


     See notes to condensed consolidated financial statements.
                                                                     F-2
                                                                    





                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

             NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                   (Unaudited)







<TABLE>



                                                          Nine Months                          Three Months
                                                        Ended September 30,                   Ended September 30,

<CAPTION>
<S>                                          <C>                  <C>              <C>                  <C> 
                                                1997                 1996             1997                 1996
                                                ----                 ----             ----                 ----


Net sales                                     $6,361,242         $6,762,495         $1,989,915         $2,273,250

Cost of sales                                  4,611,831          4,901,769          1,416,585          1,631,121
                                              ----------         ----------         ----------         ----------

Gross profit                                   1,749,411          1,860,726            573,330            642,129

Operating expenses                             3,503,220          3,541,264          1,008,917          1,181,398
                                              ----------         ----------         ----------         ----------

Loss from operations                        ( 1,753,809)       ( 1,680,538)       (   435,587)       (   539,269)
                                             ----------         ----------         ----------         ----------

Other income (charges):
  Rental and storage
   income                                         11,480             51,182                                51,182
  Gain on sale of
   equipment                                       5,400                                 5,400
  Interest income                                 13,872             42,691              2,510              2,227
  Interest expense                          (    23,390)       (    23,479)       (       349)       (     7,198)
                                             ----------         ----------         ----------         ----------
                                                   7,362             70,394              7,561             46,211
                                              ----------         ----------         ----------         ----------

Loss before extraordinary
 item                                       ( 1,746,447)       ( 1,610,144)       (   428,026)       (   493,058)

Extraordinary item-gain on
 extinguishment of debt                                              31,375                                31,375
                                              ----------         ----------         ----------         ----------

Net loss                                    ($1,746,447)       ($1,578,769)       ($  428,026)       ($  461,683)
                                             ==========         ==========         ==========         ==========

Net loss per common
 share                                      ($     0.30)       ($     0.41)       ($     0.07)       ($     0.12)
                                             ==========         ==========          ==========         ==========

Weighted average number
 of common shares
 outstanding                                  5,789,369          3,806,628          6,289,428          3,806,628
                                              ==========         ==========         ==========         ==========



</TABLE>










     See notes to condensed consolidated financial statements.
                                                                         F-3


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

                  NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                   (Unaudited)



<TABLE>
<CAPTION>
<S>                                                                               <C>                <C> 
                                                                                        1997               1996
                                                                                        ----               ----

Operating activities:
  Loss before extraordinary item                                                  ($1,746,447)       ($1,610,144)
  Adjustments to reconcile net income to
   cash provided from operating activities:
     Depreciation and amortization                                                     196,891            345,508
     Extraordinary item                                                                                    31,375
     Compensatory element of issuance of warrants                                      513,446
   Changes in other operating assets and liabilities:
     Accounts receivable                                                          (     8,654)             11,186
     Inventory                                                                    (    92,680)       (    35,718)
     Interest receivable                                                          (     1,916)       (     2,396)
     Prepaid expenses and other current assets                                    (    59,583)       (   180,073)
     Accounts payable                                                                   24,798       (    44,433)
     Accrued expenses and other current liabilities                                    178,962             48,769
     Estimated liability for restructuring                                        (   100,000)
     Deferred rent                                                                     166,138              8,277
                                                                                    ----------         ----------

     Net cash used in operating activities                                        (   929,045)       ( 1,427,649)
                                                                                   ----------         ----------

Investing activities:
  Purchase of subsidiary                                                          (   900,000)
  Decrease in note receivable, related party                                             2,700            119,250
  Purchase of property and equipment                                              (   387,900)       (   364,302)
  Increase in security deposits                                                   (     9,191)       (    35,308)
                                                                                   ----------         ----------

     Net cash used in investing activities                                        ( 1,294,391)       (   280,360)
                                                                                   ----------         ----------

Financing activities:
  Proceeds from issuance of common stock and
   warrants                                                                          1,747,500
  Increase in notes payable, bank                                                       74,379
  Increase in notes payable, shareholders                                              225,000
  Increase in debt                                                                     109,319       (    84,410)
                                                                                    ----------        ----------

     Net cash provided by (used in) financing
      activities                                                                     2,156,198       (    84,410)
                                                                                    ----------        ----------

Net decrease in cash                                                              (    67,238)       ( 1,792,419)

Cash, beginning of period                                                              288,265          3,097,161
                                                                                    ----------         ----------

Cash, end of period                                                                 $  221,027         $1,304,742
                                                                                    ==========         ==========

Supplemental disclosures:
  Cash paid during the year for:
    Interest                                                                      ($   23,907)         $   23,639
                                                                                   ==========          ==========
    Income taxes                                                                    $        0         $        0
                                                                                    ==========         ==========

Supplemental schedule of non-cash investing activities and financing activities:
    Issuance of common stock and warrants
     regarding acquisition of subsidiary                                            $1,415,000
                                                                                    ==========

</TABLE>



     See notes to condensed consolidated financial statements.
                                                                           F-4


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.      The accompanying unaudited financial statements have been prepared in
         accordance with generally accepted accounting principles for interim
         financial information and with the instructions to Form 10-QSB.
         Accordingly, they do not include all of the information and footnotes
         required by generally accepted accounting principles for complete
         financial statements.  In the opinion of management, all adjustments
         considered necessary for a fair presentation have been included.  The
         results of operations for the three months ended is not necessarily
         indicative of the results to be expected for the full year. For further
         information, refer to the consolidated financial statements and
         footnotes thereto included in the Company's annual report for the year
         ended December 31, 1996 included in its Annual Report filed on Form 10-
         KSB.


2. Organization of the Company:

        William  Greenberg  Jr.  Desserts and Cafes,  Inc. (the  "Company")  was
        incorporated  in the State of New York on November 12, 1993.  Since its
        inception  through July 10, 1995,  the Company was a development  stage
        enterprise  and did not  generate any revenues and did not carry on any
        significant  operations.  Management's efforts were directed toward the
        development  and  implementation  of  a  plan  to  generate  sufficient
        revenues in the bakery  industry to cover all of its present and future
        costs and  expenses.  On July 10,  1995,  the Company  acquired the net
        operating assets of Greenberg Desserts  Associates Limited  Partnership
        ("Greenberg's - L.P.") at which time the Company  commenced  operations
        and  ceased  being  a  development   stage   enterprise.   The  deficit
        accumulated during the development stage aggregated $100,112.

