<PAGE>   1



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                       THE SECURITIES EXCHANGE ACT OF 1934

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

                   For the fiscal year ended December 31, 2000
                                       OR

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

         [NO FEE REQUIRED]

            For the transition period from _______________ to ______
                         Commission file number _______

                            JERRY'S FAMOUS DELI, INC.
             (Exact name of Registrant as specified in its charter)


<TABLE>
<S>                                  <C>                               <C>
           California                            5812                        95-3302338
 (State or other jurisdiction of     (Primary Standard Industrial         (I.R.S. Employer
 incorporation or organization)       Classification Code Number)      Identification Number)
</TABLE>

                             12711 Ventura Boulevard
                                    Suite 400
                          Studio City, California 91604
                                 (818) 766-8311
               (Address, including zip code, and telephone number,
        including area code, of registrant's principal executive offices)

        Securities registered pursuant to Section 12(b) of the Act: None
    Securities registered pursuant to Section 12(g) of the Act: Common Stock

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES [X]     NO [ ].

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 [ ].

         The number of shares of common stock of the Registrant outstanding as
of February 28, 2001: 4,673,042 shares.

         The aggregate market value of the outstanding common stock of the
Registrant held by non-affiliates of the Registrant, based on the market price
at February 28, 2001, was approximately $6,139,789.

                       Documents Incorporated by Reference
                       -----------------------------------
         Certain portions of the following documents are incorporated by
reference into Part III of this Form 10-K: The Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held May 29, 2001.

<PAGE>   2


                            JERRY'S FAMOUS DELI, INC.

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Jerry's Famous Deli, Inc. (the "Company" or "JFD") is an operator of
New York deli-style restaurants and a gourmet market. The Company currently
operates 10 restaurants, including seven in Southern California operating under
the name "Jerry's Famous Deli," one in Southern California operating under the
name "Solley's" and two in Southern Florida operating under the name Wolfie
Cohen's Rascal House ("Rascal House"). The Company also operates The Epicure
Market ("Epicure"), a specialty gourmet market located in Miami Beach, Florida.

         In Southern California, the seven Jerry's Famous Deli restaurants have
the look and high energy feel of a New York deli-style restaurant, with Broadway
as the theme, and posters and colored klieg lighting creating the setting. The
Solley's restaurant in Sherman Oaks, California retains the smaller, family
atmosphere its patrons enjoyed for years before it was acquired by the Company
in 1996. The Rascal House in Miami Beach, Florida, has its own unique character
that has been popular for over 40 years, and the Company added another in Boca
Raton, Florida which opened in July 1998. However, the true strength of all of
the Company's restaurants is in the execution of the extraordinary menus. At
Jerry's Famous Deli restaurants, customers can choose from a menu of over 600
items, while at Solley's and Rascal House, customers can enjoy their old
favorites, along with many of the Jerry's Famous Deli menu items, all prepared
with consistency and quality at every location. People come to a Jerry's,
Solley's or Rascal House for the food, and they expect their favorite item the
same way every time at each location. The Company depends heavily on its repeat
customers, and it emphasizes consistency, quality and cleanliness in an
atmosphere acceptable to the whole family, and appealing to the very different
demographics in the clientele at different times of the day. Each of the
Company's restaurants offer moderately priced, high quality food for in-store
eating, take-out, delivery or catering services, seven days a week operation,
and high energy ambiance. Epicure is a gourmet market that has been in operation
for over 50 years, which serves fresh hot-cooked food and soups, juices, salads
and numerous bakery products all prepared on the premises. Epicure also has
traditional delicatessen fare, along with fresh produce and specialty wines and
cheeses.

         The seven Jerry's Famous Deli restaurants in operation at December 31,
2000 had average sales of approximately $5.5 million per location for the year
ended December 31, 2000. Solley's had sales of approximately $3.6 million, and
the Rascal House restaurants had average sales of approximately $5.9 million for
the year ended December 31, 2000. Epicure had sales of approximately $15.9
million for the year ended December 31, 2000.

         In 2000, the Company continued with operational changes which appear to
have resulted in significant improvements at the restaurant level. However, the
price of the Company's stock continued to deteriorate. The price fell below $1
per share, which caused violation of a listing maintenance requirement of the
Nasdaq Stock Market. In order to avoid delisting from the Nasdaq Stock Market,
the Company effected a one-for-three reverse stock split on February 9, 2000,
reducing the total number of issued and outstanding shares from 14,019,202 to
4,673,042 and moved its listing from the Nasdaq National Market to the Nasdaq
SmallCap Market. (Except as specifically indicated, all share and per share
information in this report have been adjusted to give retroactive effect to the
reverse stock split.)

         In light of the market conditions for the Company's stock, and other
restaurant industry and non-technology stocks, the Company and the Board of
Directors has engaged in an ongoing review of all strategic alternatives. At
this point the Company is not necessarily going to aggressively seek expansion
by development of new restaurants or stores, at least while the strategy is
under review. The Company will continue to seek attractive licensing


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opportunities with shopping mall food court operations, such as it has made with
Universal CityWalk in Universal City, California.

         Management and the Board of Directors will continue to examine all
strategic alternatives and, in that regard, continue to have discussions with
professional advisers. The Company may still seek to expand and will continue to
review opportunities for acquisition of sites for expansion of existing deli
style operations available for acquisition to determine if particularly
attractive situations are available, especially in its core areas of operation
in Southern Florida and Southern California. A Jerry's Famous Deli is currently
under development in South Miami, Florida. Management may consider additional
public or private offerings of equity or additional debt financing to fund its
future expansion. However, there is no assurance that a growth strategy will be
pursued or additional capital will be available to finance growth. See "Risk
Factors." The Company may determine the best course is to use any positive cash
flow to improve its financial condition, putting the Company in a better
position to be opportunistic in taking advantage of future opportunities. The
Company may use available cash for other actions, including additional stock
repurchases, to try to enhance shareholder value. The Company may pursue mergers
or acquisitions or asset or other sale possibilities, although previous
investigation of potential sale opportunities did not indicate satisfactory
potential.

         The ownership of the Company's stock is now highly concentrated, which
could increase the possibility of a proposal to take the Company private. As
previously announced, an Independent Committee of the Board of Directors of the
Company has been given full authority to respond to any tender offers, merger
proposals or proposals to take the Company private which might come from the
affiliates of any other board member or the affiliates of the Mitchell family,
who have accumulated a major holding in the Company. While no specific proposals
have yet been put to the Company, the Independent Committee has engaged a
valuation firm to provide a fairness opinion in relation to the evaluating of
any potential tender offer made by the Company or a third party and in regard to
any potential "going private" transaction that may be proposed by affiliates or
otherwise.

         The Company is organized under the laws of the State of California. The
Company's offices are located at 12711 Ventura Boulevard, Suite 400, Studio
City, California 91604. Its telephone number is (818) 766-8311.

HISTORY AND BACKGROUND

         The Company was established in 1978 to develop the Jerry's Famous Deli
restaurant in Studio City, California. Three additional Jerry's Famous Deli
restaurants were opened prior to 1995 in Encino, California (July 1989), Marina
del Rey, California (July 1991) and West Hollywood, California (January 1994).

         In October 1995, the Company completed its initial public offering of
651,667 shares of Common Stock (the "Public Offering"), which resulted in net
proceeds of approximately $9.2 million. The proceeds of the Public Offering were
used to finance the opening of new restaurants in 1996.

         The Company opened two new Jerry's Famous Deli restaurants in the first
half of 1996, in Pasadena, California (February 1996) and Westwood, California
(June 1996). The Pasadena restaurant was subsequently sold on May 2, 1999. The
Company purchased two existing restaurants and an adjoining bakery in Sherman
Oaks, California, and Woodland Hills, California, in July 1996. The Sherman Oaks
restaurant has continued to operate under the name "Solley's," and the Woodland
Hills restaurant was closed for renovation and reopened in December 1996 as a
Jerry's Famous Deli.

         In August and November of 1996, the Company sold 12,000 convertible
preferred shares to affiliates of Waterton Management, LLC ("Waterton"), raising
approximately $11 million. The proceeds of these issuances, together with bank
borrowings, were used in connection with the Company's acquisition, renovation
and opening of new restaurants. In December 1996 and March 1997, all of the
outstanding preferred shares were converted into a total of 1,218,802 shares of
Common Stock. Concurrently with the conversion, the Company entered into a
consulting agreement with Kenneth J. Abdalla, a director of the Company and
managing member of Waterton, to act as the Company's President and to provide
advice and consultation with respect to sites to be leased or purchased or other
assets or entities to be acquired by the Company. The consulting agreement
expired on December 31, 2000.


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         In September 1996, the Company purchased the real property, building
and restaurant business of "Wolfie Cohen's Rascal House," a well known
deli-style restaurant in Miami Beach, Florida, which the Company has operated
and intends to continue to operate under the name "Wolfie Cohen's Rascal House."
The Company substantially retained and expanded upon the menu and operating
format of the restaurant, but the hours of operation have been expanded. In
addition, the restaurant implemented delivery service, taking call-in orders for
take out, and taking charge cards, all of which were not previously done at
Rascal House.

         In August 1997, the Company opened its newest Jerry's Famous Deli
restaurant in Costa Mesa, California. The restaurant is a 9,400 square foot
facility located adjacent to the South Coast Plaza shopping mall in Orange
County, California.

         On January 21, 1998, the Company entered into an agreement to acquire a
long-term ground lease on an 11,000 square foot restaurant property located in
Boca Raton, Florida. The acquisition closed on February 18, 1998. Under the
agreement, the Company acquired the restaurant equipment and other personal
property located on the premises, and the seller's liquor license for the
restaurant, for a total purchase price of approximately $1.8 million. The
Company closed the restaurant for refurbishment and conversion to a Rascal House
restaurant until July 1, 1998, when it was reopened.

         On April 1, 1998, the Company purchased The Epicure Market of Miami
Beach, Florida, a family-owned specialty gourmet food market that has been in
operation for more than 50 years. The total purchase price for the business was
approximately $7.1 million in cash and 311,503 shares of the Company's common
stock (valued at approximately $2,395,147). Concurrently with the purchase, the
Company entered into a 20-year term lease agreement with additional options to
renew with affiliates of the seller and five-year term employment agreements
with the two family members who, together with their family, have managed the
market for over 50 years. In November 1998, Mitchell Thal, one of the previous
owners of Epicure, left the Company to pursue other interests. In addition, the
Company has increased the interior sales area of the market and has increased
store operating hours. Epicure has begun to supply some of its homemade cooked
foods to its Rascal House restaurants in Boca Raton and Miami, Florida.

         In September 1998, the Company initiated a stock repurchase program to
buyback up to $300,000 in the Company's common stock, which it subsequently
increased to $1,000,000 in November 1998 and to $2,000,000 in March 1999. The
Company believes that at its current market price the Common Stock remains an
excellent value and that it is therefore in the best interest of the Company to
repurchase the shares. As of December 31, 1999, the Company had repurchased
approximately 375,000 shares. No additional repurchases have been made during
fiscal year 2000.

         On May 2, 1999, the Company closed escrow on the sale of its Pasadena
restaurant facility. The gross proceeds from the sale were $4,120,000 which
resulted in no significant gain or loss. Of these proceeds, approximately
$3,750,000 was used to reduce the Company's debt and the remaining proceeds were
applied to other related costs of the sale.

         In September 1999, the Company entered into a Quick Food License
Agreement ("Agreement") with Universal Studios CityWalk Hollywood ("Universal")
to provide consulting and technical services to Universal in connection with the
planning, development, construction, furnishing and equipping of a "Jerry's
Famous Deli" type restaurant, located in Universal City, California. The
Agreement has a term of approximately 10 years from the restaurant's opening
date, with certain provisions for options to extend. The restaurant opened March
21, 2000. The Company will earn from Universal a licensing fee at a specified
amount for the first two years of restaurant operations, with an additional fee
payable to the Company if certain excess requirements are met. In addition,
during all subsequent years the Company will earn an amount equal to a specified
percentage of defined "gross sales" of the restaurant.


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RECENT DEVELOPMENTS

         On February 9, 2000, the Company effected a one-for-three reverse stock
split. The purpose of the reverse split was to qualify the Company's stock for
listing on the Nasdaq SmallCap Market. A decreasing share price and public float
had resulted in a notice of delisting from the Nasdaq National Market. The
Company's shares could no longer qualify for the Nasdaq National Market, but
could move to the Nasdaq SmallCap Market if they could maintain a bid price over
$1 per share. As of February 3, 2000, the Company's stock is being traded over
the Nasdaq SmallCap Market instead of the Nasdaq National Market.

         On August 10, 2000, the Starkman Family Partnership (an affiliate of
the Company) sold to the Company two parcels of land constituting the primary
parking facility for the West Hollywood restaurant. The Company previously
leased these two parcels from the Starkman Family Partnership on terms arranged
before the Company's initial public offering. Prior to the purchase, the Company
had no option or right of first refusal in relation to the parcels. The West
Hollywood restaurant facility is still leased by the Company from a third party
landlord. The parcels are required for the use of the restaurant facility. The
independent Directors of the Company determined that control of the parking lots
was strategically important to the Company, especially in future lease
negotiations with the landlord of the restaurant facility. In addition, with the
rent projected to be equivalent to the carrying cost of the funds to purchase
the property, the Directors believed that the future appreciation in value would
be a valuable asset to the Company. The Starkman Family Partnership sold the
parcels to the Company for $1,420,000, which was determined by an independent
third party appraiser. The Board of Directors approved the purchase of the
parcels in July 2000. The purchase price was financed through funds available on
the Company's line of credit.

         On September 12, 2000, the Company entered into an operating lease
agreement on an 11,000 square foot property located in South Miami Beach,
Florida for development as a Jerry's Famous Deli. The lease agreement has an
initial term of 15 years from the restaurants opening date and required a
non-refundable deposit of $300,000. The location is currently a nightclub and
will take up to twelve months to refurbish as a Jerry's Famous Deli. The Company
has a due diligence contingency period and no assurance can be given that
currently unforeseen issues will not cause the Company to exercise its right to
cancel the transaction.

EXISTING FACILITIES

         The Company operates seven Jerry's Famous Deli restaurants in Southern
California, each of which features a New York Broadway theme, with an array of
lighting, posters and decor giving a "theatrical" setting. Each of the Jerry's
restaurants has a large deli style take-out counter displaying a wide range of
deli meats, salads and other prepared foods, along with a bakery display. Most
of the Southern California restaurants, including Solley's, provide attractive
patio dining, where smoking is permitted, and strategically placed televisions,
generally showing sports events, which add to the casual atmosphere. The
Company's eight Southern California restaurants in operation at the end of 2000
averaged approximately 7,488 square feet of dining and kitchen space and 326
seats.

          The Rascal House features a traditional deli restaurant atmosphere
that has been popular with its patrons for over 40 years. When the Company
acquired the Rascal House in Miami Beach, it substantially retained and expanded
upon the existing menu and operating format of the restaurant, but the hours of
operation of the restaurant were expanded, and the restaurant began delivery
service, taking call-in orders for take out, and taking charge cards, all of
which were not previously done at Rascal House. This led to a substantial
increase in sales. The Rascal House restaurant consists of over 12,000 square
feet of dining and kitchen space and 375 seats. The Rascal House restaurant in
Boca Raton features the traditional atmosphere and menu of the original Miami
Beach Rascal House.

         Epicure is an over 50 year old gourmet market, which serves fresh
hot-cooked food and soups, juices, salads and numerous bakery products all
prepared on the premises. Epicure also has traditional delicatessen fare, along
with fresh produce and specialty wines and cheeses.

         All of the restaurants feature an extensive menu emphasizing
traditional deli type fare (such as pastrami, corned beef, roast beef and turkey
sandwiches, knishes, blintzes, chopped liver, lox and bagels, chicken soup,


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knockwurst and hot dogs), as well as an extensive assortment of pastas, salads,
omelettes, fresh baked breads and desserts, burgers, chicken and steaks. Also
offered at most restaurants is a complete line of pizzas, ranging from
traditional to specialty items, such as lox pizza, chicken pizza and deli pizza.
Most items, other than smoked fish and meat, are prepared on site at each
restaurant. Each restaurant also provides bar service.

         Annual sales for 2000 for each of the seven Jerry's Famous Deli
restaurants open during all of 2000 ranged from approximately $3.6 million for
the Costa Mesa restaurant, with 320 seats, to approximately $7.9 million for the
Studio City restaurant, with 342 seats. Annual sales at Solley's in Sherman
Oaks, California totaled approximately $3.6 million, with 160 seats. Annual
sales at the Rascal House restaurants in Miami Beach and Boca Raton, Florida for
2000 totaled approximately $7.1 million, with 375 seats and $4.7 million, with
325 seats, respectively. Annual sales at the Epicure Market in Southern Florida
for 2000 totaled approximately $15.9 million. Management believes that the
Company's high sales volume per restaurant coupled with efficient cost controls
enable the Company to offer an excellent value, while permitting the Company to
maintain strong operating margins.

