<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, 1999
                                       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 29, 2000: 4,673,063 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 29, 2000, was approximately $6,904,159.

                       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 19, 2000.


<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,
1999 had average sales of approximately $5.4 million per location for the year
ended December 31, 1999. Solley's had sales of approximately $3.8 million, and
the Rascal House restaurants had average sales of approximately $6.5 million for
the year ended December 31, 1999. Epicure had sales of approximately $15.1
million for the year ended December 31, 1999.

        In 1999, 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. In order to avoid
delisting from the Nasdaq National 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 14,019,203 to 4,673,068 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
opportunities with shopping mall food court operations, such as it has made in
Naples, Florida and at Universal CityWalk in Universal City, California.


                                       2
<PAGE>   3


        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.

        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 has
been extended through December 31, 2000.

        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.


                                       3
<PAGE>   4


        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 which 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 plans to increase the interior sales area of the market, install seating
for in-house dining, increase store operating hours, and expand into delivery,
catering and home meal replacement. Epicure has begun to supply some of its
homemade cooked foods to its Rascal House restaurant in Boca Raton.

        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, has
clients that include numerous family, midscale, and casual dining restaurant
chains. The consultant 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 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 has seen immediate results from these
recommendations, as evidenced by favorable feedback from customers, and overall
same store sales increases.

        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. To date, the Company has repurchased approximately
375,000 shares.

RECENT DEVELOPMENTS

        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.

        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


                                       4
<PAGE>   5


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.

        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 since a decreasing share price and public
float had resulted in a notice of delisting from the Nasdaq National Market and
the Company's shares were required to have a bid price over $1 per share to move
the listing to the SmallCap Market. As of February 3, 2000, the Company's stock
is being traded over the Nasdaq SmallCap Market instead of the Nasdaq National
Market.

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 1999
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 new 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, 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 1999 for each of the seven Jerry's Famous Deli
restaurants open during all of 1999 ranged from approximately $3.9 million for
the Encino restaurant, with 302 seats, to approximately $7.6 million for the
Studio City restaurant, with 342 seats. Annual sales at Solley's in Sherman
Oaks, California totaled approximately $3.8 million, with 160 seats. Annual
sales at the Rascal House restaurants in Miami Beach and Boca Raton, Florida for
1999 totaled approximately $8.0 million, with 375 seats and $4.9 million, with
325 seats, respectively. Annual sales at the Epicure Market in Southern Florida
for 1999 totaled approximately $15.1 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. Based upon its ability to replicate the
Jerry's Famous Deli concept in Southern California and the Rascal House concept
in Southern Florida, and acquisition of Solley's, The Rascal House in Miami
Beach, and The Epicure Market in Southern Florida, management believes that it
can acquire other famous brand name deli-style restaurants and markets in larger
metropolitan areas and achieve operating efficiencies through its management of
those operations. All of the Company's restaurants and markets will offer an
extensive menu of high quality food for moderate prices in a distinctive
environment with superior service.


                                       5
<PAGE>   6


INDUSTRY BACKGROUND

        Trade magazines estimate that 1999 restaurant industry sales were
approximately $358 billion. Within the industry, the casual dining segment
includes restaurants with full table service, a variety of contemporary foods,
moderate prices and surroundings that appeal to families and a variety of
customers. According to the National Restaurant Association Survey for 1999,
full service restaurant sales exceeded $121 billion in 1999.

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. With the acquisition of The Epicure Market in
April 1998, the Company plans to use many of its restaurant operating techniques
to enhance the operation of the market.

        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. Sale of alcoholic beverages in 1999 accounted for
approximately 3% of the Company's restaurant revenues.

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, and
the conversion 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.


                                       6
<PAGE>   7


        However, 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 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. The Company
will continue to seek attractive licensing opportunities with shopping mall food
court operations, such as it has made in Naples, Florida and at 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. 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.