        On January 17, 1997, the Company  purchased all of  outstanding  capital
        stock  of  J.M.  Specialties,  Inc.  ("JMS")  in an  acquisition  to be
        accounted for as a purchase  (the  "Acquisition").  The total  purchase
        price aggregated  $2,215,000 of which $900,000 was paid in cash and the
        remaining  $1,315,000  through the  issuance  of 500,000  shares of the
        Company's  common  stock at fair  market  value of $1.75  per share and
        purchase  warrants  valued at fair market value of $1.10 per warrant to
        acquire  400,000  shares of the  Company's  common stock at an exercise
        price of $2.50  per  share.  JMS  offers a line of  batter  and  frozen
        finished cakes, brownies and muffins.

       In connection  with the above  described  subsequent  transactions,  the
       Company  transferred  all of its  business  assets  to a  newly  formed
       wholly-owned subsidiary,  WGJ Desserts and Cafes, Inc., in exchange for
       all of the issued and outstanding shares of common stock of such entity
       (the  "Subsidiary").  As a result,  the  Company  will act as a holding
        company with two  wholly-owned  subsidiaries.  JMS and WGJ Desserts and
        Cafes, Inc. Upon obtaining consent of the Company's  stockholders,  the
        Company changed its name to Creative Bakeries, Inc.

       On September  1, 1997,  the  Company  purchased  all of the  outstanding
       shares  of  Chatterly   Elegant  Desserts,   Inc.   (Chatterly)  in  an
       acquisition  to be accounted for as a pooling of interest.  The Company
       issued  1,300,000  of its $.001 par value  common stock in exchange for
       all of the outstanding shares of Chatterly.  Chatterly offers a line of
       tortes, cakes and mousses.




                                                                          F-5


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








3. Principles of consolidation:

       The consolidated financial statements of Creative Bakeries, Inc. and
       subsidiaries include the accounts of all significant wholly owned
       subsidiaries, after elimination of all significant intercompany
       transactions and accounts.  The accounts of J.M. Specialties, Inc., WGJ
       Desserts and Cafes, Inc. and Chatterly Elegant Desserts, Inc. are
       included as the subsidiaries of Creative Bakeries, Inc.


4.      Acquisition of Greenberg Dessert Associates Limited Partnership:

        On June 2, 1995,  the Company  entered into an agreement to purchase the
        operating assets (net of $155,700 in assumed  liabilities),  properties
        and  rights  of  Greenberg  Dessert  Associates   Limited   Partnership
        (Greenberg's - L.P.) for  $2,000,000,  consisting of $1,967,300 in cash
        and a promissory note in the amount of $32,700. This Acquisition, which
        was consummated on July 10, 1995, was accounted for as a purchase.  The
        excess of the purchase price over the value of the net assets  acquired
        was recorded as goodwill. In addition,  the Company incurred legal fees
        of $26,000, which related to the Greenberg's - L.P. acquisition.

        The net assets purchased and the liabilities assumed of Greenberg's -
        L.P. are summarized below:



        Assets purchased:
           Furniture, fixtures and leasehold improvements           $1,130,000
           Inventories                                                  40,000
           Covenant not to compete                                     125,000
                                                                    ----------
                                                                     1,295,000
        Liabilities assumed:
           Note payable - bank                                     (   123,000)
           Rent payable                                            (    32,700)
                                                                     ----------
        Net assets acquired                                          1,139,300
        Purchase price, including $73,500 of acquisition costs       2,073,500
                                                                    ----------

        Excess of purchase price over net assets acquired          ($  934,200)
                                                                    ==========




        The business acquired from Greenberg's - L.P. was founded in 1946 and is
         a recognized provider of premium quality baked goods and desserts.  The
         Company  currently  owns and  operates  six (6)  retail  bakery  stores
         located in  Manhattan,  N.Y. All baking is done at its main  commercial
         bakery  which is  located on West 47th  Street,  N.Y.,  N.Y.  From this
         location,  it services  commercial  and  catering  customers as well as
         supplying all baked goods to its six retail stores.







                                                                           F-6


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS










4.      Acquisition of Greenberg Dessert Associates Limited Partnership
         (continued):

        In order to  finance  this  acquisition,  on July 10,  1995 the  Company
        obtained   $2,000,000  from   InterEquity   Capital   Partners,   L.P.,
        ("InterEquity")  in the form of (i) an amortizing note in the aggregate
        amount of  $1,999,000  (the  "Amortizing  Note") and (ii) a $1,000 note
        which was  convertible  into shares of common stock of the Company or a
        warrant  to acquire  shares of the  Company's  stock (the  "Convertible
        Note" and together with the Amortizing Note, the "Notes").  Interest on
        the Note was 14.5% per  annum.  The  Company  also paid  InterEquity  a
        commitment fee of $50,000.  The Notes were collateralized by a security
        interest in the Company's assets as well as a collateral  assignment of
        all of the  Company's  leases and a pledge of an aggregate of 1,025,000
        shares of common stock owned by the two founding  stockholders  and the
        Company's  President.  The  Amortizing  Note was payable on or prior to
        July 31, 2000,  with interest only for the first 12 months and 48 equal
        monthly installments of principal and interest commencing July 31, 1996
        through June 30, 2000. The Convertible Note was payable in full on July
        31, 2000 with interest only payable  monthly  commencing July 31, 1995.
        This financing agreement allowed InterEquity to convert the Convertible
        Note into shares of the Company's capital stock or a warrant to acquire
        shares of stock of the Company in a number sufficient to equal up to 6%
        of the Company's  then  outstanding  preferred  and/or common shares of
        stock.