MARKET NICHE

         Management's strategy has been to expand upon well-known brand name
restaurants in high profile sites within larger metropolitan areas. Management
believes that the Company's commitment to providing attractive locations that
stand out in major high traffic areas and a high level of customer service has
been its most effective approach to attracting customers. Accordingly, the
Company has historically relied primarily on word of mouth to attract new and
repeat customers. Management believes that this strategy has enabled its newer
restaurants to benefit from the name recognition and reputation for quality
developed by existing restaurants.

         The Company seeks to distinguish itself from its competitors in the
moderately priced, casual dining market segment by offering the following:

         o        an extensive menu at each of its restaurants emphasizing
                  traditional deli type fare (such as pastrami, corned beef,
                  roast beef and turkey sandwiches, knishes, blintzes, chopped
                  liver, lox and bagels, chicken soup, knockwurst and hot dogs),
                  as well as pastas, salads, omelettes, fresh baked breads and
                  desserts, burgers, chicken and steaks. All menu selections are
                  prepared with high quality fresh ingredients, attractively
                  presented in generous portions at moderate prices;

         o        a full selection of freshly baked breads, bagels, danishes and
                  desserts mainly from the Company's own bakeries;

         o        a comfortable and attractive setting, in which each of the
                  Company's brand name restaurant groups has its own distinctive
                  character; and

         o        take-out, delivery and catering service.

         The Studio City, Marina del Rey, West Hollywood, Westwood, Woodland
Hills, Costa Mesa and Rascal House restaurants have alcoholic beverages
available at the table with meals and maintain a full-service bar at which all
menu selections are available. The Encino and Sherman Oaks locations offer wine
and beer service only. The availability of alcoholic beverages is intended to
complement the meal service and is not a primary focus of the restaurant
operations at any location.


FUTURE DEVELOPMENT STRATEGY

         The Company's growth strategy has been to acquire and expand on
well-known brand name restaurants and markets located in major metropolitan
areas throughout the United States. With the opening of Jerry's Famous Deli in
Costa Mesa, California, the Company executed the initial phase of expansion
strategy for the Jerry's Famous Deli concept. With the acquisitions of Solley's
Deli in 1996, the Rascal House in 1996, The Epicure Market in April 1998,


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and the development of the second Rascal House in Boca Raton, the Company
executed the second phase of its overall expansion strategy, which is to acquire
and expand upon other popular deli-style restaurants and markets, in addition to
developing new locations for each of its brand names.

         In light of the market conditions for the Company's stock, especially
the lack of liquidity for shareholders, the Company and the Board of Directors
has engaged in an ongoing review of all strategic alternatives and of the prior
overall growth strategy. At this point the Company is not necessarily going to
aggressively seek expansion by development of new restaurants or stores, at
least while the strategy is under review. However, the Company is currently
developing a Jerry's Famous Deli in South Miami, Florida.

         Management and the Board of Directors will continue to examine all
strategic alternatives and, in that regard, continue to have discussions with
professional advisers. The Company may still seek to expand and will continue to
review opportunities for acquisition of sites for expansion of existing deli
style operations available for acquisition to determine if particularly
attractive situations are available, especially in its core areas of operation
in Southern Florida and Southern California. Management may consider additional
public or private offerings of equity or additional debt financing to fund its
future expansion. However, there is no assurance that a growth strategy will be
pursued or additional capital will be available to finance growth. See "Risk
Factors." The Company may determine the best course is to use any positive cash
flow to improve its financial condition, putting the Company in a better
position to be opportunistic in taking advantage of future opportunities. The
Company may determine to use available cash for dividends or other actions,
including additional stock repurchases, to try to enhance shareholder value. The
Company may pursue mergers or acquisitions or asset or other sale possibilities,
although previous investigation of potential sale opportunities did not indicate
satisfactory potential.

         To date, the Company has relied upon bank borrowings, landlord
financing and equity contributions from its shareholders and the proceeds of
public and private offerings of common and preferred stock to fund growth.
Recently, the Company has been paying down its bank loans from operating cash
flows. The Company may consider additional public or private offerings of
additional common stock or preferred stock or debt to fund any future expansion
plans, if cash flows from operations are not sufficient. The Company believes
the new location in South Miami, Florida can be funded through cash flows from
operations.

COMPETITION

         The Company's competition includes all restaurant segments and take-out
dining establishments. General trends toward in-home or fast food dining
alternatives could adversely affect the Company. The Company's competition in
the casual dining segment includes numerous types of dining establishments,
including deli-style restaurants and a broad range of establishments emphasizing
ethnic food, such as Chinese, Italian, and Mexican, as well as a broad range of
restaurants serving general American fare, including steakhouses, seafood
restaurants and broad general menus such as those served at publicly-held
restaurant chains such as The Cheesecake Factory and the Daily Grill. The
competition includes numerous single-facility restaurants as well as numerous
restaurant chains seeking to use a common name and identity and the management
efficiencies that may come with larger size restaurant chains for competitive
purposes.

         Many casual dining restaurant chains in addition to the Company have
become public entities, thereby allowing them greater access to capital for
expansion. Large public companies which own restaurant chains provide these
chains with advantages in the cost of and access to capital. An enhanced capital
position and size can allow a restaurant chain to obtain access to favorable
locations and better lease terms in regard to facilities and equipment, thereby
enhancing its competitive position.

         The Company's competition for Epicure includes all traditional grocery
stores, along with the natural and organic markets. Consistent with the
restaurant industry, many market chains in addition to the Company have become
public entities, affording them greater potential to attain capital and utilize
name brand association to increase popularity.


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OPERATIONS

         RESTAURANT OPERATIONS AND MANAGEMENT

         The Company has developed and implemented systems which enable
management to execute its broad menu and effectively manage its high volume
restaurants. Operational procedures, controls, food line management systems and
cooking styles and processes, as well as a centralized computer system at each
location, have been implemented to accommodate the Company's extensive menu and
high volume sales in an attempt to retain as much consistency among the
restaurants as possible.

         The Company believes that its relatively high sales volume and gross
margins allow it to attract and compensate high quality, experienced restaurant
management and staff. Each restaurant is managed by one general manager, two
managers and up to three assistant managers. Each restaurant also has one
kitchen manager and one to two assistant kitchen managers. The general manager
of each restaurant possesses approximately twelve years of experience in
restaurant management and reports directly to the Director of Operations who, in
turn, reports directly to the Chief Executive Officer.

         The Company's overall restaurant operating concept incorporates
efficient, attentive, and friendly service. New servers participate in at least
one week of training during which the employee works under the close supervision
of the restaurant's operational management. The Company provides a comprehensive
training period for its management personnel.

         The Company has a decentralized system of management for individual
restaurants and a training system that promotes, even requires, growth. Each of
the Company's restaurants are run on site by managers who place orders and
handle all on site issues except those noted below. All managers have cash
incentive plans based on performance of their restaurant and generally also
receive stock options. The Company's high volume operation provides for the
training of new floor and kitchen managers in every restaurant, so that each
location is constantly training assistant and alternative shift managers who
expect to move up as new locations are opened. In addition, when expanding
through acquisitions, the Company obtains experienced staff. Key staff acquired
in acquisitions are given intensive training in the restaurants' menu while the
computerized point of sale system and oversight is put in place.

         The Company's main office, and a satellite headquarters in Florida,
retain functions that provide oversight and control. Contracts and pricing with
national vendors are negotiated by the main office and most invoices are paid at
the main office. The main office also maintains responsibility for monitoring
compliance with all labor laws and maintaining all insurance coverage.

         TAKE-OUT AND DELIVERY OPERATIONS

         The Company's take-out and delivery service is a significant and
popular feature of each restaurant and is estimated by management to currently
account for approximately 20% of JFD's total revenue. The take-out counters,
with their displays of deli meats, salads, other prepared foods and bakery
items, are located in close proximity to the entrance of each restaurant.
Therefore, upon entering the restaurant the customer can view a full array of
appetizers, deli meats, salads, fish, and freshly baked breads and desserts. All
menu items are available for take-out and delivery. Take-out service is
available at each restaurant and delivery service is typically available from
6:00 a.m. to 1:00 a.m. daily.

         PURCHASING OPERATIONS

         Key food products and related restaurant supplies are purchased from
specified food producers, independent wholesale food distributors and
manufacturers. The Company is not materially dependent upon any particular
supplier. Each restaurant manager orders supplies directly from an approved list
of vendors on an as-needed basis. This process enables the Company to take
advantage of volume discounts and ensures the consistent quality of its


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products and supplies while enabling individual restaurant managers to be
efficient in their purchasing procedures, tailored to each specific restaurant.
Many supplies are purchased in an unprocessed state, since each restaurant
prepares most of its own salads and cooked items, except smoked fish and meat
and other prepared foods. This system also allows the restaurants to maintain
low inventory levels and ensures freshness. The Company believes that the
quantities of food and supplies it purchases on a centralized basis enables it
to obtain and maintain the desired high quality products at the best available
prices.

         GOVERNMENT REGULATIONS

         The Company is subject to various federal, state and local laws, rules
and regulations affecting its business. Each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities,
which may include alcoholic beverage control, building, land use, access for
disabled patrons, health and safety and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area or adversely affect the
operation of an existing restaurant or limit, as with the inability to obtain a
liquor or restaurant license, its products and services available at a given
restaurant. However, management believes the Company is in compliance in all
material respects with all relevant laws, rules, and regulations, and the
Company has never experienced abnormal difficulties or delays in obtaining the
required licenses or approvals required to open a new restaurant or continue the
operation of its existing restaurants. Management is not aware of any
environmental regulations that have had or that it believes will have a material
adverse effect on the operations of the Company.

         Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a federal and state authority and, in certain locations,
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause by such authority at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, and storage
and dispensing of alcoholic beverages. The Company has not encountered any
material problems relating to alcoholic beverage licenses or permits to date and
does not expect to encounter any material problems going forward. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect the Company's ability to obtain such a license
elsewhere.

         The Company is subject to "dram-shop" statutes in California (and
possibly in other states in the future as it expands) which generally provide a
person injured by an intoxicated person the right to recover damages from an
establishment which wrongfully served alcoholic beverages to such person. The
Company carries liquor liability coverage as part of its existing comprehensive
general liability insurance which it believes is consistent with coverage
carried by other entities in the restaurant industry and should protect the
Company from possible claims. Even though the Company carries liquor liability
insurance, a judgment against the Company under a dram-shop statute in excess of
the Company's liability coverage could have a material adverse effect on the
Company. The Company has never been the subject of a "dram-shop" claim.

         Various federal and state labor laws, rules and regulations govern the
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and working conditions. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could negatively impact the
Company's restaurants.

EMPLOYEES

         As of February 25, 2001, the Company employed approximately 1,483
employees at its ten restaurants and one gourmet market. The Company also
employs approximately 20 persons at its corporate administrative office.
Historically, the Company has experienced relatively low turnover of key
management employees. The Company


                                       9
<PAGE>   10


believes that it maintains favorable relations with its employees. There are no
unions or collective bargaining arrangements.

INSURANCE

         The Company maintains workers' compensation insurance and general
liability insurance coverage which it believes will be adequate to protect the
Company, its business, assets, and operations. There is no assurance that any
insurance coverage maintained by the Company will be adequate, that it can
continue to obtain and maintain such insurance at all or that the premium costs
will not rise to an extent that they adversely affect the Company or the
Company's ability to economically obtain or maintain such insurance. In
addition, punitive damage awards are generally not covered by such insurance.
The Company has obtained $1,000,000 of key man life insurance on its Chief
Executive Officer, Isaac Starkman.

TRADEMARKS AND COPYRIGHTS

         The Company has little, if any, trademark protection for the name
"Jerry's Famous Deli," although it has a trademark with respect to the initials
"JFD." A company unaffiliated with JFD, Jerrico, Inc. ("Jerrico"), registered
the service mark "JERRY'S" for use in connection with restaurants prior to its
use by JFD. Another company unaffiliated with JFD, Jerry's Systems, Inc.
("Jerry's Systems"), uses the service mark in connection with submarine sandwich
shops. Jerry's Systems is currently in litigation with Jerrico seeking to limit
Jerrico's registration to the territories of Kentucky and Indiana. JFD and
Jerry's Systems have an agreement allowing concurrent use of the service mark,
with certain restrictions, for their respective businesses. Therefore, if
Jerry's Systems is successful in its litigation with Jerrico, JFD should be able
to proceed with its use of the service mark except in Kentucky and Indiana.
However, should Jerrico prevail in the litigation, it could challenge JFD's use
of the service mark.

         The Company has successfully registered the trademarks "Rascal House"
and "Wolfie Cohen's Rascal House." The Company has not filed for registration of
the Solley's trademark.

ITEM 2.  PROPERTIES

         Leased Properties. The Company's Sherman Oaks (Solley's), Studio City,
Encino, West Hollywood, Westwood, Woodland Hills, Costa Mesa, and Boca Raton
restaurants, Epicure and the new restaurant to be located in South Miami, are
all on leased premises. The Company owns the furnishings, fixtures and equipment
in each of its restaurants. Existing leases have expirations ranging from 2003
through 2018 (excluding renewal options). Leases typically provide for minimum
base rents plus a percentage of gross sales above the minimum base rents, plus
payment of certain operating expenses. See Note 7 of Notes to Consolidated
Financial Statements for information regarding aggregate minimum rents paid by
the Company for recent periods and information regarding the Company's
obligation to pay minimum rents in future years. The Westwood restaurant
property, as well as the Guy's Place property adjacent to the West Hollywood
restaurant, are leased from The Starkman Family Partnership, which is owned by
the Starkman family, principally Isaac Starkman, the controlling beneficial
shareholder of the Company. In addition, the three parking lots which service
the West Hollywood restaurant were also leased from the Starkman Family
Partnership. However, in August 2000, the Company purchased two of the three
parking lots which constitute the primary parking facility for the West
Hollywood restaurant from the Starkman Family Partnership. See "Purchased
Restaurant Properties." In addition, the Epicure property is leased from E&L
Thal Properties, an affiliate of the previous owners. See "Certain Relationships
and Related Transactions."

         Purchased Restaurant Properties. The Company owns the land and
buildings of its Marina del Rey Jerry's Famous Deli restaurant and the Rascal
House restaurant in Miami Beach. The Company owns a parking lot at Epicure. In
April 1995, the Company purchased the Pasadena restaurant site located at 42
South Delacey Street for $1,675,000. The Company completed construction of a
7,400 square foot building at a cost of approximately $2,894,000, and the new
restaurant opened on February 20, 1996. The Pasadena property was sold on May 2,
1999 with no significant gain or loss recognized. In March 1996, the Company
purchased the Marina del Rey property including the 9,300 square foot, 405 seat
Jerry's Famous Deli restaurant which has been in operation since 1991, for


                                       10
<PAGE>   11


a total purchase price of $3,963,510, paid $713,510 in cash and $3,250,000 in
the form of a collateralized promissory note payable to the Marina landlord. The
note payable to the Marina landlord provides for interest only payments at 9%
per annum, and for principal and accrued interest to be paid in full on March
31, 2002. In September 1996, as part of the purchase of Wolfie Cohen's Rascal
House in Miami, Florida, the Company purchased 2.21 acres of land and the 23,000
square foot two story restaurant building. The total purchase price of the real
estate, fixtures and equipment of $4,750,000 was paid in full at closing. In
August 2000, the Company purchased the two parcels of land constituting the
primary parking facility of the West Hollywood restaurant for a total purchase
price of $1,420,000. The purchase price was financed through funds available on
the Company's line of credit.

         Leased Corporate Offices. The Company leases 7,750 square feet for its
corporate offices at Suites 400 and 490, 12711 Ventura Boulevard, Studio City,
California.

         Future Facilities. In the future, the Company will not lease new
restaurant sites or facilities from The Starkman Family Partnership or other
affiliated persons or entities unless the terms of the lease have been approved
by the Company's independent directors and reviewed by an independent national
or regional real estate evaluation firm or commercial leasing firm and deemed,
in a written opinion, as favorable as would be available from a non-affiliated
third party. The Starkman Family Partnership has the ability to sell the
properties it owns which are leased to the Company, and could do so at a
substantial profit.

         The cost of opening a new Jerry's Famous Deli restaurant in a leased
building, depending upon the location and condition of the premises, has ranged
from approximately $2.0 million to $3.0 million, or $267 to $400 per square
foot, including renovation, furniture, fixtures, equipment, and pre-opening
costs and depending in part upon tenant improvement allowances. Cost of
development of the new Jerry's Famous Deli in South Miami, Florida, which is
leased, is anticipated to be approximately $3.0 million. To date, the Company
has relied upon bank borrowings, landlord financing and sale of its common and
preferred stock to finance new restaurants. The Company intends to rely upon
financing raised in possible future debt or equity offerings, real estate
financing transactions and additional lines of credit as available, to fund
future expansion plans.

ITEM 3.  LEGAL PROCEEDINGS

         Restaurants such as those operated by the Company are subject to
litigation in the ordinary course of business, most of which the Company expects
to be covered by its general liability insurance. However, punitive damages
awards are not covered by general liability insurance. Punitive damages are
routinely claimed in litigation actions against the Company. To date the Company
has not paid punitive damages in respect to any of such claims. However, there
can be no assurance that punitive damages will not be given with respect to any
of such claims or in any other actions which may arise in any future action.
Based upon current information, management, after consultation with legal
counsel defending the Company's interests in the cases, believes the ultimate
disposition thereof will not have a material effect upon either the Company's
results of operations or its financial position.