        Management still believes there are many deli-style restaurants and
gourmet markets in cities around the country with excellent market presence,
clientele and staff, and a first or second generation ownership with no exit
strategy. The Company may still seek to acquire locations with cash, and stock
if appropriate, to provide these owners with an exit. The Company will refurbish
restaurants and markets it acquires but will seek to retain their distinctive
atmosphere. In addition, the Company will consider the expansion of the
restaurant's menu if appropriate. The goal of each brand name restaurant or
market acquisition will be to maintain the existing clientele while attracting
new business. The acquisition of existing businesses allows a shorter conversion
time, immediate revenues, a ready pool of staffing and penetration of a market
with an initial clientele in a place that does not have to be lured away from a
competitor. Management believes it can acquire existing restaurants and
immediately cut food costs by using its national vendor contracts to cut prices,
using its cash position to take advantage of discounts and using its computer
systems to cut waste in ordering and from other losses. Management further
believes it can enhance profitability with its superior charge card processing
arrangements, extended hours of operation, expanding delivery and takeout if it
is not already in place and by attracting additional clientele with the broader
menu.

        In terms of evaluating sites for development of new restaurants and
markets using one of the Company's brand names, the Company will consider many
factors, including demographic information, visibility, traffic patterns,
accessibility, proximity to shopping areas, office parks, tourist attractions,
residential and commercial development, and area growth prospects and trends.

        Future anticipated capital needs, primarily for development or
acquisition of restaurants, cannot be projected with certainty. The Company
generally intends, if expansion is pursued, to seek leased locations. Renovation
cost for each restaurant will depend in large part upon the style of restaurant
being developed. Jerry's Famous Deli restaurant refurbishment costs generally
are between $2.0 million to $3.0 million per location, or $267 to $400 per
square foot to build out, including renovation, furniture, fixtures, equipment,
and pre-opening costs.

        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. The Company may
consider additional public or private offerings of additional common stock or
preferred stock or debt to fund any future expansion plans.


                                       7
<PAGE>   8


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.

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


                                       8
<PAGE>   9


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.

        The Company has applied many of its operating systems and procedures to
the operation of The Epicure Market. In addition, the Company had retained the
expertise of its then current owner-operators, Harry and Mitchell Thal, who,
together with their family, have operated The Epicure Market for over 50 years.
In November 1998, Mitchell Thal resigned from the Company to pursue other
interests.

        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 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


                                       9
<PAGE>   10


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 27, 2000, the Company employed approximately 1,650
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 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.


                                       10
<PAGE>   11


        The Company has applications pending for registration of 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 and Epicure 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 6 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 and three parking lots which service 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 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 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 for five
years at 9% per annum, and for principal and accrued interest to be paid in full
on March 27, 2001. 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.

        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. 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.


                                       11
<PAGE>   12


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 1999. 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.

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                  62                    Director, Chief Executive Officer, Secretary
                                                      and Chairman of the Board

Kenneth Abdalla                 36                    President and Director

Christina Sterling              55                    Chief Financial Officer

Guy Starkman                    29                    Director, Director of Operations, and
                                                      Vice-President

Jason Starkman                  25                    Director, Management Information Systems
                                                      Director, Vice-President

Ami Saffron                     42                    Director of Development, Vice-President
</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. Kenneth Abdalla became a Director of the Company in December 1996
and President of the Company on March 27, 1997. As President of the Company, Mr.
Abdalla provides limited services to the Company in connection with restaurant
acquisitions pursuant to a contract which has been extended through December 31,
2000. 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.


                                       12
<PAGE>   13


        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. 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 has been a Director of the Company and Vice
President since January 1995. Mr. Starkman is generally responsible for the
overall operations of the restaurants. Specifically, Mr. Starkman negotiates
with vendors, reviews purchases at each restaurant, oversees the delivery fleet
and participates in major personnel decisions. Mr. Starkman studied Business
Administration at the University of Southern California, and is the son of Isaac
Starkman.

        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.

        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.

                                     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:

<TABLE>
<CAPTION>
                                       High           Low
                                       ----           ---
<S>                                   <C>           <C>
March 31, 1998                        $10.50        $6.75
June 30, 1998                         $ 7.88        $5.06
September 30, 1998                    $ 6.09        $2.53
December 31, 1998                     $ 4.88        $1.78

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
</TABLE>


        On February 29, 2000, the closing sale price for the Common Stock
reported on the Nasdaq SmallCap Market was $5.13 per share. The Company's Common
Stock is traded on the Nasdaq SmallCap Market under the symbol "DELI."