        The Notes were repaid in full in October  1995 from the  proceeds of the
        sale to the public of the Company's  common stock which was consummated
        in October  1995.  InterEquity  exercised its option under the terms of
        the Convertible Note to purchase a warrant for $1,000 to acquire shares
        equal to 6% of the Company's  outstanding  preferred and common shares.
        The  warrant  expires  in  October,  2001  and  contains  anti-dilutive
        provisions  which entitle  InterEquity  to 6% of the Company's  capital
        stock on the date the warrant is converted into capital stock. The loan
        agreement   also  requires  the  Company  to  keep  in  reserve  shares
        sufficient to satisfy the required  amount to be issued to  InterEquity
        upon  conversion.  The holder of any  shares  issued  pursuant  to such
        conversion  may  demand,  under  certain  conditions,  that the Company
        purchase  such  capital  shares for an amount  equal to a  multiple  of
        earnings  as defined or the fair value of the shares as  determined  by
        independent  appraisal.  Such put is only available to the holder(s) of
        such shares from July 10, 2000  through  July 31, 2005 and then only if
        the  Company's  classes  of  capital  stock  subject to the put are not
        listed for  trading on a national  securities  exchange  and/or are not
        quoted on an automated quotation system.










                                                                          F-7


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS










4.      Acquisition of Greenberg Dessert Associates Limited Partnership
         (continued):

        The $856,871  difference between the fair value of the 163,404 shares of
        the Company's  common stock reserved for issuance under the warrant and
        the $1,000 proceeds from the warrant was charged to operations in 1995.
        Management  ascribed  a fair  value of $5.25  per  common  share  which
        approximated the market value of the Company's common stock at the date
        InterEquity  purchased  the  warrant.  As a  result  of  the  Company's
        issuance of 61,500 common shares during 1996,  InterEquity  is entitled
        to 3,925 additional shares of the Company's common stock based upon the
        anti-dilutive  provision  of  its  warrant.  Accordingly,  $11,775  was
        charged to operations in 1996 which represented the market value of the
        warrants on the date the warrants were issued.


5.      Acquisition of J.M. Specialties, Inc.:

        On January 23,  1997,  the  Company  purchased  100% of the  outstanding
        common stock of J.M.  Specialties,  Inc. ("JMS") in a transaction to be
        accounted for as a purchase (the "Acquisition").  The purchase price of
        $2,215,000  consisted of (i) $900,000 in cash,  (ii) 500,000  shares of
        the  Company's  common  stock  valued at fair market value of $1.75 per
        share  (aggregating  $875,000),  and (iii)  400,000  purchase  warrants
        valued at fair value of $1.10 per  warrant  (aggregating  $440,000)  to
        acquire  400,000  shares  of the  Company's  common  stock at $2.50 per
        share. The warrants are in the same form as those described below.

        JMS, which was founded in 1984,  offers a line of both batter and frozen
        finished  cakes,  brownies  and  muffins  - with  muffins  constituting
        approximately  90% of sales.  These  products  are  produced in batches
        using partially automated equipment at its facility in Parsippany,  New
        Jersey.  The  product  is  sold  to  wholesale  customers  as  well  as
        supermarket distribution centers and is marketed primarily through food
        distribution  companies in New Jersey and New York. In turn,  according
        to JMS's management,  the distributor sells approximately forty percent
        of the  product  to  supermarkets  and sixty  percent  to food  service
        customers,  such as  hospitals,  colleges,  restaurants  and  corporate
        dining rooms.

        In  connection  with  the  Acquisition,  the  Company  entered  into  an
        employment  agreement with the selling shareholder pursuant to which he
        will serve as a director and chief executive  officer of the Company at
        an annual  salary level of $250,000 for the first year and a minimum of
        $150,000  thereafter.  In  addition,  the  Company  agreed  to  provide
        $600,000 to JMS for working capital.









                                                                            F-8


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






5.      Acquisition of J.M. Specialties, Inc. (continued):

        In connection with the acquisition,  the Company  transferred all of its
        then owned business assets to a newly formed wholly-owned subsidiary in
        exchange for all of the issued and  outstanding  shares if common stock
        of WGJ Desserts and Cafes, Inc. As a result, the Company currently acts
        as a holding company with two wholly-owned  subsidiaries,  JMS and WGJ.
        Upon obtaining the Company's stockholders, the Company changed its name
        to Creative Bakeries, Inc.

        In order to  finance  the  Acquisition,  the  Company  sold in a private
        placement  1,875,500  common stock purchase  warrants  ("the  Placement
        Warrants") at a net price to the Company  (after  expenses of $315,000)
        of $1,747,500.  Each Placement  Warrant  entitles the holder thereof to
        purchase  one common  share,  par value $.001 per share,  of the common
        stock of the Company at an exercise price per share of $2.50 for a term
        which will expire on December 31, 2000.

        The  Company  has  the  right  to  redeem  the  Placement  Warrants, in
        installments,  at a redemption price of $.10 per warrant commencing six
        months  after the date of issuance if the stock  trades at a designated
        level for a least five  trading days prior to the month  preceding  the
        date on which the redemption right may be exercised.

        The holders of the  Placement  Warrants  have a put option  pursuant  to
        which for a 60 day period prior to their  expiration  date,  the holder
        has the right to  require  the  Company  to  repurchase  the  Placement
        Warrants for a consideration consisting of $.10 per warrant plus 40% of
        a share of common  stock.  In addition,  the  Placement  Warrants  have
        standard anti-dilution protection.

        The assets acquired and the liabilities assumed at December 31, 1996, in
        connection with the Acquisition, are as follows:

                Assets:
                  Cash                               $ 84,129
                  Accounts receivable                 224,378
                  Notes receivable                     60,000
                  Inventories                         274,803
                  Prepaid expenses                     14,063
                  Property and equipment              483,608
                  Other assets                         27,999
                                                      --------
                                                                     $1,168,980
                Liabilities:
                  Long-term debt                       23,607
                  Notes payable - bank                 75,000
                  Accounts payable and 
                     accrued expenses                 123,938
                                                     --------
                                                                        222,545
                                                                        -------

                    Excess of net assets acquired over
                     liabilities assumed                                946,435

                    Goodwill                                          1,268,565
                                                                      ---------

                                                                     $2,215,000
                                                                     ==========




                                                                           F-9


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS









5.      Acquisition of J.M. Specialties, Inc. (continued):

        Under the terms of its  agreement  with  InterEquity  Capital  Partners,
        L.P.,  the  Company  reserved  179,229  shares of its common  stock for
        issuance under the warrant.  Management  ascribed a fair value of $1.10
        per common share which  resulted a charge to  operations of $197,229 in
        the first quarter of operations in 1997.