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

         No matters were submitted to a vote of shareholders in the fourth
quarter of 2000. However, the reverse stock split discussed above was approved
by a majority of the shareholders in an action taken by written consent in
January 2000.


                                       11
<PAGE>   12


EXECUTIVE OFFICERS

         The following table sets forth certain information concerning the
Company's executive officers.

<TABLE>
<CAPTION>
NAME                       AGE                                  POSITION
<S>                        <C>          <C>
Isaac Starkman             63           Director, Chief Executive Officer, Secretary and
                                        Chairman of the Board

Guy Starkman               30           President and Director

Christina Sterling         56           Chief Financial Officer

Jason Starkman             26           Director, Management Information Systems Director,
                                        Vice-President

Ami Saffron                43           Director of Development, Vice-President

Kenneth Abdalla            37           Director
</TABLE>


         Mr. Isaac Starkman founded Jerry's Famous Deli in 1978 with his then
partner, Jerry Seidman, whose interest Mr. Starkman purchased in 1984. Mr.
Starkman has been Chief Executive Officer of the Company since February 1984. He
has been the Chairman of the Board of Directors of the Company since the
creation of the position in January 1995 and a Director of the Company since
1978. Mr. Starkman maintains a direct involvement in the day-to-day operations
of the Company and is the primary architect of the Company's expansion program.
In 1971, Mr. Starkman founded Aquarius Concession Co., a national theater
concessionaire (whose headquarters are in New York) which he still partially
owns. Mr. Starkman began his career in the food services industry in 1965 as a
field manager for Ogden Foods. Mr. Starkman was born and raised in Israel where
he served as a Lieutenant in the Israeli Defense Force.

         Mr. Guy Starkman has been involved with the general operations of the
Company since 1987. He became employed by the Company on a full-time basis as
Director of Operations in 1989, and had been a Director of the Company and Vice
President since January 1995. On January 12, 2001 Mr. Starkman was promoted to
President of the Company. Mr. Starkman is generally responsible for the overall
operations of the Company. In addition, Mr. Starkman will continue to negotiate
with vendors, review purchases at each restaurant, oversee the delivery fleet
and participate in major personnel decisions. Mr. Starkman studied Business
Administration at the University of Southern California, and is the son of Isaac
Starkman.

         Ms. Christina Sterling has been with the Company since its inception in
1978 acting as the Controller until her promotion in November 1993 to Chief
Financial Officer. Ms. Sterling reports to Mr. Starkman and heads the Company's
accounting and finance departments. Between 1974 and her joining the Company,
Ms. Sterling was the Controller for FACIT AB, a Swedish distributor of office
machines. Prior to that Ms. Sterling served as the Controller of Fasson AB, an
affiliate of Avery International Company, in Sweden. Ms. Sterling holds a B.S.
degree in accounting and engineering from The National College in Sweden.

         Mr. Jason Starkman has been involved with the general operations of the
Company since 1989. He became employed by the Company on a full-time basis as
Director of Management Information Systems in June 1992, in which position he
has been directly responsible for the automation of the Company's restaurant
information systems. He has been a Director and Vice-President of the Company
since January 1995, and is the son of Isaac Starkman. During 1999, Jason
relocated to Florida where his responsibilities have increased to overseeing the
Florida operations.


                                       12
<PAGE>   13


         Mr. Ami Saffron was appointed Vice President and Director of
Development of the Company in June 1995. He was 50% owner and supervisor of
Pizza By the Pound, Inc., dba Jerry's Famous Pizza, from 1989 to June 1995.
Since May 1991 Mr. Saffron has supervised restaurant food purchases and food
quality for all of the Company's restaurants.

         Mr. Kenneth Abdalla became a Director of the Company in December 1996
and served as President of the Company from March 27, 1997 through December 31,
2000. As President of the Company, Mr. Abdalla provided limited services to the
Company in connection with restaurant acquisitions pursuant to a contract which
expired on December 31, 2000. Mr. Abdalla continues to be a Director of the
Company. Mr. Abdalla is the founder and managing member of Waterton Management,
LLC, a private investment firm established in July 1995. Mr. Abdalla was a Vice
President at Salomon Brothers, Inc., where he managed a team of professionals in
the private investment department. Mr. Abdalla obtained a Bachelor of Science
degree from the University of the Pacific in 1986.

                                     PART II

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

         From October 22, 1995 and until February 2, 2000, the Company's Common
Stock was traded on the Nasdaq National Market. Commencing February 3, 2000, the
Company's Common Stock has been traded on the Nasdaq SmallCap Market. The high
and low sales prices for the Common Stock during the eight most recent quarters
are as follows:


                                                High             Low

March 31, 1999                                  $6.19           $2.63
June 30, 1999                                   $4.78           $3.00
September 30, 1999                              $4.50           $2.63
December 31, 1999                               $3.19           $1.69

March 31, 2000                                  $6.66           $1.88
June 30, 2000                                   $4.00           $1.69
September 30, 2000                              $4.88           $3.50
December 31, 2000                               $4.63           $1.16


         On February 28, 2001, the closing sale price for the Common Stock
reported on the Nasdaq SmallCap Market was $3.75 per share. The Company's Common
Stock is traded on the Nasdaq SmallCap Market under the symbol "DELI."

         As of February 28, 2001, there were 132 shareholders of record of the
Common Stock.

DIVIDEND POLICY FOR COMMON STOCK

         The Company has not paid any dividends since it became a public company
and will likely not pay any cash dividends in respect of the Common Stock in the
future, although all strategic issues are under review. In addition, the
Company's line of credit with BankBoston, N.A. requires the bank's consent
before the payment of any dividends, which consent may not be unreasonably
withheld.


                                       13
<PAGE>   14


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The selected financial data presented below for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996 are derived from the consolidated
December 31 (2000, 1999, 1998, 1997, and 1996) financial statements (hereafter
"consolidated financial statements") of the Company.


<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                               ------------------------------------------------------------
                    Description                  2000         1999         1998         1997         1996
                    -----------                --------     --------     --------     --------     --------
                                                (Dollars in thousands except Earnings Per Share Data and
                                                                Restaurant Operating Data)
<S>                                            <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:

Revenues                                       $ 69,601     $ 70,675     $ 66,583     $ 56,418     $ 40,160
Cost of sales                                    23,956       24,729       22,408       17,508       12,480
                                               --------     --------     --------     --------     --------
Gross profit                                     45,645       45,946       44,175       38,910       27,680

Operating expenses                               34,240       35,217       33,849       28,769       19,951
General and administrative expenses               4,487        4,748        4,832        4,839        4,180
Preopening expenses                                --           --            538         --           --
Depreciation and amortization expenses            3,588        3,356        3,730        3,870        2,114
                                               --------     --------     --------     --------     --------

Income from operations                            3,330        2,625        1,226        1,432        1,435

Interest expense, net                             1,116        1,213        1,255          600          366
Other expense, net                                  130          214          167          135          206
                                               --------     --------     --------     --------     --------
Income (loss) before items below                  2,084        1,198         (196)         697          863
Income tax (provision) benefit                     (653)        (288)          65         (134)        (284)
                                               --------     --------     --------     --------     --------
Income (loss) before cumulative effect of a       1,431          910         (131)         563          579
 change in accounting principle
Cumulative effect of a change in
 accounting principle, net of tax benefit
 of $65,162                                        --           --           (133)        --           --
                                               --------     --------     --------     --------     --------
                                               $  1,431     $    910     $   (264)    $    563     $    579
                                               ========     ========     ========     ========     ========
Net income (loss)


EARNINGS PER SHARE DATA:


Preferred stock:

  Cash dividends paid or accrued                                                                   $   (227)
  Accounting deemed dividend (3)                                                                     (5,000)
                                                                                                   --------
Net loss applicable to common stock                                                                $ (4,648)
                                                                                                   ========
Net income per share
    Net income - Basic                                                                             $   0.17
                                                                                                   ========
Preferred stock:
     Cash dividends paid or accrued - Basic                                                        $  (0.07)
     Accounting deemed dividend (3) - Basic                                                           (1.44)
                                                                                                   --------
                                                                                                   $  (1.51)
                                                                                                   ========
</TABLE>


                                       14
<PAGE>   15

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                               --------------------------------------------------------------------------
                    Description                   2000            1999             1998           1997           1996
                    -----------                -----------     -----------     -----------     -----------    -----------
                                                (Dollars in thousands except Earnings Per Share Data and
                                                                Restaurant Operating Data)
<S>                                            <C>             <C>             <C>             <C>            <C>
Basic
Net income (loss) per share
   before cumulative effect of an
   accounting change applicable to
   common stock                                $      0.31     $      0.19     $     (0.02)    $      0.13    $     (1.34)
Cumulative effect of change in
   accounting principle                               --              --             (0.03)           --             --
                                               -----------     -----------     -----------     -----------    -----------
Net income (loss) per share
   applicable to common stock                  $      0.31     $      0.19     $     (0.05)    $      0.13    $     (1.34)
                                               ===========     ===========     ===========     ===========    ===========
Net income per share
   Net income - Diluted                                                                                       $      0.16
                                                                                                              ===========
Preferred Stock:
   Cash dividends paid or accrued - Diluted                                                                   $     (0.06)

   Accounting deemed dividend (3) - Diluted                                                                   $     (1.43)
                                                                                                              -----------

Diluted                                                                                                       $     (1.49)
                                                                                                              ===========
Net income (loss) per share
   before cumulative effect of
   an accounting change applicable
   to common stock                             $      0.31     $      0.19     $     (0.02)    $      0.13    $     (1.33)
Cumulative effect of change in
   accounting principle                               --              --             (0.03)           --             --
                                               -----------     -----------     -----------     -----------    -----------
Net income (loss) per share
   applicable to common stock                  $      0.31     $      0.19     $     (0.05)    $      0.13    $     (1.33)
                                               ===========     ===========     ===========     ===========    ===========

Weighted average common shares
     outstanding - Basic                         4,673,042       4,719,274       4,956,582       4,456,666      3,470,687
Weighted average common shares
     outstanding - Diluted                       4,677,518       4,724,468       4,975,636       4,473,032      3,508,507

RESTAURANT OPERATING DATA(1):

For restaurants open for the full year:

    Average sales per restaurant               $ 5,357,670     $ 5,445,673     $ 5,286,187     $ 6,040,515    $ 6,842,542
    Average sales per seat                     $    16,191     $    16,457     $    16,097     $    18,373    $    19,221
    Average sales per square foot              $       646     $       657     $       655     $       780    $       939

    Total number of restaurants open
      for the full year                                 10              10              10               9              4

Total restaurants open at end of year                   10              10              11              10              9


BALANCE SHEET DATA (END OF YEAR):



Working capital (deficit)                      $    (2,405)    $    (2,972)    $    (2,421)    $       208    $       103
Total assets                                   $    46,411     $    45,148     $    48,993     $    37,978    $    36,563
Total debt (including current portion)         $    12,720     $    12,743     $    17,188     $     8,442    $     6,559
Minority interest (2)                          $       504     $       677     $       555     $       480    $       441
Equity                                         $    27,504     $    26,073     $    25,859     $    24,576    $    23,624
</TABLE>

All share and per share amounts have been adjusted to reflect the one-for-three
reverse split which took place on February 9, 2000.


                                       15
<PAGE>   16


(1)      Determined as total sales divided by the number of all restaurants open
         for the full period, total seats, and total square feet. Four
         restaurants were open for the full year in 1996, nine for the full year
         1997 and ten for the full year 1998, 1999 and 2000. Total seats is
         based upon the typical seating configuration of each restaurant.
         Seating configurations in each restaurant are subject to change. Square
         foot data is based on approximate square feet for the kitchen and
         dining room area.

(2)      The minority interest represents the other limited partners and the
         other general partner's interest in the Encino restaurant. For October
         1, 2000 to December 31, 2000, the minority interest represents the
         limited partners' 64.66% share and the other co-general partner's 5%
         share of accumulated net income or loss and dividends. For November 15,
         1999 to September 30, 2000, the minority interest represents the other
         limited partners' 64.84% share and the other general partner's 5% share
         of accumulated net income or loss and dividends. Prior to November 14,
         1999, the minority interest represented the other limited partners'
         67.45% share and the other general partner's 5% share of accumulated
         net income or loss and dividends.

(3)      In 1996, in accordance with the recent Securities and Exchange
         Commission position regarding accounting for Preferred Stock which is
         convertible at a discount from market price for Common Stock, the
         Company has reflected an accounting "deemed dividend." This accounting
         deemed dividend, which relates to the issuance of the Preferred Stock
         which has been reflected in the third and fourth quarters of 1996, is a
         non-cash, non-recurring accounting entry for determining income (loss)
         applicable to common stock and income (loss) per share.

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

         The following discussion and analysis of the Company's consolidated
financial condition and results of operations for the fiscal years ended
December 31, 2000, 1999, and 1998 should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere in this report.

GENERAL

         Statements contained herein that are not historical facts are forward
looking statements. Important factors which could cause the Company's actual
results to differ materially from those projected in, or inferred by, forward
looking statements are (but are not necessarily limited to) the following: the
impact of increasing competition in the moderately priced, casual dining segment
of the restaurant industry; changes in general economic conditions which impact
consumer spending for restaurant occasions; unforeseen events which increase the
cost to develop and/or delay the development and opening of new restaurants;
unexpected increases in the cost of raw materials, labor and other resources
necessary to operate the restaurants, including without limitation the recent
increases in the minimum wage; the amount and rate of growth of general and
administrative expenses; the availability, amount, type and cost of financing
for the Company and any changes to that financing; the revaluation of any of the
Company's assets (and related expenses); costs of reviewing alternative
strategies for the Company's future and possible solutions to bring liquidity to
the Company's shareholders; and the amount of, and any changes to, tax rates.
See "Risk Factors" below for further information on these considerations, and
see periodic and other reports filed by the Company with the Securities and
Exchange Commission.


                                       16
<PAGE>   17


         The Company's revenues are derived primarily from food and beverage
sales at its ten restaurants and The Epicure Market. As of December 31, 2000,
the Company owned the following restaurants, except the Encino restaurant in
which it owns a general partner's and a limited partner's interest:

          Location                                Date Opened or Acquired
          --------                                -----------------------
          Studio City, CA                            November 1, 1978
          Encino, CA                                 July 25, 1989
          Marina del Rey, CA                         July 23, 1991
          West Hollywood, CA                         January 18, 1994
          Westwood, CA                               June 18, 1996
          Woodland Hills, CA                         July  1, 1996
          Sherman Oaks, CA (Solley's)                July  1, 1996
          Miami Beach, FL (Rascal House)             September 9, 1996
          Costa Mesa, CA                             August 19, 1997
          The Epicure Market, FL                     April 1, 1998
          Boca Raton, FL (Rascal House)              July 1, 1998


         In addition, the Company has leased a location in South Miami, Florida,
which is currently under development and expected to open in the fourth quarter
of 2001.

          The Company's expenses consist primarily of food and beverage costs,
operating costs (consisting of salaries, rent and occupancy expenses), general
and administrative expenses, interest expense and depreciation and amortization
expenses.

         Certain preopening costs, including direct and incremental costs
associated with the opening of a new restaurant, historically were amortized
over a period of one year from the opening date of such restaurant. These costs
include primarily those incurred to train a new restaurant management team and
the food, beverage and supply costs incurred to perform testing of all
equipment, concept systems and recipes. In addition, the Company had
organization costs which were being amortized over a five-year life. The Company
adopted Statement of Position ("SOP") 98-5 in 1998, which requires entities to
expense as incurred all start-up (including organization) and preopening costs
that are not otherwise capitalizable as long-lived assets. The Company's
adoption, in 1998, of the accounting principle resulted in the recognition of a
cumulative effect of a change in accounting principle as a one-time charge
against earnings, net of any related tax effect. The net cumulative pre-tax
effect of the change in accounting principle was approximately $197,000, which
represented the unamortized balance of preopening and organization costs at
December 31, 1997.

         The Company owns both the land and the building for its restaurants
located in Marina del Rey and Miami Beach; all other restaurant locations are
leased. The Company also owns the parcels of land constituting the primary
parking lots at the West Hollywood restaurant and at Epicure. All the Company's
restaurants except the Encino restaurant are wholly-owned. Epicure is operated
by a wholly-owned subsidiary, National Deli Corporation. The Encino restaurant
is owned and operated through JFD-Encino, a limited partnership of which a
wholly-owned subsidiary of the Company is the 80% co-general partner and a
10.34% limited partner. The general partners of JFD-Encino are entitled to 25%
of the net income, loss or dividends of the Encino restaurant and the limited
partners are entitled to the remaining 75% until the limited partners have
received a return of 100% of their capital plus a cumulative return of 10% per
annum. After payout of the limited partners' initial contributed capital, the
general partners are entitled to 65% of the net income or loss of the Encino
restaurant and the limited partners are entitled to the remaining 35%. The
Company consolidated the financial statements of the Encino restaurant and
separately stated the effect of minority interests in the Consolidated Balance
Sheets and Consolidated Statements of Operations based upon the Company's
current operating control of the Encino restaurant.