        As of February 29, 2000, there were 151 shareholders of record of the
Common Stock.


                                       13
<PAGE>   14


DIVIDEND POLICY FOR COMMON STOCK

        The Company has not paid any dividends since it became a public company
and may 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.


                                       14
<PAGE>   15


ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The selected financial data presented below for the years ended December
31, 1999, 1998, 1997, 1996 and 1995 are derived from the consolidated December
31 (1999, 1998, 1997, 1996 and 1995) financial statements (hereafter
"consolidated financial statements") of the Company.




<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                 1999         1998         1997         1996         1995
                                                               --------     --------     --------     --------     --------
                                                                (dollars in thousands except under Earnings Per Share Data,
                                                                       Pro Forma Data and Restaurant Operating Data)
<S>                                                            <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Revenues                                                       $ 70,675     $ 66,583     $ 56,418     $ 40,160     $ 28,030
Cost of sales                                                    24,729       22,408       17,508       12,480        9,168
                                                               --------     --------     --------     --------     --------
Gross profit                                                     45,946       44,175       38,910       27,680       18,862

Operating expenses                                               35,217       33,849       28,769       19,951       13,634
General and administrative expenses                               4,748        4,832        4,839        4,180        2,924
Restaurant concept discontinuation costs                             --           --           --           --          137
Preopening expenses                                                  --          538           --           --           --
Depreciation and amortization expenses                            3,356        3,730        3,870        2,114          977
                                                               --------     --------     --------     --------     --------

Income from operations                                            2,625        1,226        1,432        1,435        1,190

Interest expense, net                                             1,213        1,255          600          366          110
Other, net                                                          214          167          135          206          111
                                                               --------     --------     --------     --------     --------
Income (loss) before items below                                  1,198         (196)         697          863          969
Income tax (provision) benefit                                     (288)          65         (134)        (284)        (187)
                                                               --------     --------     --------     --------     --------
Income (loss) before cumulative effect of a change in
   accounting principle                                        $    910     $   (131)    $    563     $    579     $    782
Cumulative effect of change in accounting principle,
   net of tax benefit of $65,162                                     --         (133)          --           --           --
                                                               --------     --------     --------     --------     --------
Net income (loss)                                              $    910     $   (264)    $    563     $    579     $    782
                                                               ========     ========     ========     ========     ========

EARNINGS PER SHARE DATA:
Preferred stock
   Cash dividends paid or accrued                                                                     $   (227)
   Accounting deemed dividend (4)                                                                       (5,000)
                                                                                                      --------
Net loss applicable to common stock                                                                   $ (4,648)
                                                                                                      ========

Net income (loss) per share
          Net income - Basic                                                                          $   0.17
                                                                                                      --------
Preferred stock:
   Cash dividends paid or accrued - Basic                                                             $  (0.07)
   Accounting deemed dividend (4) - Basic                                                             $  (1.44)
                                                                                                      --------
                                                                                                      $  (1.51)
                                                                                                      --------
Basic
Net income (loss) per share before cumulative effect
  of an accounting change applicable to common stock             $ 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           $ 0.19      $ (0.05)      $ 0.13     $  (1.34)
                                                               --------     --------     --------     --------
</TABLE>


                                       15
<PAGE>   16


<TABLE>
<S>                                                       <C>             <C>             <C>            <C>            <C>
Net income (loss) per share
          Net income - Diluted                                                                          $      0.16
                                                                                                        -----------
Preferred stock:
   Cash dividends paid or accrued - Diluted                                                             $     (0.06)
   Accounting deemed dividend (4) - Diluted                                                             $     (1.43)
                                                                                                        -----------
                                                                                                        $     (1.49)
                                                                                                        -----------
Diluted
Net income (loss) per share before cumulative effect
  of an accounting change applicable to common stock     $      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   $      0.19     $     (0.05)    $      0.13    $     (1.33)
                                                         -----------     -----------     -----------    -----------

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

PRO FORMA DATA (1):
          Pro forma net income per common share - Basic                                                                 $      0.23
          Pro forma common shares outstanding - Basic                                                                     3,462,084