6.      Acquisition of Chatterly Elegant Desserts, Inc.:

        On September  1, 1997,  the  Company  acquired  100% of the  outstanding
        common shares of Chatterly  Elegant  Desserts,  Inc.  (Chatterly)  in a
        transaction  to be accounted for as a pooling of interest.  The Company
        issued 1,300,000 of its common shares pursuant to the acquisition.

        Chatterly,  which was founded in 1985,  produces a line of cakes, tortes
        and other  dessert  items which are made in its facility in  Fairfield,
        New Jersey.  The products  are sold to  wholesale  customers as well as
        supermarkets and other food distributors in New Jersey and New York.

        In connection with the acquisition of Chatterly Elegant Desserts,  Inc.,
        the Company entered into an agreement with the selling  shareholder for
        a two year period commencing September 1, 1997. The agreement calls for
        an annual salary of $100,000 to be paid to such shareholder.

        The assets acquired and the liabilities assumed at December 31, 1996, in
        connection with the acquisition of Chatterly, are as follows:

              Assets:
                 Accounts receivable              $151,750
                 Inventories                       135,000
                 Prepaid expenses                    4,713
                 Property and equipment            422,493
                 Other assets                       54,073
                                                   --------
                                                                   $768,029
              Liabilities:
                 Long-term debt                     111,034
                 Notes payable, others               47,320
                 Accounts payable and 
                     accrued expenses               375,238
                 Deferred rent                      136,958
                                                   --------
                                                                    670,550
                                                                    =======

              Excess of net assets acquired over
                 liabilities assumed                                 97,479

              Goodwill                                                2,521
                                                                      -----

                                                                   $100,000
                                                                   ========







                                                                         F-10


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS









7. Property and equipment:

        The Company's  baking  equipment,  furniture  and fixtures and leasehold
        improvements   were  deemed  to  be  impaired   and  written   down  to
        management's  estimate of their fair value at December 31,  1996.  Fair
        value, was determined by management's estimation of the net sales value
        if the property assets were offered for sale. An impairment loss in the
        amount of $797,559 was charged to operations  during the fourth quarter
        of 1996.

       The following is a summary of property  and  equipment at September  30,
        1997:

                  Baking equipment                            $1,713,628
                  Furniture and fixtures                         110,850
                  Leasehold improvements                         713,096
                  Automotive equipment                            12,896
                                                               ----------
                                                               2,550,470
                  Less:  Accumulated depreciation
                         and amortization                        907,433
                                                                 -------
                                                              $1,643,037
                                                              ==========



8. Intangible assets:

       The acquisition  agreement of  Greenberg's - L.P.  contained a provision
       for  a  covenant  not  to  compete  of  $125,000  which  management  is
       amortizing  over its  five  year  term.  Amortization  of the  covenant
       charged to operations was $18,750 in 1997 and 1996.

       The excess cost over the fair value of the net assets acquired from
       Greenberg's - L.P. aggregated $934,200.  This goodwill had been
       amortized over its estimated useful life of fifteen years.  Amortization
       charged to operations in 1996 was $46,734.

       Continuing  operating  losses has caused  management to  reevaluate  the
       goodwill  acquired in the purchase of  Greenberg's - L.P. In the fourth
       quarter of 1996,  management  completed its reevaluation and determined
       that the goodwill had no continuing  value and the unamortized  portion
       of $840,780 was charged to operations in the fourth quarter of 1996.

       On December 30, 1993, John McDonough, a fifty percent shareholder in
       J. M. Specialties, Inc., sold 100 shares of the Company's common stock
       to Philip Grabow, making Mr. Grabow the owner of all of the Company's
       outstanding shares.  As part of this transaction, J. M. Specialties,
       Inc. entered into a covenant not to compete with Mr. McDonough, whereby
       Mr. McDonough agreed not to manage, operate, join, control, or
       participate, in or be consulted as an officer, employee, sole
       proprietor, partner, shareholder or otherwise, with or for any business
       which in any such matter, directly or indirectly, has competed or will






                                                                           F-11


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








8.  Intangible assets (continued):

       compete with J. M. Specialties, Inc.  As consideration for entering into
       this agreement, the Company agreed to pay Mr. McDonough $1,000 per week,
       commencing the first week of January, 1994 and continuing through
       December 31, 1998 until a total of $260,000 has been paid.  Because no
       interest rate was stated in this agreement, $29,358 was deemed to be
       interest, as per Accounting Principles Board Opinion No. 21, leaving a
       value of $230,642 to be assigned to the covenant not to compete.

       In April of 1996, Mr. McDonough passed away, leaving the remaining
       balance of the note to his estate.  In October of 1996, J. M.
       Specialties, Inc. negotiated with the Estate of Mr. John McDonough and
       paid the remaining balance of the note of $147,179 with a lump sum
       payment of $115,000 leaving an extraordinary gain of $32,179 on the
       extinguishment of the debt as of September 30, 1996.

       Amortization  expense amounted to $34,125 for the period ended September
       30, 1997.



9. Deferred rent:

      The  accompanying   financial  statements  reflect  rent  expense  on  a
      straight-line basis over the life of the lease. Rent expense charged to
      operations  differs with the cash payments  required under the terms of
      the real property  operating  leases  because of scheduled rent payment
      increases  throughout  the  term  of  the  leases.  The  deferred  rent
      liability is the result of  recognizing  rental  expense as required by
      generally accepted accounting principles.



10. Capital stock:

      (a)  Common stock:

       In November  1996,  the Company issued 11,000 shares of its common stock
       to two (2)  employees  valued at  $33,000  for  services  rendered.  In
       November and December  1996,  the Company issued an aggregate of 26,000
       shares  of its  common  stock  valued  at  $54,510  to two law firms in
       settlement of amounts owed for legal services.