                                       17
<PAGE>   18


RESULTS OF OPERATIONS

         The following table presents for the last three fiscal years the
Consolidated Statements of Operations of the Company expressed as percentages of
total revenue.

<TABLE>
<CAPTION>
                                                                    Percentage of Total Revenues
                                                                      Years Ended December 31,
                                                                    ----------------------------
                                                                     2000       1999       1998
                                                                    -----      -----      ------
<S>                                                                 <C>        <C>        <C>
Revenues                                                            100.0%     100.0%     100.0%

Cost of sales                                                        34.4       35.0       33.7
                                                                    -----      -----      -----

Gross profit                                                         65.6       65.0       66.3
Operating expenses
         Labor                                                       34.9       35.4       35.6
         Occupancy and other                                         14.3       14.5       15.3
                                                                    -----      -----      -----

Total operating expenses                                             49.2       49.9       50.9

General and administrative expenses                                   6.5        6.7        7.2

Preopening expenses                                                   0.0        0.0        0.8

Depreciation and amortization expense                                 5.1        4.7        5.6
                                                                    -----      -----      -----

Total expenses                                                       60.8       61.3       64.5
                                                                    -----      -----      -----

Income from operations                                                4.8        3.7        1.8

Interest expense, net                                                (1.6)      (1.7)      (1.8)
                                                                    -----      -----      -----

Income before provision for income taxes and minority interest        3.2        2.0        0.0

Income tax (provision) benefit                                       (0.9)      (0.4)       0.1

Minority interest                                                    (0.3)      (0.3)      (0.3)
                                                                    -----      -----      -----

Income (loss) before cumulative effect of change in accounting
principle                                                             2.0        1.3       (0.2)
                                                                    -----      -----      -----

Cumulative effect of change in accounting principle                   0.0        0.0       (0.2)
                                                                    -----      -----      -----

         Net income (loss)                                            2.0%       1.3%      (0.4)%
                                                                    =====      =====      =====
</TABLE>


                                       18
<PAGE>   19


Fiscal Year 2000 Compared to Fiscal Year 1999

         Total revenues decreased approximately $1,074,000, or 1.5%, to
approximately $69,601,000 for 2000 from $70,675,000 for 1999. The overall
decrease in total revenues was in part due to the sale of the Pasadena
restaurant, which had revenues of approximately $977,000 for the fiscal year
ended December 31, 1999. Also contributing to the overall decrease was a
decrease in revenues of approximately $1,135,000 or 8.7% for the Florida
restaurants. The decrease in revenues for the Rascal House restaurants was
primarily due to weather conditions affecting that areas seasonality, coupled
with increased competition in the Miami and Boca Raton areas. The overall
decrease was partially offset by an increase in same store sales for the
California restaurants and an increase in sales for The Epicure Market. Same
store sales for the eight restaurants opened from January 1, 1999 were
approximately $41,714,000 in 2000 compared to $41,485,000 in 1999, an increase
of approximately $229,000 or 0.6%. Revenues for The Epicure Market increased by
approximately $804,000 or 5.3% to approximately $15,891,000 for 2000 from
$15,087,000 for 1999.

         Cost of sales, which includes the cost of food, beverages and supplies
decreased $773,000, or 3.1%, to $23,956,000 in 2000 from $24,729,000 in 1999.
Total food cost, which comprises approximately 95% of cost of sales, as a
percentage of total revenues decreased to 34.4% in 2000 from 35.0% in 1999.
Without Epicure, food costs as a percentage of restaurant revenues decreased
only slightly to 32.0% in 2000 from 32.7% in 1999. Epicure's food costs
decreased to 42.8% in 2000 from 43.5% in 1999. Management attributes this
decrease to the Company's continued focus on more efficient buying and increased
management monitoring of purchase costs at the restaurants and Epicure.

         Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, decreased $977,000, or 2.8%, to approximately $34,240,000 in 2000 from
$35,217,000 in 1999. As a percentage of revenues, operating expenses decreased
to 49.2% in 2000 from 49.9% in 1999. Labor costs, the largest component of
operating expenses, decreased slightly to 34.9% in 2000 from 35.4% in 1999.
Generally, Epicure has a lower overall labor cost as compared to the
restaurants. Labor costs as a percentage of revenues for Epicure decreased
slightly to 27.4% in 2000 as compared to 27.9% for 1999. Without Epicure, labor
costs as a percentage of revenues also decreased slightly to 37.1% for 2000
compared to 37.4% for 1999. The overall decrease in labor costs is primarily due
to the benefit derived from less turnover in management at the restaurant level.
Contributing to the decrease in operating expenses was a slight decrease in
occupancy costs to 14.3% in 2000 from 14.5% in 1999.

         General and administrative expenses decreased approximately $261,000,
or 5.5% to approximately $4,487,000 in 2000 from approximately $4,748,000 in
1999. As a percentage of revenues, general and administrative expenses decreased
0.2 percentage point, to 6.5% in 2000 from 6.7% in 1999.

         Depreciation and amortization expense increased approximately $232,000,
or 6.9%, to approximately $3,588,000 in 2000, from $3,356,000 in 1999.
Depreciation expense increased approximately $193,000, or 7.2%, to approximately
$2,865,000 in 2000 from approximately $2,672,000 in 1999. The increase was
primarily due to the acquisitions made throughout the current fiscal year.
Amortization expense increased slightly by approximately $38,000, or 5.6%, to
approximately $723,000 in 2000 from approximately $685,000 in 1999.

         The $96,000 decrease in interest expense to approximately $1,141,000 in
2000 from approximately $1,237,000 in 1999 was primarily due to the reduction in
the Company's debt during the first six months of fiscal year 2000.

         Licensing income of approximately $79,000 recorded for the year ended
December 31, 2000 was generated from the licensing agreements, originally signed
in 1999, with CA One Services, Inc., for the licensing of the "Wolfie Cohen's
Rascal House" concept for one shopping mall food court in Naples, Florida, and
with Universal City Walk, for the licensing of the "Jerry's Famous Deli" concept
for a restaurant located in Universal City, California.


                                       19
<PAGE>   20


Fiscal Year 1999 Compared to Fiscal Year 1998

         Total revenues increased approximately $4,092,000, or 6.1%, to
approximately $70,675,000 for 1999 from $66,583,000 for 1998. Included in this
increase is approximately $15,087,000 in revenues contributed by Epicure,
acquired April 1, 1998, as compared to revenues of approximately $10,793,000 in
1998. The Boca Raton restaurant, which opened July 1, 1998, added revenues of
approximately $4,934,000 in 1999 as compared to revenues of approximately
$2,829,000 for 1998. Same store sales for the eight restaurants opened from
January 1, 1998 were approximately $41,485,000 in 1999 compared to $40,970,000
in 1998, an increase of approximately $515,000 or 1.3%. The overall increase in
total revenues was partially offset by the decrease in revenues of approximately
$1,991,000 for the Pasadena restaurant, which was sold May 2, 1999.

         In September 1998, the Company retained the services of an outside
consultant with significant restaurant industry experience in an effort to
increase revenues. The consultant, with over 26 years in the industry, whose
clients have included numerous family, midscale, and casual dining restaurant
chains also completed an overall analysis of the Company's operations, including
customer service, menu pricing and review, and general operating policies and
procedures. To date, the consultant has completed his work in California and
Florida and the Company has implemented many of the consultant's
recommendations, which have focused mostly on improving customer service,
formalizing training procedures, and improving communication within the
restaurants. The Company was able to see immediate results from these
recommendations, as the Company has received favorable feedback from customers
as evidenced by customer comment cards and mystery shopper data, as well as an
increase in same store sales.

         The Company's revised incentive program for its General Managers,
implemented in 1999, has had a positive impact. This program is based upon the
achievement of certain financial and non-financial goals, including food and
labor cost budget criteria. The Company believes with the General Managers being
more responsible and aware of their individual restaurant's performance, along
with monetarily rewarding them for attaining stated goals, all parties will
continue to benefit.

         In January 1999, the Company entered into a license agreement with CA
One Services, Inc., a well known national food operator, to license the "Wolfie
Cohen's Rascal House" concept for one shopping mall food court in Naples,
Florida. The facility opened on March 23, 1999. Revenues generated from this
agreement were nominal in 1999.

         The Company has benefited by an increase in same store sales of
approximately $1,415,000 or 12.4% during the fourth quarter of 1999 as compared
to the third quarter of 1999 which management believes substantially resulted
from the actions outlined above.

         With the addition of Epicure, the Company diversified its presence in
Southern Florida, and in 1999 began providing homemade products from Epicure to
its Rascal House restaurants.

         Cost of sales, which includes the cost of food, beverages and supplies
increased $2,321,000, or 10.4%, to $24,729,000 in 1999 from $22,408,000 in 1998,
primarily from the addition of Epicure and Boca Raton. Total food cost, which
comprises approximately 95% of cost of sales, increased to 33.1% in 1999 from
31.9% in 1998. Without Epicure, food costs increased only slightly to 30.3% in
1999 from 29.8% in 1998. Management attributes the majority of this increase to
its Rascal House restaurants in Florida. When a new restaurant opens, it takes
several months for a customer use pattern to develop during which time the
Company incurs relatively higher labor and food costs; after customer use
patterns are developed, the restaurant can be staffed and food supply prepared,
consistent with these patterns. Management also attributes a portion of the
increase to minor cost increases in some of the Company's core food products.

         Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased $1,368,000, or 4.0%, to approximately $35,217,000 in 1999
from $33,849,000 in 1998. This overall increase is primarily due to a full year
of costs for Epicure and the Rascal House restaurant in Boca Raton, Florida in
1999 as compared to a partial year of costs in 1998 with Epicure


                                       20
<PAGE>   21


opening on April 1, 1998 and Rascal House opening on July 1, 1998. As a
percentage of revenues, operating expenses decreased to 49.9% in 1999 from 50.9%
in 1998. Labor costs, the largest component of operating expenses, decreased
slightly to 35.4% in 1999 from 35.6% in 1998. This decrease was primarily due to
Epicure, which has a lower overall labor cost as compared to the restaurants.
Without Epicure, labor costs as a percentage of revenues were 37.4% for 1999
compared to 36.8% for 1998. Contributing to the decrease in operating expenses
was a slight decrease in occupancy costs to 14.5% in 1999 from 15.3% in 1998. A
portion of the decrease was also due to the increase in sales, as many of the
Company's occupancy expenses are fixed costs.

         General and administrative expenses decreased approximately $84,000, or
1.7% to approximately $4,748,000 in 1999 from approximately $4,832,000 in 1998.
As a percentage of revenues, general and administrative expenses decreased 0.5
percentage point, to 6.7% in 1999 from 7.2% in 1998.

         Depreciation and amortization expense decreased approximately $374,000,
or 10.0%, to approximately $3,356,000 in 1999, from $3,730,000 in 1998.
Depreciation expense decreased approximately $393,000, or 12.8%, to
approximately $2,672,000 in 1999 from approximately $3,065,000 in 1998. The
decrease was partially due to the sale of the Pasadena facility in May 1999,
coupled with the reductions in depreciation expense for the change in life of
certain restaurant equipment and furniture and fixtures from a five-year useful
life to an eight-year useful life and certain other adjustments during 1998.
Amortization expense increased slightly by approximately $20,000, or 3.0%, to
approximately $685,000 in 1999 from approximately $665,000 in 1998. The slight
increase was primarily attributable to a full years amortization in 1999 for the
goodwill and covenants not to compete related to the Epicure acquisition as
compared to only nine months of amortization in 1998.

         The $55,000 decrease in interest expense to approximately $1,237,000 in
1999 from approximately $1,292,000 in 1998 was primarily due to the reduction in
the Company's debt from the proceeds of the sale of the Pasadena facility.

Business Outlook

         The Company does not believe that its existing restaurants can show
substantial growth in per restaurant revenues. Management believes that any
significant sales growth will have to come from additional restaurants or other
retail food establishments. Currently, only one new location in South Miami,
Florida is under development.

         The Company continues to search for prime locations appropriate for its
customer base and to develop them into restaurants, both in the Southern
California and Southern Florida areas, as well as new areas, while continuing to
provide quality food and service in its existing restaurants. However, the issue
of whether or not to aggressively expand, in light of stock market conditions,
is currently under review. The Company seeks to exploit its brand names for
ancillary income from licensing and possibly third party retail sales. This is a
new initiative and the outlook is not yet clear.

         The Company's business strategy in 1995, when it became a public
company, was to seek appreciation in the value of its common stock through
growth in revenues and earnings. Although the Company has substantially
increased revenues since 1995 and increased its net income and earnings per
share over the past two years, shareholders have not realized an increase in the
value of the Company's common stock. Currently, no analyst reports on the
Company's stock and the market has very low volume. Under current market
conditions, it is not clear whether additional expansion would result in an
increase in value of the Company's stock in the near term. In addition, the cost
of additional expansion necessary for substantial growth of the Company's
earnings would require significant amounts of additional capital or debt
financing, and there is no assurance that the Company could obtain the necessary
financing to complete an aggressive strategy under present market conditions.

         For these reasons, the Company has considered and continues to consider
other strategic alternatives to maximize value for the Company's shareholders.
The Company's Board of Directors recently appointed an Independent Committee to
respond to any tender offers, merger proposals or proposals to take the Company
private which might come from the affiliates of any other board members or the
affiliates of the Mitchell family, who have


                                       21
<PAGE>   22


accumulated a major holding in the Company. While no specific proposals have yet
been put to the Company, the Independent Committee has engaged a valuation firm
to provide a fairness opinion in relation to evaluating any potential tender
offer by the Company or a third party and in regard to any potential "going
private" transaction that may be proposed by affiliates or otherwise.

LIQUIDITY AND CAPITAL RESOURCES

         As is typical in the restaurant industry, the Company historically has
operated with little or no working capital, and does not have significant
inventory or trade receivables and customarily receives several weeks of trade
credit in purchasing food and supplies.

         Since the completion of the 1995 Public Offering, the policy of the
Company has been to reinvest positive cash flow for restaurant development and
general working capital, and more recently, the Company's stock repurchase
program. Net cash flow from operating activities increased to approximately
$5,274,000 for 2000 from approximately $4,734,000 for 1999. Net cash flow from
operating activities was approximately $4,965,000 for 1998. In the future, the
Company intends to use any positive cash flow for restaurant development and
general working capital and possible stock repurchase programs. Because funds
available from cash sales are not needed immediately to pay for food and
supplies or to finance receivables or inventory, they can be used for capital
expenditures.

         The March 1996 purchase of the Marina del Rey restaurant property from
the Company's landlord was funded primarily through a $3,250,000 note from the
landlord. It is collateralized by the property, requires interest only payments
at 9% per annum until maturity, and is due in March 2002. The Company may seek
to refinance the debt or utilize existing credit facilities, depending on market
conditions, to meet its obligation.

         The Company utilized its revolving line of credit in 1998 in
conjunction with the purchase of Epicure in the aggregate amount of $965,000
from United Mizrahi Bank. Borrowings under the credit line were collateralized
by the fixtures and equipment of the Pasadena restaurant. The debt was repaid in
full without penalty in September 1999 from the proceeds of the sale of the
Pasadena facility.

         In July 1997, the Company obtained a $2,500,000 term loan
collateralized by certain real and personal property of the Rascal House
restaurant. The loan bears interest at the LIBOR rate for one-, two- or
three-month periods plus 2.5% up to a maximum rate of 11.0% and will mature on
August 1, 2004. Approximately $750,000 of the loan was used to complete
renovation of the Costa Mesa restaurant. During 1998, the loan interest rate was
capped at 9.39%.

         In September 1998, the Company entered into a $15,000,000 credit
facility with BankBoston, N.A. in the form of a $9,000,000 term loan and
$6,000,000 revolving line of credit. In conjunction with the agreement, the
Company paid off certain existing debt with the proceeds from the term loan. The
term loan and revolver mature five years from inception and bear interest at the
Eurodollar rate plus a variable percentage margin totaling approximately 9.22%
at December 31, 2000. The debt is collateralized by assets of the Company and
includes certain financial covenants. The Company has utilized approximately
$2,000,000 of the credit line in conjunction with the repurchase of its Common
Stock and the renovation of the Rascal House restaurant. As of December 31,
2000, the amount of borrowings available under the revolving line of credit was
$2,720,000.

         Management believes that cash on hand, cash flow from operations and
its available line of credit will be sufficient to finance the operation of the
Company's existing restaurants. Future anticipated capital needs cannot be
projected with certainty. Additional capital expenditures will be required if
new locations are added. The Company generally intends to seek leased locations.
The cost of renovation will depend upon the style of restaurant being converted.
Renovation of Jerry's Famous Deli restaurants have cost between $2.0 million and
$3.0 million per location, or $267 to $400 per square foot.