RESTAURANT OPERATING DATA (2):
For restaurants open for the full year:
         Average sales per restaurant                     $ 5,445,673     $ 5,286,187     $ 6,040,515    $ 6,842,542    $ 6,922,618
         Average sales per seat                           $    16,457     $    16,097     $    18,373    $    19,221    $    19,494
         Average sales per square foot                    $       657     $       655     $       780    $       939    $       922
Total number of restaurants open for the full year                 10              10               9              4              4

Total number of restaurants open at end of year                    10              11              10              9              4

BALANCE SHEET DATA (END OF YEAR):
Working capital (deficit)                                 $    (2,972)    $    (2,421)    $       208    $       103    $     3,845
Total assets                                              $    45,148     $    48,993     $    37,978    $    36,563    $    18,782
Total debt (including current portion)                    $    12,743     $    17,188     $     8,442    $     6,559    $     2,430
Minority interest (3)                                     $       677     $       555     $       480    $       441    $       263
Equity                                                    $    26,073     $    25,859     $    24,576    $    23,624    $    12,766
</TABLE>


                                       16
<PAGE>   17


The unaudited pro forma basic net income per share is presented as if the
Company was publicly traded for the entire fiscal year ended 1995. All share and
per share amounts have been adjusted to reflect the one-for-three reverse split
which took place on February 9, 2000.

(1)   Pro forma net income per common basic share was calculated using net
      income and based on as if the 3,462,084 shares of common stock were
      outstanding for all of fiscal year 1995. The pro forma shares outstanding
      are based on (i) 2,486,667 shares outstanding at December 31, 1994, (ii)
      13,333 shares issued on January 9, 1995, per the terms of a consulting
      agreement, (iii) 310,417 shares sold through a private placement completed
      in March 1995 and (iv) an additional 651,667 shares sold in the Public
      Offering in October 1995.

(2)   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 1995 and 1996, nine for the full year 1997
      and ten for the full year 1998 and 1999. 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.

(3)   The minority interest represents the other limited partners and the other
      general partner's interest in the Encino restaurant. The minority interest
      share represents the other limited partners' 67.45% share (through
      November 15, 1999 and 64.84% share thereafter) and the other general
      partner's 5% share of accumulated net income or loss and dividends.

(4)   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, 1999, 1998 and 1997 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
increase in the minimum wage; the amount and rate of growth of general and
administrative expenses associated with building a strengthened corporate
infrastructure to support the development and operation of new restaurants; 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); and the amount of, and any changes to, tax rates. See "Risk Factors"
below for further information on these considerations, and see the Company's
Prospectus dated October 20, 1995 and periodic and other reports filed by the
Company with the Securities and Exchange Commission.

        The Company's revenues are derived primarily from food and beverage
sales at its ten restaurants and The Epicure Market. As of December 31, 1999,
the Company owned the following restaurants, except the Encino restaurant in
which it owns a general partner's and a limited partner's interest:


                                       17
<PAGE>   18


<TABLE>
<CAPTION>
               Location                           Date Opened or Acquired
               --------                           -----------------------
<S>                                               <C>
               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
</TABLE>

        *Miami Beach (Rascal House) was closed for renovation during September
1999.

        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. As of December 31, 1997 and
1996, unamortized preopening costs incurred in connection with the opening or
remodeling of restaurants were approximately $105,000 and $550,000,
respectively. Furthermore, unamortized organization costs were approximately
$92,000 and $104,000 at December 31, 1997 and 1996, respectively. The net
cumulative pre-tax effect of the change in accounting principle is approximately
$197,000, which represents 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 owns a parking lot 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
10.15% 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.