                                                                          F-12


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







10.     Capital stock (continued):

        (a)  Common stock (continued):

        In  November  1996,  25,000  shares of  common  stock  were  issued to a
        consultant  pursuant  to an  exercise  of an  option at $2.00 per share
        resulting in a charge to operations of $50,000  which  represented  the
        value of his services.

       On January 17, 1997, the Company issued 500,000 shares of its common
        shares pursuant to a stock purchase agreement of J.M. Specialties, Inc.
        (see Notes 2 and 5).

       On September 1, 1997, the Company issued  1,300,000 shares of its common
       shares  pursuant to a stock  purchase  agreement of  Chatterly  Elegant
        Desserts, Inc. (see Notes 2 and 6).

       (b)  Warrants:

              (i)  Warrants issued in 1995:

            In order to obtain  financing for the  acquisition  of Greenberg's
             -L.P.  (see Note 2), the Company sold to the lender for $1,000,
              a Convertible  Note which in  accordance  with the terms of the
              conversion  agreement,  was  converted  by  the  lender  into a
              warrant to acquire  shares of stock of the  Company in a number
              sufficient  to  equal  6% of  the  Company's  then  outstanding
              preferred and common stock  (163,404  shares of common  stock).
              The warrant  expires on July 31,  2001.  The  warrant  contains
              anti-dilutive provisions throughout its six (6) year life which
              entitles  the  holder  to  its  applicable  percentages  of the
              Company's  capital  stock on the date the warrant is exercised.
              Based upon the  issuance  1,834,000  shares of common stock and
              2,425,000  warrants  during 1997,  the lender is entitled to an
              additional  262,677  shares of common stock.  Accordingly,  the
              financial statements include a charge to operations of $288,946
              which  represents the market value of the stock at the time the
              262,677 warrants were issued by the Company.

             (ii) Other warrants issued in 1997:

             As part of the  Acquisition,  the  Company  issued on January  17,
             1997,  350,000  warrants  to  JMS's  former  owner  and  50,000
             warrants to certain of its employees.

            Concurrent with the  Acquisition on January 17, 1997, the Company
            issued  50,000  warrants  to  each  of  the  three  (3)  of the
            Company's directors.  Two (2) of which are also officers of the
             Company.

            In order  to  finance  the   Acquisition,   the  Company  sold  to
            accredited investors 1,875,000 Placement Warrants at a purchase
            price to the Company of  $1,747,500  (after  offering  costs of
             $315,000).






                                                                         F-13


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS











10.     Capital stock (continued):

        (b)  Warrants (continued):

               (ii) Other warrants issued in 1997 (continued):

               All of the  warrants  issued  in 1997,  including  the  Placement
                Warrants,  aggregating 2,425,000 entitles the holder thereof to
                purchase one common  share,  par value $.001 per share,  of the
                common  stock of the Company at an exercise  price per share of
                $2.50 for a term which will expire on December 31, 2000.

               The  Company   has  the  right  to  redeem   the   warrants,   in
                installments,  at  a  redemption  price  of  $.10  per  warrant
                commencing  six months  after the date of issuance if the stock
                trades at a  designated  level for at least five  trading  days
                prior to the month  preceding the date on which the  redemption
                right may be exercised.

               The holders of the warrants  have a put option  pursuant to which
                for a 60 day period prior to their  expiration date, the holder
                has the right to require the Company to repurchase the warrants
                for a consideration  consisting of $.10 per warrant plus 40% of
                a share  of  common  stock.  In  addition,  the  warrants  have
                standard anti-dilution protection.




11. Commitments and contingencies:

       Employment Agreements:

       On March 20,  1997,  the Company  entered in to an  employment  contract
        with the  former  owners  of a  company  that  produced  low-fat  and
        fat-free  cookies.   Pursuant  to  the  contracts,  both  individuals
        received a signing bonus aggregating  $68,000 and will each receive a
        salary of $25,000 per annum with an opportunity to earn an additional
        $50,000  each  based  on  sales   performance.   In  addition,   both
        individuals  will be entitled to warrants to acquire an  aggregate of
        50,000 shares of the  Company's  common stock in the event that sales
        volume exceeds $750,000 per annum.













                                                                         F-14


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








11.  Commitments and contingencies (continued):

      Employment Agreements (continued):

      In May and June of 1997, the employment contracts of Stephen Fass, a
      Director and President of the subsidiary, Maria Marfuggi, a Director and
      President of J.M. Specialties, Inc. and Seth Greenberg, President of the
      subsidiaries baking division, were officially terminated and settled, as
      well as the employment agreements of William and Carol Greenberg.  These
      agreements are summarized below:

                                                       Value of
                                       Cash            Warrants
                                    Settlement          Issued         Total
                                    For Wages         at $1.10       Settlement
                                                                  


         Stephen Fass                $ 44,100            $ 55,000     $ 99,100

         Maria Marfuggi                36,000              55,000       91,000

         Seth Greenberg, William
          Greenberg and Carol
          Greenberg                    72,003              39,732      111,735
                                      --------           --------     --------

                                     $152,103            $149,732     $301,835
                                     ========            ========     ========


        The  settlement  of these three  employment  agreements  resulted in the
         Company incurring an additional $89,681 in officers compensation in the
         quarter ended June 30, 1997.

        The Company also reached  agreement with four other  employees with whom
         the  Company  had  employment  agreements.  The  net  effect  of  these
         settlements  decreased officers  compensation,  which had been accrued,
         $72,914 in the quarter ended June 30, 1997.

        In conjunction with the purchase of Chatterly  Elegant  Desserts,  Inc.,
         The Company entered into an employment agreement with a former employee
         of Chatterly.  The agreement covers a three year period commencing upon
         the  transfer of the  Company's  shares to the seller of  Chatterly  on
         September 1, 1997. In the first year of the contract the employee is to
         receive  warrants to purchase  20,000  shares of the  Company's  common
         stock at $2.50 per share. In the second two years of the agreement, the
         employee  is to  receive an annual  salary of  $150,000  per year.  The
         Company has not recognized  compensation on the granting of warrants to
         this  employee  since the fair value of the  warrants  is less than the
         exercise price.