                                       22
<PAGE>   23


IMPACT OF INFLATION

         Impact of inflation on food, labor and occupancy costs can
significantly affect the Company's operations. Many of the Company's employees
are paid hourly rates related to the federal minimum wage which has been
increased numerous times and remains subject to increase. Management believes
that food costs as a percentage of revenues have been essentially stable due to,
among other things, procurement efficiencies and menu price adjustments.
Building costs, taxes, maintenance and insurance costs which continue to
increase all have an impact on the Company's operating expenses and occupancy
costs. Management believes the current practice of maintaining operating margins
through, among other things, a combination of cost controls, careful evaluation
of property and equipment needs, efficient purchasing practices and menu price
increases is its most effective tool for coping with inflation.

SEASONALITY

         The Rascal House restaurants and Epicure traditionally experience
higher revenues in the first and fourth quarters of each year, consistent with
the tourist season in Florida. In addition, management has noted that certain of
the Company's Jerry's Famous Deli locations may have experienced a seasonal
influence, with higher revenues in the first and fourth quarters of each year,
although this has not clearly been established as a recurring trend.

RISK FACTORS

         The discussion in this Report contains certain forward-looking
statements relating to anticipated financial performance, business prospects and
business plans. Actual future results could differ materially from those
described in the forward-looking statements as a result of factors discussed
below. The Company cautions the reader, however, that this list of risk factors
may not be exhaustive. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.

         LACK OF DIVERSIFICATION. At the present time, the Company has invested
primarily in deli-style restaurants and gourmet markets. As a result, changes in
consumer preferences, including a change in consumer preferences for restaurants
of the type operated by the Company, may have a disproportionate and materially
adverse impact on the Company's business and its operating results.

         NEED FOR ADDITIONAL FINANCING. Management believes that the Company has
sufficient funds for limited expansion, if such a course is undertaken, but may
need additional funding if it makes future acquisitions or develops new
locations. There is no assurance that the Company will be able to obtain such
additional financing, or that such additional financing will be available on
terms acceptable to the Company and at the times required by the Company.
Failure to obtain such financing may adversely impact the growth, development or
general operations of the Company. If, on the other hand, such financing can be
obtained, it will most likely result in additional leverage or dilution of
existing shareholders.

         UNCERTAINTY REGARDING GROWTH AND EXPANSION. In order to achieve growth
the Company must acquire or develop new restaurants. The Company's prior
expansion plans are now under review. Even if it is determined that the Company
should pursue expansion, the Company's ability to successfully expand will
depend on a number of factors, including without limitation, the selection and
availability of suitable locations, the hiring and training of sufficiently
skilled management and personnel, the availability of adequate financing,
distributors and suppliers, the obtaining of necessary governmental permits and
authorizations, and contracting with appropriate development and construction
firms, some of which are beyond the control of the Company. If expansion is
sought, there is no assurance that the Company will be able to open any new
restaurants, or that any new restaurants will be opened at budgeted costs or in
a timely manner, or that such restaurants can be operated profitably. If the
Company decides to delay expansion plans, the uncertainty over future strategy
remains a risk.


                                       23
<PAGE>   24


         LIMITATIONS AND VULNERABILITY AS A RESULT OF GEOGRAPHIC CONCENTRATION.
Because all of the Company's existing restaurants (other than the Rascal Houses
and Epicure in Florida) are located in Southern California, the Company is
vulnerable to the Southern California economy, which has experienced adverse
results in past years. In addition, the Company's experience with construction
and development outside the Los Angeles metropolitan area is limited, which may
increase associated risks of development and construction as the Company expands
outside this area. Expansion to other geographic areas may require substantially
more funds for advertising and marketing since the Company will not initially
have name recognition or word of mouth advertising available to it in areas
outside of Southern California. The centralization of the Company's management
in Southern California may be a problem in terms of expansion to new geographic
areas, since the Company may suffer from lack of experience with local
distributors, suppliers and consumer factors and from other issues as a result
of the distance between the Company's main headquarters and its restaurant
sites. These factors could impede the growth of the Company.

         SIGNIFICANT RESTAURANT INDUSTRY COMPETITION. The restaurant industry is
intensely competitive with respect to price, service, location, ambiance and
quality, both within the casual dining field and in general. As a result, the
rate of failure for restaurants is very high and the business of owning and
operating restaurants involves greater risks than for businesses generally.
There are many competitors of the Company in the casual dining segment that have
substantially greater financial and other resources than the Company and may be
better established in those markets where the Company has opened or intends to
open restaurants. There is no assurance that the Company will be able to compete
in these markets.

         DEPENDENCE UPON CONSUMER TRENDS. The Company's restaurants are, by
their nature, dependent upon consumer trends with respect to the public's
tastes, eating habits (including increased awareness of nutrition), and
discretionary spending priorities, all of which can shift rapidly. In general,
such trends are significantly affected by many factors, including the national,
regional or local economy, changes in area demographics, increases in regional
competition, food, liquor and labor costs, traffic patterns, weather, natural
disasters, and the availability and relative cost of automobile fuel. Any
negative change in any of the above factors could negatively affect the Company
and its operations.

         DEPENDENCE ON KEY PERSONNEL. The Company believes that the development
of its business has been, and will continue to be, highly dependent on Isaac
Starkman, the Chairman of the Board and Chief Executive Officer of the Company.
Isaac Starkman is currently 63 years old. Mr. Starkman has an employment
agreement which requires that he devote a substantial majority of his time to
the Company; however, he does have, and will continue to have, limited
involvement with certain concession and souvenir businesses in New York, and
other business ventures, each unrelated to the Company and its business. Guy
Starkman, President of the Company, is currently 30 years old and Jason
Starkman, Vice President of the Company, is currently 26 years old. The Company
has obtained key man life insurance of $1,000,000 face amount on Isaac Starkman.
However, if Isaac Starkman's services become unavailable for any reason, it
could affect the Company's business and operations adversely.

         POSSIBLE HIGHER COSTS UNDER EXISTING RELATED PARTY LEASES. The Company
currently leases its Westwood restaurant building and eight adjacent parking
spaces, along with one parking lot and a 1,200 square foot building adjacent to
its West Hollywood restaurant, from the Starkman Family Partnership ("The
Starkman Family Partnership"), an entity controlled by Isaac Starkman, the
controlling beneficial shareholder of the Company. There is no assurance that
the leases between The Starkman Family Partnership and the Company are as
favorable as the Company could have obtained from an unaffiliated third party.
These leases were not negotiated at arm's length and Isaac Starkman, the
controlling beneficial shareholder and the Chief Executive Officer of the
Company, had a conflict of interest in negotiating these transactions. In
addition, several of the leases are subject to renewal at their then fair market
value, which could involve substantial increases, depending upon the real estate
leasing market at the time of renewal of each of such leases. In the future, the
Company will not lease new restaurant sites or facilities or renew existing
leases from The Starkman Family Partnership or other affiliated persons or
entities unless the terms of the lease have been approved by the Company's
independent directors and deemed at least as favorable as would be available
from a non-affiliated third party by an independent national or regional real
estate evaluation firm or commercial leasing firm in a written opinion.


                                       24
<PAGE>   25


         INCREASES IN FOOD COSTS. Among various other factors, the Company's
profitability is highly sensitive to changes in food costs, which sensitivity
requires Management to be able to anticipate and react to such changes. Various
factors beyond the Company's control, including adverse weather, labor strikes
and delays in any of the restaurants' frequent deliveries, may negatively affect
food costs, quality and availability. While in the past, Management has been
able to anticipate and react to increasing food costs through, among other
things, purchasing practices, menu changes and price adjustments, there can be
no assurance that it will be able to do so in the future.

         INCREASE IN MINIMUM WAGE. The federal minimum wage increased from $4.75
an hour to $5.15 effective September 1, 1997. The California minimum wage
increased from $5.75 an hour to $6.25 effective April 1, 2000. In addition, the
California minimum wage will increase again to $6.75 effective January 1, 2002.
Approximately one-third of the employees working in restaurants operated by the
Company receives salaries equal to the federal minimum wage.

         SECURITY CONCERNS AND EXPENSES AT RESTAURANT SITES. In light of, among
other things, the 24-hour operation of some of the Company's restaurants,
security for patrons and workers at restaurant locations is an ongoing and
increasing concern and expense. The Company has previously had criminal
incidents at its restaurants, some of which have resulted in lawsuits. There is
no assurance that there will not be any additional problems at any of the
locations. The Company maintains its own security personnel at each location.
The Company also maintains general liability insurance.

         POTENTIAL UNINSURED LOSSES. The Company has comprehensive insurance,
including general liability, fire and extended coverage, which the Company
considers adequate. However, there are certain types of losses which may be
uninsurable or not economically insurable. Such hazards may include earthquake,
hurricane and flood losses. While the Company currently maintains limited
earthquake coverage, it may not be economically feasible to do so in the future.
Since the Company's operations are currently concentrated in one area of
Southern California and Southern Florida, the Company has had temporary
interruptions in its operations due to such hazards in the past. Punitive damage
awards are generally not covered by insurance; thus, any awards of punitive
damages as to which the Company may be liable could adversely affect the ability
of the Company to continue to conduct its business, to expand its operations or
to develop additional restaurants. If such a loss should occur, the Company
would, to the extent that it is not covered for such loss by insurance, suffer a
loss of the capital invested in, as well as anticipated profits and/or cash flow
from, such damaged or destroyed properties. There is no assurance that any
insurance coverage maintained by the Company will be adequate, that it can
continue to obtain and maintain such insurance at all or that the premium costs
will not rise to an extent that they adversely affect the Company or the
Company's ability to economically obtain or maintain such insurance.

         POTENTIAL "DRAM SHOP" LIABILITY. Restaurants in California and most
other states are subject to "dram shop" laws, rules and regulations, which
impose liability on licensed alcoholic beverage servers for injuries or damages
caused by their negligent service of alcoholic beverages to a visibly
intoxicated person or to a minor, if such service is the proximate cause of the
injury or damage and such injury or damage is reasonably foreseeable. While the
Company has limited amounts of liquor liability insurance and intends to
maintain liquor liability insurance as part of its comprehensive general
liability insurance which it believes should be adequate to protect against such
liability, there is no assurance that it will not be subject to a judgment in
excess of such insurance coverage or that it will be able to obtain or continue
to maintain such insurance coverage at reasonable costs, or at all. The
imposition of a judgment substantially in excess of the Company's current
insurance coverage would have a materially adverse effect on the Company and its
operations. The failure or inability of the Company to maintain or increase
insurance coverage could materially and adversely affect the Company and its
operations. In addition, punitive damage awards are generally not covered by
such insurance. Thus, any awards of punitive damages as to which the Company may
be liable could adversely affect the ability of the Company to continue to
conduct its business, to expand its operations or to develop additional
restaurants.

         TRADEMARK AND SERVICE MARK RISKS. The Company has not had a challenge
to its use of the "Jerry's" service mark as of this time. However, to date, the
Company has used the service mark only in Southern California. In addition, the
Company has not secured clear rights to the use of the "Jerry's" service mark or
any other name,


                                       25
<PAGE>   26


service mark or trademark used in the Company's business operations, other than
"JFD," in connection with restaurants. There are other restaurants using the
name "Jerry's" throughout the United States, and use of the service mark or any
other name, service mark or trademark in the Company's business operations,
other than "JFD," may be subject to challenge.

         EFFECTS OF COMPLIANCE WITH GOVERNMENT REGULATION. The Company is
subject to various federal, state and local laws, rules and regulations
affecting its businesses and operations. Each of the Company's restaurants is
and shall be subject to licensing regulation and reporting requirements by
numerous governmental authorities, which may include alcoholic beverage control,
building, land use, health and safety and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failures to obtain the necessary licenses or approvals could delay or prevent
the development or operation of a given restaurant or limit, as with the
inability to obtain a liquor or restaurant license, its products and services
available at a given restaurant. Any problems that the Company may encounter in
renewing such licenses in one jurisdiction may adversely affect its licensing
status on a federal, state or municipal level in other relevant jurisdictions.

         LIMITED CONTROL AND INFLUENCE ON THE COMPANY. The current officers and
directors of the Company in the aggregate, directly or beneficially, currently
own a majority of the total outstanding Common Stock. In addition, three out of
six directors are members of the Starkman family. As a result, these individuals
are in a position to materially influence, if not control the outcome of all
matters requiring shareholder or board approval, including the election of
directors. Such influence and control is likely to continue for the foreseeable
future and significantly diminishes control and influence which future
shareholders may have on the Company.

         NO DIVIDENDS. The Company has not paid dividends since it became a
public company and may not pay any cash dividends in the future, although all
strategic issues are under review. If dividends are paid, it will reduce the
Company's financial liquidity and capital resources.

         POSSIBLE ADVERSE IMPACT ON POTENTIAL BIDS TO ACQUIRE SHARES DUE TO
ISSUANCE OF PREFERRED OR COMMON STOCK. The Board of Directors of the Company has
authority to issue up to 5,000,000 shares of preferred stock of the Company (the
"Preferred Stock") and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
shareholders. In addition, the Company has authorized 60,000,000 shares of
Common Stock. Only 4,673,042 shares of Common Stock are currently outstanding,
and no preferred shares are currently outstanding. The potential issuance of
authorized and unissued preferred shares or Common Stock of the Company may
result in special rights and privileges, including voting rights, to individuals
designated by the Company and have the effect of delaying, deferring or
preventing a change in control of the Company. As a result, such potential
issuance may adversely affect the marketability and potential market price of
the shares. As additional acquisition opportunities become available, Management
may determine to issue and sell additional Common Stock or preferred shares at
any time in the future.

         CHANGES IN LOCAL ENFORCEMENT OF HEALTH CODE AND NEGATIVE PUBLICITY. As
a result of a November 1997 series of investigative reports on local television
regarding restaurant health code violations, the Los Angeles County Health
Department has instigated more strict monitoring and enforcement of health code
provisions. The Company's Studio City restaurant was one of several prominent
restaurants mentioned in the November 1997 report, which resulted in negative
publicity to the Company. Management believes that this may have contributed to
reduced revenues from the Southern California restaurants in the fourth quarter
of 1997 and the first two quarters of 1998. The Health Department's current
policy is to grade every restaurant "A," "B" or "C," with A being best, B being
acceptable and C being grounds for closing the restaurant. All of the Company's
seven restaurants in the Los Angeles County Health Department jurisdiction have
been inspected to date, and those have all received "A" ratings from the Health
Department under the new policy. The Company's Orange County restaurant has also
been inspected recently by the appropriate local health department authorities
and received a "no violations observed" rating, which is comparable to an "A"
rating. Poor future ratings or adverse related publicity could negatively impact
revenues at Company stores.


                                       26
<PAGE>   27


         NEGATIVE PUBLICITY FROM PRIVATE DAMAGE CLAIMS. Restaurants such as
those operated by the Company are subject to litigation in the ordinary course
of business, most of which the Company expects to be covered by its general
liability insurance. In the past, certain claims have been filed against the
Company. In 1998, certain of these claims received newspaper and television
publicity, which may have a negative impact on revenues on the Company's
Southern California restaurants. Future negative publicity could negatively
impact revenues at Company stores.

         SAME STORE SALES DECLINES. There can be no assurance that same store
sales declines can be stemmed in the future. The Company has been able to stem
some of the declines during 2000, however there is no guarantee that this trend
will continue.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE AND MARKET RISK.

         The Company is exposed to market risk from changes in interest rates on
debt. The Company's exposure to interest rate risk relates to its $9,000,000
term loan and $6,000,000 revolving line of credit. Borrowings under the
agreements bear interest as discussed in Note 5 of Notes to Consolidated
Financial Statements. Borrowings outstanding under the agreements were
$7,440,000 at December 31, 2000. Consequently, a hypothetical 1% interest rate
change could have a material impact on the Company's results of operations.


                                       27
<PAGE>   28


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

                                                                            Page

Report of Independent Accountants .........................................  29

Consolidated Balance Sheets as of December 31, 2000 and 1999...............  30

Consolidated Statements of Operations for the years
     ended December 31, 2000, 1999 and 1998................................  31

Consolidated Statements of Equity for the years
     ended December 31, 2000, 1999 and 1998................................  32

Consolidated Statements of Cash Flows for the years
     ended December 31, 2000, 1999 and 1998................................  33

Notes to Consolidated Financial Statements.................................  34


                                       28
<PAGE>   29


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Jerry's Famous Deli, Inc.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, equity and cash flows present
fairly, in all material respects, the financial position of Jerry's Famous Deli,
Inc. and its subsidiaries at December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

     As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for the cost of start-up activities in
1998.