                                       18
<PAGE>   19


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,
                                                         -----------------------------------
                                                          1999          1998          1997
                                                         ------        ------        ------
<S>                                                      <C>           <C>           <C>
Revenues                                                  100.0%        100.0%        100.0%

Cost of sales
        Food                                               33.1          31.9          28.5
        Other                                               1.9           1.8           2.5
                                                         ------        ------        ------

Total cost of sales                                        35.0          33.7          31.0
                                                         ------        ------        ------

Gross profit                                               65.0          66.3          69.0

Operating expenses
        Labor                                              35.4          35.6          36.7
        Occupancy and other                                14.5          15.3          14.3
                                                         ------        ------        ------

Total operating expenses                                   49.9          50.9          51.0

General and administrative expenses                         6.7           7.2           8.6

Preopening expenses                                         0.0           0.8           0.0

Depreciation and amortization expense                       4.7           5.6           6.9
                                                         ------        ------        ------

Total expenses                                             61.3          64.5          66.5
                                                         ------        ------        ------

Income from operations                                      3.7           1.8           2.5

Interest expense, net                                      (1.7)         (1.8)         (1.0)
                                                         ------        ------        ------
Income before provision for income taxes and
minority interest                                           2.0           0.0           1.5

Income tax (provision) benefit                             (0.4)          0.1          (0.3)

Minority interest                                          (0.3)         (0.3)         (0.2)
                                                         ------        ------        ------

Income (loss) before cumulative effect of change in
accounting principle                                        1.3          (0.2)          1.0
                                                         ------        ------        ------

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

        Net income (loss)                                   1.3%        (0.4)%          1.0%
                                                         ======        ======        =======
</TABLE>


                                       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 has been 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 has begun providing homemade products from Epicure to its
Rascal House restaurants. The Company will continue to explore other
possibilities in the licensing, producing and delivering of its products to
capitalize on its strong brand loyalties and recognition. The Company has been
approached with proposals for utilizing its brand names for internet sales of
food and gift baskets. In 1999, the Company established a Jerry's Famous Deli
website for ordering food and gift baskets, and Epicure is scheduled to be added
to the website in April 2000.

        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.


                                       20
<PAGE>   21


        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 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.

Fiscal Year 1998 Compared to Fiscal Year 1997

        Total revenues increased approximately $10,165,000, or 18.0%, to
approximately $66,583,000 for 1998 from $56,418,000 for 1997. Included in this
increase is approximately $10,793,000 contributed by Epicure, acquired April 1,
1998. In addition, the Boca Raton restaurant, which opened July 1, 1998, added
revenues of approximately $2,829,000. The Costa Mesa restaurant, which opened
August 19, 1997, contributed revenues of approximately $3,549,000 in 1998
compared to revenues of approximately $1,881,000 in 1997. Same store sales for
the nine restaurants opened from January 1, 1997 were approximately $49,313,000
in 1998 compared to $54,365,000 in 1997, a decrease of approximately $5,052,000
or 9.3%.

        Cost of sales, which includes the cost of food, beverages and supplies
increased $4,900,000, or 28.0%, to $22,408,000 in 1998 from $17,508,000 in 1997,
primarily from the addition of Epicure and Boca Raton. Total food cost, which
comprises over 90% of cost of sales, increased to 31.9% from 28.5% in 1997.
Without Epicure, food costs increased to 29.8% in 1998 from 28.5% in 1997.
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 $5,080,000, or 17.7%, to approximately $33,849,000 in 1998
from $28,769,000 in 1997. As a percentage of revenues, operating expenses
decreased to 50.8% in 1998 from


                                       21
<PAGE>   22


51.0% in 1997. Labor costs, the largest component of operating expenses,
decreased to 35.6% in 1998 from 36.7% in 1997. This decrease was primarily due
to Epicure, which has a lower overall labor cost as compared to the restaurants.
Without Epicure, labor costs were 36.8% for 1998 compared to 36.7% for 1997.
Offsetting the decrease in labor was an increase in occupancy costs to 15.3% in
1998 from 14.3% in 1997. This increase was due primarily to increases in
supplies, which increased approximately $376,000, of which $330,000 relates to
Epicure and $59,000 to Boca Raton. Utilities also increased approximately
$274,000, of which approximately $167,000 relates to Epicure and $96,000 relates
to Boca Raton. A portion of the increase was also due to the decline in sales,
as many of the Company's occupancy expenses are fixed costs.