                                                                          F-15


<PAGE>



                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS











11.  Commitments and contingencies (continued):

        License Agreement (continued):

        On May 18, 1995, the Company entered into an agreement with Macy's East,
         Inc.  (the  "licensor"),  pursuant  to which it granted  the  Company a
         license  consisting of the right to operate a cafe in its store located
         on 34th  Street,  New York,  NY. The cafe  offers for sale fresh  baked
         pastries and desserts as well as soups,  salads,  sandwiches,  coffees,
         teas and other non-alcoholic beverages to the general public. Under the
         license agreement, the Company must pay the Licensor a fee equal to ten
         percent  (10%) of net sales  relating  to the cafe.  Such  license  fee
         charged to  operations  amounted to $5,069 in 1995.  In  addition,  the
         Company must spend for  advertising  an amount  equal to three  percent
         (3%) of its net sales. The license  commenced in November 1995 and ends
         on the Saturday nearest to July 31, 1996. The agreement, which has been
         renewed  for the one year,  is  automatically  renewed  for  successive
         periods of one year unless  either  party gives  notice to the other at
         least ninety (90) days prior to the  expiration  of the initial term or
         any renewal term that the agreement shall not be renewed.

        As an addendum to the above agreement,  during 1996 the Company opened a
         second  cafe in the Macy's  34th  Street  store and has placed four (4)
         kiosks  in  various  Macy's  locations   outside  New  York  City.  The
         additional  locations all operate under the  provisions of the original
         agreement described above.

        Long-term debt:

        Equipment  with a cost of $297,000 has been pledged as  collateral  in a
         note payable in monthly installments of $5,374, including interest. The
         notes  carry  interest  varying  rates of 10.30% to 17.87%  and  mature
         between 1998 and 2000.

        The  total  future  annual  payments  as of  September  30,  1997 are as
follows:



                           September 30, 1998                     $49,793
                           September 30, 1999                      32,568
                           September 30, 2000                      10,979
                                                                  -------
                                                                  $93,340
                                                                  =======












                                                                       F-16


<PAGE>


                    CREATIVE BAKERIES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS









12. Related party transactions:

      The Company shares warehouse facilities with J. P. Veggies, Inc.  Mr.
      Grabow and his family, own 40 percent of J. P. Veggies, Inc.  The
      Company charges J. P. Veggies, Inc. for the manufacturing and packing of
      product and for certain sales and administrative support provided by
      J. M. Specialties, Inc.  These billings were included in the Company's
      net sales and amounted to $35,540 in 1997 and $71,926 in 1996.

      The  Company  has a demand  note  receivable  with a related  party that
      carries  interest at five  percent.  The balance at September  30, 1997
      amounted to $57,300.



13. Reconciliation of shares used in computation of earnings per share.


                                                      1997              1996
                                                      ----              ----

   Weighted average of shares actually
    outstanding                                    3,203,000          3,060,000

   Common stock purchase warrants                  2,586,369            746,628
                                                   ---------          ---------

   Primary and fully diluted weighted
    average common shares outstanding              5,789,369          3,806,628
                                                   =========          =========





                                                                        F-17


<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Plan of
         Operation

General:

     The Company was  incorporated  in November 1993 and was in the  development
stage  through  July 1995.  From  April 1994  through  June  1995,  the  Company
assembled  its core  management,  raised  approximately  $ 600,000  from  equity
financing,  and  negotiated  a definitive  agreement  to purchase the  operating
assets and business of Greenberg's L.P. In July 1995, the Company  completed the
acquisition  for a purchase  price of $ 1,967,300 in cash and a promissory  note
for $ 32,700.  In  connection  with the  acquisition,  the Company  obtained a $
2,000,000  term loan and applied a portion of the net proceeds  from its initial
public  offering,  consummated  in October 1995 to pay in full the principal and
accrued  interest  under the term loan. The  acquisition  was accounted for as a
purchase and the excess of the  purchase  price over the value of the net assets
acquired was recorded as goodwill.

At  September  30,  1997 to the extent the Company  may have  taxable  income in
future  periods,  there is available a net operating loss for federal income tax
purposes of  approximately  $  6,500,000  which can be used to reduce the tax on
income up to that amount through the year 2011.

b.  Results of Operations:

         Historical:
     The Company  from its  inception  on November 12, 1993 through July 10,1995
was in the developmental  stage and did not carry on any significant  operations
nor generate  any  revenues.  Management's  efforts  were  directed  towards the
development and implementation of a plan to generate  sufficient revenues in the
baking  industry  to cover all of its costs and  expenses.  The  Company did not
generate any revenues until July 10, 1995 when it acquired the operating  assets
of Greenberg's L.P.

     The Company's  consolidated revenues aggregated $ 6,361,242 and $ 6,762,495
for the nine months ended September 30, 1997 and 1996, respectively. The cost of
goods sold was  $4,611,831 in 1997 and $ 4,901,769 in 1996.  Operating  expenses
were $ 3,503,220  in 1997 and  $3,541,264  in 1996.  As a result,  the loss from
operations for the nine months ended  September 30, 1997 and 1996 was $1,746,447
and $ 1,578,769 respectively.

     The Company's  consolidated revenues aggregated $ 1,989,913 and $ 2,273,250
for the three months ended September 30, 1997 and 1996, respectively, a decrease
of 13%. The cost of goods sold for 1997 was  $1,416,585 and $ 1,631,121 in 1996,
a decrease  of $ 214,536 or 14%. In  addition,  operating  expenses  decreased $
172,481 from  $1,181,398 in 1996 to $ 1,008,917 in 1997, or 15%. The net loss in
1997 was $  428,026  and $  461,683  in  1996,  a  decrease  of  $33,657  or 8%.
Management  attributes this positive trend to its restructuring  efforts and its
implementation of new management.


     In the first nine months of 1997,  the Company  incurred  costs  associated
with issuance of the warrants.  These costs, for services rendered and loan fees
to Interequity,  were charged to operating costs and amounted to approximately $
486,946 of which  $198,000  was used to pay  certain  payroll  obligations  when
employment   contracts  were  settled.   In  addition,   one  of  the  Company's
subsidiaries,  JM  Specialties,  Inc.,  paid one  time  signing  bonuses  to two
employees amounting to $68,000


     For the nine months ended  September 30, 1996, the Company earned  interest
income of $ 42,691  which  arose  mainly  from  investing  a portion  of the net
proceeds it received upon the  consummation  of the initial  public  offering in
liquid cash equivalents.