                                      PricewaterhouseCoopers LLP

Los Angeles, California
March 12, 2001


                                       29
<PAGE>   30


                            JERRY'S FAMOUS DELI, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                                               December 31,
                                                                                         --------------------------
                                                                                            2000           1999
                                                                                         -----------    -----------
ASSETS
<S>                                                                                      <C>            <C>
Currents assets
   Cash and cash equivalents                                                             $ 1,833,686    $ 1,184,329
   Accounts receivable, net                                                                  601,733        519,948
   Inventory                                                                               1,298,418      1,382,784
   Prepaid expenses                                                                          421,241        349,105
   Deferred income taxes                                                                     285,511        288,725
   Income taxes receivable                                                                      --          201,700
                                                                                         -----------    -----------
          Total current assets                                                             4,440,589      3,926,591

Property and equipment, net                                                               31,673,889     30,155,403

Deferred income taxes                                                                         96,183        312,531
Goodwill and covenants not to compete                                                      8,720,620      9,184,526
Other assets                                                                               1,479,907      1,569,138
                                                                                         -----------    -----------

          Total assets                                                                   $46,411,188    $45,148,189
                                                                                         ===========    ===========

LIABILITIES AND EQUITY
Current liabilities
   Accounts payable                                                                      $ 3,136,596    $ 3,378,452
   Accrued expenses                                                                        1,563,454      1,414,934
   Sales tax payable                                                                         354,813        404,613
   Income tax payable                                                                         31,826           --
   Current portion of capital lease obligation                                                46,337           --
   Current portion of long-term debt                                                       1,712,260      1,700,955
                                                                                         -----------    -----------
          Total current liabilities                                                        6,845,286      6,898,954

Long-term debt                                                                            11,007,256     11,042,092
Capital lease obligation                                                                     119,710           --
Deferred rent                                                                                430,683        456,774
                                                                                         -----------    -----------

          Total liabilities                                                               18,402,935     18,397,820

Minority interest                                                                            504,098        677,053

Commitments and contingencies (Note 7)

Equity
   Preferred stock Series A , no par, 5,000,000 shares authorized,
      none issued or outstanding                                                                --             --
   Common stock, no par value, 60,000,000 shares authorized, 4,673,042 and 14,019,202
      (pre-split) shares issued and outstanding in 2000 and 1999, respectively            24,575,522     24,575,522
   Equity                                                                                  2,928,633      1,497,794
                                                                                         -----------    -----------
          Total equity                                                                    27,504,155     26,073,316
                                                                                         -----------    -----------

          Total liabilities and equity                                                   $46,411,188    $45,148,189
                                                                                         ===========    ===========
</TABLE>

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


                                       30
<PAGE>   31




                            JERRY'S FAMOUS DELI, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                          YEARS ENDED DECEMBER 31,
                                                              ----------------------------------------------
                                                                  2000             1999             1998
                                                              ------------     ------------     ------------
<S>                                                           <C>              <C>              <C>
Revenues                                                      $ 69,600,500     $ 70,674,459     $ 66,583,196
Cost of sales                                                   23,955,565       24,728,815       22,408,272
                                                              ------------     ------------     ------------
      Gross profit                                              45,644,935       45,945,644       44,174,924

Operating expenses
   Labor                                                        24,287,046       24,991,931       23,687,543
   Occupancy and other                                           8,905,499        9,161,824        9,240,066
   Occupancy -- related party                                    1,047,864        1,063,031          921,303
General and administrative expenses                              4,487,469        4,748,235        4,832,438
Preopening expense                                                    --               --            537,699
Depreciation expense                                             2,864,945        2,671,508        3,065,335
Amortization expense                                               722,588          684,459          664,513
                                                              ------------     ------------     ------------
      Total expenses                                            42,315,411       43,320,988       42,948,897
                                                              ------------     ------------     ------------

      Income from operations                                     3,329,524        2,624,656        1,226,027

Other income (expense)
   Interest income                                                  25,561           24,110           36,560
   Interest expense                                             (1,141,363)      (1,237,130)      (1,291,805)
   Licensing income                                                 78,931             --               --
   Other income, net                                                32,684            5,953             --
                                                              ------------     ------------     ------------
      Income (loss) before items below                           2,325,337        1,417,589          (29,218)
Income tax (provision) benefit                                    (653,192)        (287,492)          65,119
Minority interest                                                 (241,306)        (219,704)        (167,260)
                                                              ------------     ------------     ------------
Income (loss) before cumulative effect of a change in
  accounting principle                                           1,430,839          910,393         (131,359)
Cumulative effect of change in accounting, net of tax
  benefit of $65,162                                                  --               --           (132,299)
                                                              ------------     ------------     ------------
Net income (loss)                                             $  1,430,839     $    910,393     $   (263,658)
                                                              ============     ============     ============

Basic
Net income (loss) per share before cumulative effect of an
  accounting change applicable to common stock                $       0.31     $       0.19     $      (0.02)
Cumulative effect of change in accounting principle           $       --       $       --       $      (0.03)
                                                              ------------     ------------     ------------
Net income (loss) per share applicable to common stock        $       0.31     $       0.19     $      (0.05)
                                                              ------------     ------------     ------------

Diluted
Net income (loss) per share before cumulative effect of an
   accounting change applicable to common stock               $       0.31     $       0.19     $      (0.02)
Cumulative effect of change in accounting principle           $       --       $       --       $      (0.03)
                                                              ------------     ------------     ------------
Net income (loss) per share applicable to common stock        $       0.31     $       0.19     $      (0.05)
                                                              ------------     ------------     ------------


Weighted average common shares outstanding - Basic               4,673,042        4,719,274        4,956,582
Weighted average common shares outstanding - Diluted             4,677,518        4,724,468        4,975,636
</TABLE>


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


                                       31
<PAGE>   32


                            JERRY'S FAMOUS DELI, INC.
                        CONSOLIDATED STATEMENTS OF EQUITY


<TABLE>
<CAPTION>
                                              Common Stock           Preferred Stock
                                   ----------------------------   ----------------------
                                     Shares                          Shares                Contributed
                                   Issued and                      Issued and                Capital       Retained
                                   Outstanding       Amount       Outstanding     Amount    (Deficit)      Earnings        Total
                                   -----------    ------------    -----------     ------    ---------     ----------    -----------
<S>                                 <C>             <C>           <C>             <C>        <C>           <C>           <C>
Balance, December 31, 1997          14,210,155      23,724,484           --         --       (846,409)     1,697,468     24,575,543

   Net loss                                                                                                 (263,658)      (263,658)
   Common shares issued in
     purchase of market                934,509       2,395,147                                                            2,395,147
   Purchase and retirement of
     Company's common stock           (635,762)       (847,894)                                                            (847,894)

                                   -----------    ------------    -----------      ---      ---------     ----------    -----------
Balance, December 31, 1998          14,508,902      25,271,737           --         --       (846,409)     1,433,810     25,859,138

   Net income                                                                                                910,393        910,393
   Purchase and retirement of
     Company's common stock           (489,700)       (696,215)                                                            (696,215)

                                   -----------    ------------    -----------      ---      ---------     ----------    -----------
Balance, December 31, 1999          14,019,202      24,575,522           --         --       (846,409)     2,344,203     26,073,316

   One-for-three reverse stock
     split                          (9,346,160)
   Net income                                                                                              1,430,839      1,430,839

                                   -----------    ------------    -----------      ---      ---------     ----------    -----------
Balance, December 31, 2000           4,673,042    $ 24,575,522    $      --        $--      $(846,409)    $3,775,042    $27,504,155
                                   ===========    ============    ===========      ===      =========     ==========    ===========
</TABLE>


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


                                       32
<PAGE>   33


                            JERRY'S FAMOUS DELI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                         --------------------------------------------
                                                                            2000            1999             1998
                                                                         -----------     -----------     ------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                                     $ 1,430,839     $   910,393     $   (263,658)
   Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
      Depreciation                                                         2,864,945       2,671,508        3,065,335
      Amortization                                                           722,588         684,459          664,513
      Preopening                                                                --              --            537,699
      Net gain from insurance settlement                                     (30,268)         (8,500)            --
      Minority interest                                                      241,306         219,704          167,260
      Deferred income taxes                                                  219,562         280,327         (312,392)
      Changes in assets and liabilities:
         Accounts receivable                                                 (81,785)        (95,548)        (151,889)
         Inventory                                                            84,366          12,115         (460,898)
         Prepaid expenses                                                    (72,136)        100,632        1,265,973
         Preopening costs                                                       --              --            105,318
         Other assets                                                       (169,451)       (371,139)        (127,021)
         Organization costs                                                     --              --             92,143
         Accounts payable                                                   (241,856)        278,613          628,413
         Accrued expenses                                                    148,520           3,477          (22,759)
         Sales tax payable                                                   (49,800)        (17,284)          19,677
         Income taxes payable                                                 31,826            --               --
         Deferred rent and income taxes receivable                           175,609          64,870         (242,716)
                                                                         -----------     -----------     ------------
            Total adjustments                                              3,843,426       3,823,234        5,228,656
                                                                         -----------     -----------     ------------
            Net cash provided by operating activities                      5,274,265       4,733,627        4,964,998
                                                                         -----------     -----------     ------------

Cash flows from investing activities:
   Purchase of Epicure Market                                                   --              --         (8,564,359)
   Acquisitions of restaurants                                                  --              --         (1,760,000)
   Purchase of limited partners interest                                        --           (34,000)            --
   Net proceeds from sale of facility                                           --         3,916,855             --
   Additions to equipment                                                   (676,860)     (1,221,867)      (1,560,854)
   Additions to improvements--land, building and leasehold                (3,471,687)     (1,965,497)      (1,469,628)
   Proceeds from sales of fixed assets                                          --             8,500             --
                                                                         -----------     -----------     ------------
            Net cash (used in) provided by investing activities           (4,148,547)        703,991      (13,354,841)

Cash flows from financing activities:
   Borrowings on long-term debt, including line of credit                  2,850,023       2,178,988       16,965,000
   Payments on long-term debt                                             (2,873,554)     (6,623,894)      (8,219,329)
   Financing costs                                                              --              --           (694,120)
   Capital lease payments                                                    (38,569)           --               --
   Dividends paid to minority shareholders                                   (78,498)        (97,550)         (92,740)
   Return of capital to minority shareholders                               (335,763)           --               --
   Purchase of Company's common stock                                           --          (696,215)        (847,894)
                                                                         -----------     -----------     ------------
            Net cash (used in) provided by financing activities             (476,361)     (5,238,671)       7,110,917
                                                                         -----------     -----------     ------------

            Net increase (decrease) in cash and cash equivalents             649,357         198,947       (1,278,926)
Cash and cash equivalents, beginning of year                               1,184,329         985,382        2,264,308
                                                                         -----------     -----------     ------------
Cash and cash equivalents, end of year                                   $ 1,833,686     $ 1,184,329     $    985,382
                                                                         ===========     ===========     ============
</TABLE>


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


                                       33
<PAGE>   34


                   JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

Organization and Basis of Presentation

         The accompanying financial statements are comprised of the consolidated
financial statements ("consolidated statements") which consist of Jerry's Famous
Deli, Incorporated ("JFD--Inc."), a California corporation; JFD--Encino
("JFD--Encino"), a California limited partnership; and National Deli Corporation
("NDC"), a Florida corporation and wholly-owned subsidiary of JFD--Inc.
JFD--Inc. and JFD--Encino operate family oriented, full-service restaurants. NDC
operates The Epicure Market ("Epicure"), which was acquired on April 1, 1998,
and is a specialty gourmet market located in Miami Beach, Florida. These
entities are collectively referred to as "Jerry's Famous Deli, Inc." or the
"Company."

         JFD--Inc. currently includes eight Southern California restaurant
locations: Studio City (established in 1978), Encino (established in 1989),
Marina del Rey (established in 1991), West Hollywood (established in 1994),
Westwood (established in June 1996), Sherman Oaks and Woodland Hills (both
purchased in July 1996) and Costa Mesa (established in August 1997). The
Pasadena restaurant location established in February 1996 was sold in May 1999.
JFD--Inc. also includes the two Rascal House restaurants, located in Miami Beach
(purchased in September 1996) and Boca Raton, Florida (established July 1,
1998).

         Jerry's Famous Deli, L.A., Inc. ("JFDLA"), the co-general partner of
JFD--Encino was acquired by JFD-Inc. on January 12, 1995. JFDLA owns 80% of the
25% general partner interest, which represents a 20% interest in JFD--Encino.
The general partners receive a management fee equal to 3% of the gross revenues
of the Encino restaurant. The general partners are also allocated 25% of net
profits, net gains and distributions of JFD--Encino until such time as the
limited partners have received cash distributions equal to 100% of their
contributed capital plus an amount equal to 10% per annum of their capital
contribution (the "Preferred Return"). After the limited partners have received
repayment of their initial capital contribution, the general partners will be
allocated 65% of net profits, net gains and distributions.

         JFD--Encino has been presented on a consolidated basis due to the
operating and financial control of JFDLA, which as the co-general partner has
the ability to exert day to day control over the operations. A tender offer by
JFDLA to purchase the interests of the limited partners resulted in the May 1,
1996 purchase of one limited partner's share from the Company's Chief Executive
Officer for approximately $158,000. This resulted in a change in minority
interest to 72.45% from 80.00%. On November 15, 1999, the Company purchased the
interests of three limited partner's shares for approximately $34,000. This
resulted in a change in minority interest to 69.84% from 72.45%. On October 1,
2000, the Company purchased the interest of one limited partner's share for
approximately $1,900. This resulted in a change in minority interest to 69.66%
from 69.84%.

         The Company operates primarily in the restaurant and gourmet market
business, exclusively in the United States. All significant intercompany
transactions and balances have been eliminated.

Reclassifications

         Certain amounts in the previously presented consolidated financial
statements have been reclassified to conform with the current period's
presentation.


                                       34
<PAGE>   35


Significant Accounting Policies

CASH EQUIVALENTS

         Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased and are carried at cost which
approximates fair value.

INVENTORY

         Inventory primarily consists of food and beverage products and is
stated at the lower of cost (first-in, first-out) or market.

PREOPENING COSTS

         Capitalized preopening costs previously included the direct incremental
costs associated with the opening of a new restaurant. These are primarily costs
incurred to develop new restaurant management teams and the food, beverage and
supply costs incurred to perform testing of all equipment, concept systems and
recipes. The amortization period historically was one year from the restaurant's
opening date. In 1998, the Company adopted SOP 98-5 entitled "Reporting on the
Costs of Start Up Activities" which requires preopening costs to be expensed as
incurred. The early adoption in 1998, which resulted in approximately $538,000
being expensed which would have been capitalized and amortized in 1998 and 1999,
had the Company not adopted early.

         The Company's early adoption of SOP 98-5 in 1998 required the
recognition of the cumulative effect of the change in accounting principle as a
one-time charge against earnings, net of any related income tax effect,
retroactive to January 1, 1998.

GOODWILL

         The excess of costs over net assets acquired, relating to the purchase
of the Sherman Oaks, Woodland Hills, and Rascal House restaurants and Epicure,
is amortized utilizing the straight-line method over 30 years and 25 years for
the owned Rascal House and Epicure, respectively, and over the lives of the
leases for Woodland Hills (15 years) and Sherman Oaks (18 years). The
accumulated amortization at December 31, 2000 and 1999 was approximately
$1,333,000 and $907,000, respectively.

COVENANTS NOT TO COMPETE

         Covenants not to compete are amortized utilizing the straight-line
method over the life of the agreement. For the purchase of the Sherman Oaks and
Woodland Hills restaurants and Epicure, the agreement life is five years and for
the purchase of the Rascal House restaurant, the respective agreement life is
two years. Accumulated amortization at December 31, 2000 and 1999 was
approximately $594,000 and $496,000, respectively.

PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost. Expenditures for normal
maintenance and repairs are charged to operations as incurred; additions,
renewals, and betterments are capitalized. When an item is sold or retired, the
accounts are relieved of both the cost and the related accumulated depreciation
and the resulting gain or loss, if any, is recognized.

         Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets or, for leasehold
improvements, over the total of the initial term of the lease and the first
option period, if less.


                                       35
<PAGE>   36


         On July 1, 1998, the Company changed the estimated useful lives of
certain restaurant equipment and furniture and fixtures from a five-year to an
eight-year useful life and also recorded certain adjustments to depreciation
totaling approximately $420,000. The change in estimated useful life was made to
better reflect the years of benefit to be received from these assets which also
approximates industry practice. The following are the estimated useful lives:
         Land improvements..................................   15 years
         Buildings and improvements.........................   30 years
         Computer equipment.................................  3-4 years
         Transportation equipment...........................    5 years
         Fixtures and equipment.............................  4-8 years
         Leasehold improvements...................;......... 4-20 years


ORGANIZATION COSTS

         Capitalized organization costs were previously amortized on a
straight-line basis over five years. The adoption of SOP 98-5, as discussed
above, is also applicable to organization costs. As such, the Company has
written off the unamortized balance of organization costs totaling approximately
$92,000 at January 1, 1998.

INCOME TAXES

         The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 109 "Accounting for Income Taxes."
SFAS No. 109 prescribes the use of the liability method to compute the
differences between the tax bases of assets and liabilities and related
financial reporting amounts using currently enacted future tax laws and rates.
Under SFAS No. 109 the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

DEFERRED RENT

         Deferred rent represents the excess of rent expense charged to
operations as compared to the actual cash payments made since inception of the
lease, which include increases over the term of the agreements. These credits
will be recognized on a straight-line basis over the lives of the leases.