The 1997 statements of operations reflect a charge in the amount of
$ 288,946, which represents the fair market value of 262,677 warrants, issued to
a lender in order to satisfy the  obligation  under a written  agreement.  These
warrants were valued at $1.10.

The  resulting  net loss  aggregated $ 1,746,447 for 1997 ($.30) per share and $
1,578,769 for 1996 ($.41) per share.

     The retail division and wholesale divisions of the Parent Company,  William
Greenberg Jr. Desserts and Cafes, Inc., sell similar products which are baked at
the company's centralized baking facility.  Costs are allocated to each division
based  upon  the  standard  costs of the  items  sold.  Such  costs  consist  of
ingredients,  direct labor and overhead. Since the acquisition of the Greenberg-
L.P., management has concentrated their efforts on running the wholesale segment
as a separate business.


 J.M.  Specialties,  Inc.,  offers a line of batter and frozen  finished  cakes,
brownies, and muffins. J.M Specialties, Inc.'s financial records and affairs are
kept  separate  from the  parent  but  included  in the  consolidated  financial
statements at September 30, 1997 and 1996.

     Selling,  general and administrative expenses of the retail segment consist
of (i)  expenses  incurred in each of the five retail  stores and (ii)  expenses
allocated  from the Company's  centralized  operating  facility  which are based
primarily on sales volume.  The increase in selling,  general and administrative
expenses  as a  percentage  of sales  during  1997,  as  compared  to 1996,  was
primarily  the result of the effect of the  issuance  of common  stock  purchase
warrants for services rendered, salaries, and fees ($516,000) and the settlement
and termination of various employment agreements.

The decrease in depreciation  and  amortization  for 1997 as compared to 1996 is
attributable  to  depreciation  and  amortization  from assets  written  down or
written off for the year ended December 31, 1996.


c.       Plan of Operation:

Reorganization of  New York City Baking Operations:

     During the first six months of 1997  management has taken numerous steps to
restructure  its New York City baking  operation  in a  concentrated  efforts to
reduce operating costs.  Their plans have involved a restructuring of the entire
management team. Duties have been divided between manufacturing,  wholesale, and
retail  operations.  The  commissary  at 47th  Street,  New  York  City has been
redesigned  with  resulting  savings in labor and overhead.  Purchasing has been
centralized which has also resulted in savings.  Leases have been  renegotiated,
employment  contracts,  which have seriously  impacted the Company's cash flows,
have been either renegotiated or terminated.


In  connection  with the  restructuring  plan,  management  has written down its
baking equipment,  leasehold  improvements and fixtures as of December 31, 1996,
by  approximately  $ 800,000 due to  impairment  in their  value.  In  addition,
management has determined unamortized goodwill of approximately $ 840,000 has no
continuing  value and accordingly it was written off during 1996.  Finally,  the
Company  had  charged  1996  with a $ 450,000  provision  for  actions  aimed at
restructuring  the Company,  of which $100,000 was actually  incurred as of June
30,  1997.  This  restructuring  charge  is  predominantly  comprised  of  costs
associated  with the  elimination  of certain  positions,  provisions  for lease
obligations on certain retail stores,  and charges for  consultants  involved in
the restructuring.  By taking the above-mentioned  actions, future periods, will
not be burdened with the amortization, depreciation or expense of these costs.

Management feels that as a result of the restructuring and elimination of costs,
savings for the fiscal year 1997 will be in excess of $ 1,000,000.

Acquisition of J.M. Specialties Inc.:

On January 17, 1997, the Company entered into a stock purchase  agreement (Stock
Purchase Agreement) with Philip Grabow (Grabow),  pursuant to which, January 23,
1997, the Company  consummated  the purchase from Grabow of all the  outstanding
shares of J.M. Specialties,  Inc., a New Jersey Corporation (JMS Subsidiary), in
exchange  for (I) $ 900,000 in cash,  (ii)  500,000  shares (the  Shares) of the
Common  Stock  of  the  Company  and  (iii)  400,000   warrants  (the  Warrants)
exercisable  for shares of Common Stock of the Company (the  Transaction).  Each
warrant  entitles  Grabow to purchase  one share of Company  common stock at the
exercise price of $ 2.50 per share until  December 31, 2000. In connection  with
the Stock  Purchase  Agreement  , Grabow  and the  Company  also  entered  (i) a
registration rights agreement, dated as of January 23, 1997, regarding the terms
of the  registration of the Shares of Common Stock of the Company  issuable upon
exercise of the Warrants,  and (ii) and employment  agreement  dated January 23,
1997. Pursuant to the employment  agreement,  Grabow will serve as president and
Chief  Executive  Officer of the Company at the annual  salary level of $250,000
for the first year,  and a minimum of $ 150,000  thereafter.  Also in connection
with the Transaction, effective January 23, 1997, Grabow was elected to serve as
a director of the Company as a result of the  Transaction,  Grabow  beneficially
owns 850,000 shares (or 24.5%) of the common stock of the Company.

     With the acquisition of the JMS  subsidiary,  the Company now also offers a
line  of  batter  in  frozen-  finished  cakes,  brownies,  and  muffins,  which
constitute  approximately 90% of the JMS Subsidiary's  sales. These products are
manufactures  in  batches  using  partially   automated  equipment  at  the  JMS
Subsidiary's  facility in  Parsippany,  NJ. The  products  are sold to wholesale
customers as well as supermarket distribution centers and are marketed primarily
through food distribution  companies in New York and New Jersey.  The management
of the Company believes that distributors sell approximately 40% of the products
to supermarket and 60% to food service customers.


     To develop new accounts,  JMS Subsidiary  personnel present the products at
food shows,  contact possible  customers directly to have them order the product
from  their  distributor  an  through  direct  mailings  to  customers.  The JMS
Subsidiary's  current food  distribution  include  SYSCO Foods,  Alliant  Foods,
Rykoff-Sexton and over 75 other accounts consisting of supermarket  distribution
centers,  Food service  distributors,  and independent bakery distributors.  The
product  ultimately  ends up at Food  Service  accounts  such as the  Museum  Of
Natural History, Various colleges, Hospitals,  corporate feeders, and retailers,
such as Shop Rite, Path Mark, A& P etc.