MINORITY INTEREST

         Minority interest represents the limited partners' and the other
general partner's interests in the Encino restaurant, not owned directly or
indirectly by the Company. For October 1, 2000 to December 31, 2000, the
minority interest represents the limited partners' 64.66% share and the other
co-general partner's 5% share of net income or loss and equity. For January 1,
2000 to September 30, 2000, the minority interest represents the limited
partners' 64.84% share and the other co-general partner's 5% share of net income
or loss and equity. For November 15, 1999 to December 31, 1999, the minority
interest represents the limited partners' 64.84% share and the other co-general
partner's 5% share of net income or loss and equity. For January 1, 1999 to
November 14, 1999, the minority interest represents the limited partners' 67.45%
share and the other co-general partner's 5% share of net income or loss and
equity. For 1998, the minority interest represents the limited partners' 67.45%
share and the other co-general partner's 5% share of net income or loss and
equity.

         During fiscal year 2000, JFD--Encino paid to their limited partners
$392,000 as a return of their capital investment.

REVENUE RECOGNITION

         Revenues from restaurant and market sales are recognized when the
products are sold or delivered to the customer.


                                       36
<PAGE>   37


ADVERTISING

         Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 2000, 1999 and 1998 was approximately $183,000,
$367,000 and $254,000, respectively.

USE OF  ESTIMATES AND ASSUMPTIONS

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

LONG-LIVED ASSETS

         In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," long lived
assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
of the individual stores and consolidated undiscounted net cash flows for
long-lived assets not identifiable to individual stores compared to the related
carrying value. If the undiscounted net cash flows is less than the carrying
value, the amount of the impairment, if any, will be determined by comparing the
carrying value of each asset with its fair value. Fair value is generally based
on a discounted cash flow analysis. The Company does not believe that any
impairment of its goodwill, intangibles or other long-lived assets has occurred.

CONCENTRATION OF CREDIT RISK

         Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, investments in money
market accounts and trade receivables. At times, cash balances may be in excess
of FDIC insurance limits. In addition, money market accounts at times maintained
balances which were in excess of insured limits. The concentrations of credit
risk for trade receivables may be affected by changes in economic or other
conditions affecting Southern California and Southern Florida. However,
management believes that receivables are well diversified and the allowances for
doubtful accounts are sufficient to absorb estimated losses.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAF No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial instruments.
The carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair values because of the
short-term maturity of these instruments. The fair value of long-term debt
closely approximates it carrying value. The Company uses quoted market prices,
when available, or discounted cash flows to calculate these fair values.

NET INCOME PER SHARE

         In accordance with SFAS No. 128, basic net income per share is computed
by dividing the net income attributable to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted net
income per common share is computed by dividing the net income attributable to
common shareholders by the weighted average number of common and common share
equivalents outstanding during the period. Common share equivalents included in
the diluted computation represent shares issuable upon assumed exercise of stock
options using the treasury stock method.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the


                                       37
<PAGE>   38


balance sheet at their fair value. Changes in the fair value of derivatives will
be recorded on each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The new rules will be effective
the first quarter of 2001. The Company does not believe that the new standard
will have any impact, as the Company currently holds no derivatives.

2.   ACQUISITIONS

         On February 18, 1998, the Company acquired a long-term ground lease of
an 11,000 square foot restaurant property located in Boca Raton, Florida. Under
the agreement, the Company acquired the restaurant equipment and other personal
property located on the premises, and the seller's liquor license for the
restaurant, for a total purchase price of approximately $1.8 million. The
Company closed the facility until July 1, 1998, when it reopened as a second
Rascal House restaurant.

         On April 1, 1998, the Company acquired certain assets (equipment and
inventory) and the operations of The Epicure Market in Miami Beach, Florida, a
family-owned specialty gourmet market which has been in operation over 50 years.
The total purchase price was approximately $7.1 million in cash and 311,503
shares of the Company's common stock valued at $2,395,147. The funding of the
purchase came primarily from the utilization of available lines of credit and
issuance of the Company's common stock. The acquisition was accounted for as a
purchase, and, accordingly, the purchase price was allocated to the net assets
acquired based on their fair market values at the date of acquisition. The
unaudited pro forma data is based on available information and certain
assumptions regarding the allocation of purchase price, which could change
significantly based on the realization value of certain assets and potential
additional transaction costs, if any, and other analysis.

         The following summarized, unaudited pro forma results of operations for
the year ended December 31, 1998 assumes the purchase of assets and operations
of Epicure had occurred as of the beginning of the period.

                                                        Pro Forma
                                                       Year ended
                                                    December 31, 1998
                                                    -----------------
                                            (in thousands except per share data)
  Revenues                                                  $ 70,729
  Net income                                                $    108
  Net income per share - basic                              $   0.02
  Net income per share - diluted                            $   0.02

3.   STOCK OFFERINGS AND EQUITY

Common Stock

         The Company is authorized to issue 60,000,000 shares of Common Stock.
The holders of Common Stock are entitled to cast one vote for each share held of
record on all matters presented to shareholders, other than with respect to the
election of directors, for which cumulative voting is currently required under
certain circumstances by applicable provisions of California law. The effect of
cumulative voting is that the holders of a majority of the outstanding shares of
Common Stock may not be able to elect all of the Company's directors.

         In April 1998, the Company issued 311,503 shares of Common Stock valued
at $2,395,147 in conjunction with the purchase of Epicure.

         During 1999 and 1998, the Company purchased and subsequently retired
163,233 shares and 211,921 shares, respectively, of its own Common Stock for
market prices ranging between $2.64 and $4.50 per share. No shares were
repurchased by the Company during 2000.

         As of February 3, 2000, the Company's stock is being traded over Nasdaq
SmallCap Market.


                                       38
<PAGE>   39


         On February 9, 2000, the Company completed a one-for-three reverse
stock split of its Common Stock applicable to the shareholders of record on
February 9, 2000. The reverse stock split reduced the Company's outstanding
shares from 14,019,202 to approximately 4,673,042. All common share and per
share amounts have been adjusted to give retroactive effect to the one-for-three
reverse stock split for the years presented, except for the years prior to the
split as presented on the Consolidated Balance Sheets and the Consolidated
Statements of Equity.

Preferred Stock

         The Company is authorized to issue 5,000,000 shares of preferred stock.
No preferred stock is issued or outstanding at December 31, 2000 or 1999. The
Company's Board of Directors is authorized to issue the preferred stock in one
or more series and, with respect to each series, to determine the preferences
and rights and the qualifications, limitations or restrictions thereof,
including the dividends rights, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, sinking fund provisions, the number
of shares constituting the series and the designation of such series.

4.   PROPERTY AND EQUIPMENT

         Property and equipment consist of the following as of:

<TABLE>
<CAPTION>
                                                      December 31,
                                             -----------------------------
                                                 2000            1999
                                             ------------     ------------
<S>                                          <C>              <C>
Land improvements .......................    $     61,149     $     61,149
Buildings and improvements ..............       6,493,833        5,528,604
Leasehold improvements ..................      18,123,893       17,468,376
Fixtures and equipment ..................      13,232,566       14,594,610
Transportation equipment ................         289,424          261,262
                                             ------------     ------------
                                               38,200,865       37,914,001
Less: Accumulated depreciation
  and amortization.......................     (14,067,688)     (13,448,366)
                                             ------------     ------------
Property and equipment, net .............      24,133,177       24,465,635
Land ....................................       7,095,876        5,665,868
Construction-in-progress ................         444,836           23,900
                                             ------------     ------------
                                             $ 31,673,889     $ 30,155,403
                                             ============     ============
</TABLE>


         The Company closed escrow on the sale of its Pasadena restaurant
facility at the close of business on May 2, 1999. The gross proceeds from the
sale were $4,120,000 which resulted in no significant gain or loss. Of these
proceeds, approximately $3,750,000 was used to reduce the Company's debt and the
remaining proceeds were applied to other related costs of the sale.

         On August 10, 2000, the Starkman Family Partnership (an affiliate of
the Company) and the Company finalized the sale of the two parcels of land
constituting the primary parking facility for the West Hollywood restaurant. The
Company previously leased these two parcels from the Starkman Family Partnership
on terms arranged before the Company's initial public offering. Prior to the
purchase, the Company had no option or right of first refusal in relation to the
parcels. The West Hollywood restaurant facility is still leased by the Company
from a third party landlord. The parcels are required for use of the restaurant
facility. The Starkman Family Partnership sold the parcels to the Company for
$1,420,000, which was determined by an independent third party appraiser. The
Board of Directors approved the purchase of the parcels in July 2000. The
purchase price was financed through funds available on the Company's line of
credit.



                                       39
<PAGE>   40


5.   LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                   -----------------------------
                                                                       2000             1999
                                                                   ------------     ------------
<S>                                                                <C>              <C>
Note payable and line-of-credit with a bank; collateralized by
   machinery, equipment and inventory; interest at Eurodollar
   rate plus variable margin, approximately 8.60% and 10% at
   December 31, 2000, respectively; due September 2003             $  7,440,000     $  7,330,000
Note payable to a bank; collateralized by real property;
      interest rate 9.39% at December 31, 2000; due August 2004       1,944,444        2,111,111
Notes collateralized by real property; monthly interest
   payments at interest rate of 9%; principal due
   March 2002                                                         3,250,000        3,250,000
Other                                                                    85,072           51,936
                                                                   ------------     ------------
                                                                     12,719,516       12,743,047
Less: Current maturities                                             (1,712,260)      (1,700,955)
                                                                   ------------     ------------
         Total long-term debt                                      $ 11,007,256     $ 11,042,092
                                                                   ============     ============
</TABLE>


         In September 1998, the Company entered into a new Credit Facility with
BankBoston, N.A. The agreement includes a $9,000,000 term loan and a $6,000,000
revolving line of credit. In conjunction with the agreement, the Company paid
off certain existing debt with the proceeds from the term loan. The debt is
collateralized by assets of the Company and includes certain financial
covenants.

         The following are future maturities of long-term debt for each of the
remaining five years ending December 31 and in total thereafter:

         2001.........................................  $  1,712,260
         2002.........................................     4,961,617
         2003.........................................     4,581,991
         2004.........................................     1,457,442
         2005.........................................         6,206
                                                        ------------
                                   Total                $ 12,719,516
                                                        ============

         The term loan and line of credit require the Company to maintain
certain financial covenants, the most restrictive including the maintenance of
(a) minimum fixed charge, (b) minimum interest coverage, (c) maximum leverage
ratio, (d) dividend restrictions, and (e) a minimum debt service coverage ratio.

         As of December 31, 2000, the amount of borrowings available under the
revolving line of credit was $2,720,000.


                                       40
<PAGE>   41


6.   CAPITAL LEASES

     During 2000, the Company entered into non-cancelable lease arrangements for
various equipment whereby payments totaling approximately $5,100 are due
monthly. Certain of these leases are guaranteed by the principal shareholder.
Depreciation expense on this equipment was approximately $42,000 for the year
ended December 31, 2000.

     The following are the annual future minimum lease payments for the years
ending December 31:

      2001...................................................   $ 60,902
      2002...................................................     60,902
      2003...................................................     58,793
      2004...................................................     14,463
      2005...................................................      1,660
                                                                --------
                                                                $196,720
                                Less:  interest                  (30,673)
                                                                --------
                                Total minimum payments           166,047
                                Less:  current portion           (46,337)
                                                                --------
                                                                $119,710

7.   COMMITMENTS AND CONTINGENCIES

         The Company leases nine of its facilities and its corporate offices
under non-cancelable operating leases, of which certain leases are guaranteed by
the principal shareholder. Rental expense for the years ending December 31,
2000, 1999, and 1998 was $3,261,257, $3,235,829 and $3,281,949, respectively.
Certain leases contain fixed escalation clauses and rent under these leases is
charged ratably over the term of the lease. A number of leases also provide for
percentage rent on sales above a specified minimum. The following are the future
minimum base rental payments under operating leases for each of the next five
years ending December 31 and in total thereafter:

      2001...................................................    $3,120,349
      2002...................................................     3,488,416
      2003...................................................     2,993,647
      2004...................................................     2,134,326
      2005...................................................     2,034,750
      Thereafter.............................................    17,648,692
                                                                -----------
               Total                                            $31,420,180
                                                                ===========

         Rental payments made to related parties for the years ending December
31, 2000, 1999 and 1998 were approximately $1,048,000, $1,063,000 and $921,000,
respectively. At December 31, 2000, the Company had future minimum payments due
to related parties of approximately $9,276,000.

         The Company has five operating leases which contain provisions for
specified annual increases. Rent expense for these locations has been calculated
on a straight-line basis over the term of the leases. A deferred credit has been
established at December 31, 2000 and 1999 for the difference between the amount
charged to expense and the amount paid. The deferred credit will be amortized on
a straight-line basis over the lives of the leases.

         The Company is a defendant in a number of cases currently in
litigation, which are being vigorously defended. Based upon current information,
management, after consultation with legal counsel defending the Company's
interests in the cases, believes the ultimate disposition thereof will have no
material effect upon either the Company's results of operations or the
consolidated financial position.


                                       41
<PAGE>   42


8.   INCOME TAXES

         The significant components of income tax provision (benefit)
attributable to operations are summarized as follows:

<TABLE>
<CAPTION>
                                                  2000         1999          1998
                                                --------    ---------     ---------
<S>                                             <C>         <C>           <C>
Federal:
         Current tax provision ............     $310,932    $   5,580     $ 141,839
         Deferred tax provision (benefit)..      162,802      197,058      (471,779)
                                                --------    ---------     ---------
                                                 473,734      202,638      (329,940)
State:
         Current tax provision ............      122,698        1,585        40,271
         Deferred tax provision ...........       56,760       83,269       159,388
                                                --------    ---------     ---------
                                                 179,458       84,854       199,659
                                                --------    ---------     ---------

                  Total ...................     $653,192    $ 287,492     $(130,281)
                                                ========    =========     =========
</TABLE>

         The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities as of December 31, 2000 and
1999, respectively, are comprised of the following:

<TABLE>
<CAPTION>
                                                    2000             1999
                                                 -----------     -----------
<S>                                              <C>             <C>
Current deferred tax assets
         Deferred rent ......................    $   184,505     $   195,682
         Vacation accrual ...................         56,240          40,099
         Other ..............................         44,766          52,944
                                                 -----------     -----------
         Current deferred tax assets, net ...    $   285,511     $   288,725
                                                 ===========     ===========
Non-current deferred tax assets
         Property and equipment .............     (1,266,053)     (1,318,073)
         Intangible assets ..................        495,883         571,281
         FICA tip credit ....................        559,498         741,140
         AMT credit .........................        314,106         355,678
         NOL carryforward ...................        141,217         130,271
         Other ..............................       (148,468)       (167,766)
                                                 -----------     -----------
         Non-current deferred tax assets, net    $    96,183     $   312,531
                                                 ===========     ===========
</TABLE>

         The balance of the deferred tax assets should be realized through
future operating results, the reversal of taxable temporary differences and tax
planning strategies.

         The provision for income taxes at the Company's effective rate differed
from the provision for income taxes at the statutory rate as follows:

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                 -------------------------------------
                                                   2000          1999          1998
                                                 ---------     ---------     ---------
<S>                                              <C>           <C>           <C>
Federal income tax provision (benefit) at the
      statutory rate ........................    $ 707,424     $ 405,581     $(133,939)
State income taxes, net of federal income tax
      benefit ...............................      103,870        61,672       131,775
FICA tip credit .............................     (182,735)     (171,546)     (133,719)
Other .......................................       24,633        (8,215)        5,602
                                                 ---------     ---------     ---------
Provision for (benefit from) income taxes ...    $ 653,192     $ 287,492     $(130,281)
                                                 =========     =========     =========
</TABLE>


                                       42
<PAGE>   43


9.   SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                           --------------------------------------
                                                                              2000          1999          1998
                                                                           ----------    ----------    ----------
<S>                                                                        <C>           <C>           <C>
Supplemental cash flow information:
      Cash paid for:
         Interest .....................................................    $1,053,004    $1,255,300    $1,295,710
         Income taxes .................................................    $  300,000    $   54,000    $  223,000
Supplemental information on noncash investing and financing activities:
         Common Stock issued in purchase of Epicure ...................          --            --      $2,395,147
         Write-off of fully depreciated capital leases, equipment
               and leasehold improvements .............................    $2,198,306          --            --
         Equipment purchased under capital lease arrangements .........    $  204,615          --            --
</TABLE>

10.  STOCK OPTION PLAN

         The 1995 Stock Option Plan (the "Plan") is designed to attract, retain
and reward managerial and other key employees and non-employee directors and
strengthen the mutuality of interests between the Plan's participants and the
Company's stockholders. Stock options generally are granted at an exercise price
equal to the fair market value of the shares on the date of grant and are
exercisable at the rate of one-third per year beginning one year from the date
of grant. Stock options generally expire ten years from the date of grant. From
October 20, 1995 through December 31, 2000, incentive stock option grants under
the Plan to acquire 404,633 shares, were made to certain officers, directors and
key employees at exercise prices ranging from $5.91 to $24.00 per share. In
January 1997, the Company under its Stock Option Plan canceled 57,833 options
previously issued at $27.00 and $25.50 per share and reissued replacement
options exercisable at $13.50 and $14.85 per share. At December 31, 2000,
options outstanding were 299,800 and 297,801 were exercisable.