The JMS Subsidiary  started business in October 1994 as a company making gourmet
batter  product.  The product line was then extended to Sugar Free then Fat-Free
and finally frozen finished baked product.

     According to the Company's  management , this change reflects the change in
the  marketplace  where  consumers  wanted more Fat Free  products and customers
wanted  frozen  finished  products to minimize  customer time to bake and finish
batter product.


     Management of the JMS  Subsidiary  believes that the  reputation of the JMS
Subsidiary has grown  considerably as a result of the product's taste,  texture,
and  price  value.  The  product  has  no  preservatives,  hydrogenated  oil  or
chemicals: rather it uses natural ingredients.


In connection with the  Transaction,  the Company provided $ $600,000 to the JMS
Subsidiary for working capital purposes.  The payment of the cash portion of the
purchase  price for the JMS  Subsidiary  and such working  capital  aggregated $
1,500,000, was funded through net proceeds received from the sale by the Company
of $1,875,000 common stock purchase warrants (the Private Placement Warrants) at
a  price  of $ 1.10  per  Private  Placement  warrant  to a  limited  number  of
purchasers  that qualify as accredited  investors  under the  Securities  Act of
1933.The terms of the Private Placement  Warrants are  substantially  similar to
the Warrants.


 (iii) Other Acquisitions:

On March 20, 1997,  the Company  entered into an  employment  contract  with the
former owners of a company that produced low-fat and fat- free cookies. Pursuent
to the contract both individuals  received a signing bonus  aggregating $ 68,000
and will each receive a salary of $ 25,000 per annum with an opportunity to earn
an additional  $50,000 each based on performance.  In addition both  individuals
will be entitled to an  aggregate  of $ 50,000  warrants in the event that sales
volume exceeds $ 750,000 per annum.

     Currently,  a contract  has been  signed to produce  fat free  cookies  for
Safeway  Supermarkets  under their  Healthy  Advantage  label.  This contract is
estimated to take effect  September  1997.  The Company is also  pursuing  other
contracts with various Supermarket chains.


(iv) (A)Acquisition of Chatterly Elegant Desserts, Inc.:

On March 17, 1997, the company entered into a stock purchase agreement with Yona
Abrahami,  pursuant to which on  September 1, 1997 the Company  consummated  the
purchase from  Abrahami of all of the  outstanding  shares of Chatterly  Elegant
Desserts,  Inc., a New Jersey Corporation (Chatterly subsidiary) in exchange for
1,300,000 shares of the Company's stock.

       (B) JMS and Chatterly consolidation:

By the end of October  1997 the  process of merging  the  operations  of JMS and
Chatterly  was almost  completed.  By the end of November  1997 the JMS facility
will be fully vacated and the merger will have been fully completed. This merger
will  result in  estimated  savings of between $ 400,000 and $ 600,000 per year.
These  savings  are in addition to the  savings  from the  restructuring  of the
Greenberg operations.

The  acquisition  of  Chatterly  adds  considerable  management  strength to the
Company's  operations.  The  efficiencies  derived  from the  merger  of JMS and
Chatterly  positions  the  Company  to  aggressively  pursue new  business  with
improved  profit margins.  The Management will implement new marketing  programs
with focus on growing the wholesale end of the business.

Liquidity and Capital Resources:

Since its inception the Company's only source of working  capital has been the $
8,342,000 received from the issuance of its securities.

In June 1995,  The Company  issued  180,000  shares of common stock to unrelated
parties for $ 600,000 and in August 1995,  the Company  issued  60,000 shares of
its common  stock to unrelated  parties for $ 200,000.  In  connection  with the
acquisition of Greenberg's- L.P., the Company received  $2,000,000 from the sale
of two notes to InterEquity Capital Partners, L.P. (InterEquity). During October
1995, the Company received net proceeds of $4,900,000 from the sale of 1,150,000
shares of its common stock in an initial  public  offering.  During January 1997
the Company  received net proceed of  $1,747,500  from the private  placement of
1,875,000  common stock purchase  warrants at $1.10 per warrant.  During October
1997 the Company  received  net  proceeds of $882,000  from the  excersize  of a
portion of these common stock purchase warrants. Of the $5,700,000 proceeds from
the  aforementioned  stock  sales:  (i) $  2,125,000  was  issued  to repay  the
InterEquity  debt including  interest;  (ii) $ 2,615,000 was used in operations;
(iii) $ 765,000 was used to purchase  property,  equipment and  leaseholds;  and
(iv) $ 195,000 was used for general corporate purposes. The $ 1,747,500 proceeds
from the private  placement  warrants  was used to purchase  JMS.  The  $882,000
proceeds  from the excersize of warrants are  earmarked  for  consolidation  and
merger of JMS and Chatterly ($ 325,000) and to fund new business.

     As of September  30, 1997,  the Company has a negative  working  capital of
approximately  $  1,129,729  as  compared  to a  negative  working  capital of $
1,134,000 at December 31, 1996.  During the first half of 1997,  management took
actions aimed at  restructuring  the Company in order to reduce  operating costs
and enhance the Company's focus and efficiency.  Pursuant to the restructuring a
new  management  team was put into place,  executive  contracts  and leases were
renegotiated and certain positions were eliminated. The Company expects that the
aforementioned  actions will stop the cash  outflows,  which it has  experienced
since inception.

         Selling,  general and  administrative  expenses  of the retail  segment
consist of (i)  expenses  incurred  in each of the five  retail  stores and (ii)
expenses allocated from the Company's  centralized  operating facility which are
based  primarily  on  sales  volume.  The  increase  in  selling,   general  and
administrative expenses as a percentage of sales during 1997 as compared to 1996
was primarily the result of the effect of the issuance of common stocks purchase
warrants for services rendered, salaries, and fees ($714,717).

     The decrease in amortization  for 1997 as compared to 1996, is attributable
to  amortization  from  assets  written  down or written  off for the year ended
December 31, 1996.