         The Plan also provides for the grant of stock options to non-employee
directors of the Company without any action on the part of the Board or the
Board Committee. Each non-employee director shall automatically receive
non-qualified options to acquire 1,667 shares of Common Stock upon appointment
and shall receive options to acquire an additional 667 shares of Common Stock
for each additional year that such director continues to serve on the Board of
Directors. Each option becomes 50% exercisable on each the first and second
anniversary dates of the grant and expires ten years from the date of the grant.
Accordingly, on October 20, 1995, options for 1,667 shares were granted to each
of the Company's two non-employee directors at an exercise price of $18.00 per
share. Furthermore, on May 27, 1997, May 27,1998, May 26, 1999 and May 19, 2000
an additional 667 options, for each year were granted to these directors at an
exercise price of $7.50, $5.91, $3.84 and $2.78 per share, respectively. All
these options were outstanding at December 31, 2000 and 6,668 options were
exercisable.


                                       43
<PAGE>   44

                                     Weighted Average
Shares Under Option      Shares       Exercise Price
-------------------     --------     ----------------
Outstanding at
   December 31, 1997     277,967         $   15.36
Granted                   63,000         $    7.65
Exercised                   --               --
Canceled                  (4,000)        $   17.55
                        --------
Outstanding at
   December 31, 1998     336,967         $   13.89
Granted                   51,333         $    3.57
Exercised                   --               --
Canceled                  (1,333)        $    7.35
                        --------
Outstanding at
   December 31, 1999     386,967         $   12.54
Granted                   34,666         $    4.83
Exercised                   --               --
Canceled                (121,833)        $   18.97
                        --------         ---------
Outstanding at
   December 31, 2000     299,800         $    9.04
                        ========         =========
Excercisable at
   December 31, 2000     297,801         $    9.02
                        ========         =========

         Information regarding options outstanding and exercisable at December
31, 2000 is as follows:


<TABLE>
<CAPTION>

                                     Options Outstanding                     Options Exercisable
                              -----------------------------------      --------------------------------
                                              Weighted Average
                                                 Remaining                             Weighted Average
                              Number of       Contractual Life         Number of           Exercise
Range of Exercise Prices       Options           (in years)             Options              Price
------------------------      ---------       -------------------      ---------       ----------------
<S>                           <C>             <C>                      <C>             <C>
           $2.78 - $6.84        95,233               6.12               93,234              $ 4.36

          $7.50 - $14.85       172,065               7.31              172,065              $ 9.92

         $16.13 - $24.00        32,502               5.09               32,502              $18.20
                               -------                                 -------

          $2.78 - $24.00       299,800                                 297,801              $ 9.08
                               =======                                 =======
</TABLE>



         The Company has adopted the disclosure-only provision of SFAS No. 123
and will continue to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, since options were granted with an
option price equal to the grant date market value of the Company's Common Stock,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value of the option at the grant dates in 2000, 1999 and 1998
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced by approximately $49,500 or $0.01 per
share in 2000, $141,000 or $0.03 per share in 1999, and $389,000 or $ 0.08 per
share in 1998. These pro forma amounts may not be representative of future
disclosures because the estimated fair value of stock options is amortized to
expense over the vesting period, and additional options may be granted in future
years.


                                       44
<PAGE>   45


         The fair value of each option grant issued in 2000, 1999 and 1998 is
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (a) exercise prices were equal to
the fair market value on the grant date or the day before; (b) a risk-free
interest rate based on US Zero Coupon Bonds; (c) no dividend yield on the
Company's stock; (d) expected option lives of six years; and (e) an expected
volatility of 78.45%, 63.01% and 63.49%, respectively, of the Company's stock.

         In May 1999, the Company implemented its first 401(k) Plan (the
"Plan"). The Plan, which will cover substantially all employees, will have
certain requirements, including minimum age, hours worked, and length of
service. The Company may make discretionary contributions to the Plan based on
operating results, but will not be required to do so. No contributions were made
by the Company to the Plan in 1999. As of December 31, 2000, the Company
contributed $16,961 to the Plan.

11.  RELATED-PARTY TRANSACTIONS

         During 1995 and 1994 the principal shareholder's family partnership,
the Starkman Family Partnership, ("family partnership") purchased properties in
Westwood, California for the construction of a new restaurant. The Company has
been paying lease payments for the Westwood property of approximately $35,000
per month in 2000, 1999 and 1998, respectively, to the family partnership. The
Company has a seven-year right of first refusal on either or both of these
properties, which expire in years 2002 and 2001.

         The Company currently pays monthly rental payments in the amount of
$6,500 to the family partnership for use of one property adjacent to the West
Hollywood restaurant. This property has additional parking and a building used
as a private bar and lounge.

         On March 28, 1997, the Company announced that Kenneth Abdalla had
assumed the office of President on an interim basis with the specific objective
of assisting in the execution of the Company's acquisition and expansion
strategy. In connection therewith, the Company entered into a consulting
agreement with Kenneth Abdalla and a company affiliated with him for services to
be provided to the Company in consideration for 66,667 shares of Common Stock to
Kenneth Abdalla and $600,000 to his affiliated company. The consulting agreement
expired on December 31, 2000.

         Epicure pays monthly rental payments in the amount of approximately
$40,000 to a partnership that is owned by the relatives of the previous owners.

12.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

         Selected, summarized quarterly financial data for the four quarters of
fiscal years ended December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
2000  (in thousands, except per share data)         First      Second     Third        Fourth
----------------------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>        <C>
Revenues                                           $18,820    $16,264    $15,634    $   18,883
Gross Profit                                        12,494     10,716     10,184        12,251
Net Income                                             803         80         10           538
Net Income Per Share -
    Basic                                          $  0.17    $  0.02    $  0.00    $     0.12
Net Income Per Share -
    Diluted                                        $  0.17    $  0.02    $  0.00    $     0.12
</TABLE>


                                       45
<PAGE>   46


<TABLE>
<CAPTION>
1999 (in thousands, except per share data)    First           Second          Third          Fourth
---------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>              <C>            <C>
Revenues                                     $19,587        $ 16,761         $15,579        $22,747
Gross Profit                                  12,765          10,933          10,212         12,036
Net Income (Loss)                                513            (133)             33            497
Net Income (Loss) Per Share-
    Basic, restated for stock split          $  0.11        $  (0.03)        $  0.01        $  0.10
Net Income (Loss) Per Share -
    Diluted, restated for stock split        $  0.11        $  (0.03)        $  0.01        $  0.10
</TABLE>


COMMON STOCK DATA

<TABLE>
<CAPTION>
2000                                          First           Second          Third          Fourth
---------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>              <C>            <C>
      Price range:
         High                                $  6.66        $  4.00          $  4.88        $  4.63
         Low                                 $  1.88        $  1.69          $  3.50        $  1.16
</TABLE>


<TABLE>
<CAPTION>

1999                                          First           Second          Third          Fourth
---------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>              <C>            <C>
      Price range:
         High                                $  6.19        $  4.78          $  4.50        $  3.19
         Low                                 $  2.63        $  3.00          $  2.63        $  1.69
</TABLE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

               None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The information required by this Item with respect to directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the information contained in the Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 29,
2001 which will be filed with the Securities and Exchange Commission no later
than 120 days after the close of the year ended December 31, 2000. Information
with respect to executive officers is included in Part I of this Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 29, 2001, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 2000.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 29, 2001, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 2000.


                                       46
<PAGE>   47


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 29, 2001, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 2000.


                                     PART IV

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

               (a)(1) List of Financial Statements

                      The consolidated financial statements are filed as Item 8
                      of Part II of this Form 10-K.

               (a)(2) List of Financial Statement Schedules

                      None.

               (a)(3) List of Exhibits


                                       47
<PAGE>   48


Exhibit
 Number                               Description
-------                               -----------


3.1      Articles of Incorporation, as amended (including Second Amended and
         Restated Certificate of Determination of Rights of Series A Preferred
         Shares and Certificate of Determination of Rights of Series B Preferred
         Shares), incorporated by reference to Exhibit 3.1 of the Company's
         Annual Report on Form 10-K for the year ended December 31, 1996, as
         filed with the Securities and Exchange Commission on March 31, 1997
         (the "1996 10-K").


3.2      Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the
         Company's Registration Statement on Form S-1, as filed on July 18, 1995
         (Registration No. 33-94724), and declared effective by the Securities
         and Exchange Commission on October 20, 1995 (referred to herein as the
         "1995 Registration Statement").

4.1      Specimen Common Stock Certificate of the Company, incorporated by
         reference to Exhibit 4.1 of the 1995 Registration Statement.

4.2      Specimen Series A Stock Certificate of the Company, incorporated by
         reference to Exhibit 4.2 of the 1996 10-K.

4.3      Specimen Series B Stock Certificate of the Company, incorporated by
         reference to Exhibit 4.3 of the 1996 10-K.

4.4      Specimen Common Stock Purchase Warrant, incorporated by reference to
         Exhibit 10.2 of the Company's Report on Form 8-K for August 22, 1996
         (the "Waterton 8-K").

4.5      Form of Underwriter's Warrant, incorporated by reference to Exhibit 4.2
         of the 1995 Registration Statement.

10.1     Form of Employment Agreement of Isaac Starkman, dated June 1, 1995,
         incorporated by reference to Exhibit 10.1 of the 1995 Registration
         Statement.

10.2     Form of Employment Agreement of Guy Starkman, dated June 1, 1995,
         incorporated by reference to Exhibit 10.2 of the 1995 Registration
         Statement.

10.3     Form of Employment Agreement of Jason Starkman, dated June 1, 1995,
         incorporated by reference to Exhibit 10.3 of the 1995 Registration
         Statement.

10.4     Amendment and Extension of Employment Agreement of Isaac Starkman,
         dated as of July 1, 1997, incorporated by reference to Exhibit 10.1 of
         the 1995 Registration Statement.

10.5     Amendment and Extension of Employment Agreement of Guy Starkman, dated
         as of July 1, 1997, incorporated by reference to Exhibit 10.2 of the
         1995 Registration Statement.

10.6     Amendment and Extension of Employment Agreement of Jason Starkman,
         dated as of July 1, 1997, incorporated by reference to Exhibit 10.3 of
         the 1995 Registration Statement.

10.7     Form of Indemnification Agreement with officers and directors,
         incorporated by reference to Exhibit 10.5 of the Registration
         Statement.


                                       48
<PAGE>   49

Exhibit
 Number                               Description
-------                               -----------

10.8     Jerry's Famous Deli, Inc. Stock Option Plan, incorporated by reference
         to Exhibit 10.6 of the Registration Statement.

10.9     Lease Agreement, Encino, incorporated by reference to Exhibit 10.8 of
         the Registration Statement.

10.10    Lease Agreement, Marina del Rey, incorporated by reference to Exhibit
         10.9 of the Registration Statement.

10.11    Lease Agreement, West Hollywood, incorporated by reference to Exhibit
         10.10 of the Registration Statement.

10.12    Lease Agreement, West Hollywood - Parking Lot #1, incorporated by
         reference to Exhibit 10.11 of the Registration Statement.

10.13    Lease Agreement, West Hollywood - Parking Lot #2, incorporated by
         reference to Exhibit 10.12 of the Registration Statement.

10.14    Lease Agreement, West Hollywood Adjacent, incorporated by reference to
         Exhibit 10.13 of the Registration Statement.

10.15    Lease Agreement, Westwood, incorporated by reference to Exhibit 10.14
         of the Registration Statement.

10.16    Lease Agreement, Studio City, incorporated by reference to Exhibit
         10.15 of the Registration Statement.

10.17    Lease Agreements, Corporate Offices, incorporated by reference to
         Exhibit 10.16 of the Registration Statement.

10.18    JFD-Encino Agreement of Limited Partnership, incorporated by reference
         to Exhibit 10.17 of the Registration Statement.

10.22    Corporate Office Leases, incorporated by reference to Exhibit 10.21 of
         the Registration Statement.

10.23    Amendment to the Corporate Offices Lease, incorporated by reference to
         Exhibit 10.22 of the Registration Statement.

10.24    Intentionally omitted.

10.26    Agreement of Purchase and Sale of Marina del Rey property dated March
         25, 1996, incorporated by reference to Exhibit 10.27 of the 1995 10-K.

10.27    Lease Agreement dated as of March 28, 1996 for the Costa Mesa,
         California property, incorporated by reference to Exhibit 10.28 of the
         1995 10-K.

10.28    Asset Purchase Agreement, dated June 11, 1996, among the Company,
         Solley's, Inc. and Sol Zide, incorporated by reference to Exhibit 10.1
         of the Company's 10-K for June 30, 1996 ("Solley's 8-K").


                                       49
<PAGE>   50

Exhibit
 Number                               Description
-------                               -----------


10.29    Lease - Shopping Center Form, dated August 31, 1993, between Sol Zide
         and Plaza International, incorporated by reference to Exhibit 10.2 of
         the Solley's 8-K.

10.30    Amendment to Lease, dated April 4, 1996, between Sol Zide and Plaza
         International, incorporated by reference to Exhibit 10.3 of the
         Solley's 8-K.

10.31    Landlord Consent and Amendment to Lease, dated April 4, 1996, between
         the Company and Plaza International, incorporated by reference to
         Exhibit 10.4 of the Solley's 8-K.

10.32    Shopping Center Lease, dated April 2, 1984, between Solley's Inc. and
         WRAM Development Company, incorporated by reference to Exhibit 10.5 of
         the Solley's 8-K.

10.33    First Amendment to Shopping Center Lease, dated March 6, 1992, between
         Solley's, Inc. and WRAM Development Company, incorporated by reference
         to Exhibit 10.6 of the Solley's 8-K.

10.34    Landlord Consent and Amendment to Lease, dated May 6, 1996, among the
         Company, Solley's, Inc. and WRAM Development Company, incorporated by
         reference to Exhibit 10.7 of the Solley's 8-K.

10.38    Amendment to Lease Agreement dated August 1, 1995 for Westwood
         property, incorporated by reference to Exhibit 10.29 of the 1995 10-K.

10.40    Consulting Agreement dated March 27, 1997 between Kenneth J. Abdalla,
         Waterton Management, LLC and Jerry's Famous Deli, incorporated by
         reference to Exhibit 10.39 of the 1996 10-K.

10.43    Standard Form Ground Lease Agreement, dated April 7, 1993, as amended
         by the First Amendment to Lease dated April 23, 1993, by and between
         Erwin and Erwin and California Pizza Kitchen, Inc., together with
         Second Amendment to Lease, dated February 19, 1998, by and between
         Erwin and Erwin and the Company, incorporated by reference to the
         Company's 1997 10-K.

10.44    Credit agreement, dated as of September 11, 1998, by and between
         Jerry's Famous Deli, Inc. and BankBoston, N.A., incorporated by
         reference to the Company's quarter ended September 30, 1998 10-Q.

10.45    Quick Food License Agreement, dated as of September 3, 1999, by and
         between Universal Studios CityWalk Hollywood, a division of Universal
         Studios, Inc. and Jerry's Famous Deli, Inc., incorporated by reference
         to the Company's quarter ended September 30, 1999 10-Q.

10.46    Fourth Amendment To Credit Agreement dated as of September 30, 1999, by
         and between Jerry's Famous Deli, Inc. and BankBoston, N.A.,
         incorporated by reference to the Company's quarter ended September 30,
         1999 10-Q.

10.47    Net Lease Agreement, dated September 12, 2000, between Jerry's Famous
         Deli, Inc. and Zori Hayon for property located at 1450 South Collins
         Avenue in South Miami Beach, Florida, incorporated by reference to the
         Company's quarter ended September 30, 2000 10-Q.


21.1     Subsidiaries, incorporated by reference to Exhibit 21.1 of the 1995
         10-K.


                                       50
<PAGE>   51

Exhibit
 Number                               Description
-------                               -----------


23.0     Consent of PricewaterhouseCoopers LLP


27       Financial Data Schedule

         (b)    The Company filed no Reports on Form 8-K during the last
                quarter of 2000.



                                       51
<PAGE>   52


                                   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, in the City of Los Angeles, State of
California, on March 29, 2001.

                            JERRY'S FAMOUS DELI, INC.



                            By: /s/ ISAAC STARKMAN
                               ---------------------------------------
                                 Isaac Starkman, Chief Executive Officer


<TABLE>
<CAPTION>
             Signature                                 Capacity                                    Date
<S>                                       <C>                                                <C>

   /s/  Isaac Starkman                    Director, Chief Executive                           March 29, 2001
--------------------------------          Officer and Chairman of the Board
 Isaac Starkman



   /s/  Guy Starkman                      President and Director                              March 29, 2001
--------------------------------
Guy Starkman



   /s/  Jason Starkman                    Vice President and Director                         March 29, 2001
--------------------------------
 Jason Starkman



   /s/  Christina Sterling                Chief Financial Officer and                         March 29, 2001
---------------------------------         Principal Accounting Officer
Christina Sterling



   /s/  Kenneth Abdalla                   Director                                            March 29, 2001
--------------------------------
Kenneth Abdalla


   /s/  Paul Gray                         Director                                            March 29, 2001
--------------------------------
Paul Gray

   /s/  Stanley Schneider                 Director                                            March 29, 2001
--------------------------------
Stanley Schneider
</TABLE>


                                       52