        General and administrative expenses decreased approximately $7,000, or
0.1% to approximately $4,832,000 in 1998 from approximately $4,840,000 in 1997.
As a percentage of revenues, general and administrative expenses decreased 1.3
percentage points, to 7.3% in 1998 from 8.6% in 1997. A portion of the decrease
related to reductions in salaries for three executive officers in October 1997,
combined with a revision in the bonus calculation, resulting in reduction in
bonus from what would have been otherwise payable, accounting for approximately
$224,000. The Company also incurred approximately $275,000 less legal expense
during 1998. In 1997, $190,000 of additional costs were incurred relating to the
Company's legal settlement with the Company's previous worker's compensation
carrier in a lawsuit involving the appropriate charge for premiums due for a
period prior to a change in carriers in a previous year. Offsetting these
decreases were increases in advertising expense, incurred mainly by Epicure, for
store advertising.

        Preopening expense totaled approximately $538,000 in 1998. This balance
represents amounts which would have been classified as amortization expense in
1998 and 1999 had the Company not chosen early adoption of SOP 98-5 as described
above in 1998. The majority of this amount relates to preopening expense
incurred in conjunction with the opening of the Boca Raton Rascal House
restaurant. Depreciation and amortization expense decreased approximately
$141,000, or 3.6%, to approximately $3,730,000 in 1998, from $3,871,000 in 1997.
Depreciation expense increased approximately $66,000, or 2.2%, to approximately
$3,065,000 in 1998 from approximately $2,999,000 in 1997. The increase was due
primarily to the acquisition of Epicure and opening of the Boca Raton
restaurant. This was offset by 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. Amortization expense decreased approximately $206,000, or 24%, to
approximately $665,000 in 1998 from approximately $871,000 in 1997. The majority
of the decrease was due to the Company opening five restaurants in 1996 for
which preopening expense was amortized for one year from the restaurant's
opening date. The Company opened only one restaurant during 1997, and the
remaining unamortized balance at December 31, 1997, approximately $105,000 is
included in the 1998 cumulative effect of the change in accounting principle
totaling approximately $197,000 (net of tax, $132,000). All preopening costs
incurred in 1998 are included in a separate preopening expense line item as
discussed above. This decrease was offset primarily by amortization of the
goodwill and covenants not to compete related to the Epicure acquisition. In
addition, the Company also expensed approximately $109,000 in 1998, which
represented the remainder of the loan origination costs incurred with previous
financial institutions.

        The $608,000 increase in interest expense to approximately $1,292,000 in
1998 from approximately $684,000 in 1997 arose primarily from interest expense
on the credit facilities utilized in the purchase of Epicure.

Business Outlook

        The Company does not believe that its existing restaurants can show
substantial growth in per restaurant revenues. A major focus has been to stem
same store sales declines. Improvement in same store sales is critical to the
Company's business outlook. Thereafter, management believes that any significant
sales growth will have to come from additional restaurants or other retail food
establishments.

        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


                                       22
<PAGE>   23


for ancillary income from licensing and possibly third party retail sales. This
is a new initiative and the outlook is not yet clear.

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 decreased to approximately
$4,734,000 for 1999 from approximately $4,965,000 for 1998. Net cash flow from
operating activities was approximately $1,679,000 for 1997. 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 2001. 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. The line bears interest at the bank's reference rate plus 1.0% and
matures in April 2001. Interest on the credit line is payable monthly.
Prepayments are permitted at any time without penalty. Borrowings under the
credit line were collateralized by the fixtures and equipment of the Pasadena
restaurant. The debt was repaid in full 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 8.33%
at December 31, 1999. 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.

        Management believes that cash on hand, proceeds from the sale of the
Pasadena facility, 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.


                                       23
<PAGE>   24


YEAR 2000 COMPLIANCE

        To address the year 2000 issue, the Company developed a plan to ensure
that its computer systems, which primarily include the financial accounting
software and the restaurant point-of-sale ("POS") systems, will function
properly with respect to dates related to the year 2000 and beyond. The
Company's plan included the contracting with a computer consulting company to
assist in this process. Many of the Company's computer systems were already year
2000 compliant, or had an existing upgrades available from the software vendor
that would be year 2000 compliant. All phases of the year 2000 readiness plan
were completed as scheduled with respect to its computer systems, customers and
vendors. In addition, the Company did not experience any loss in revenues due to
the year 2000 issue. Achieving year 2000 compliance was not a major task, and
the cost of achieving year 2000 compliance was not material to the Company's
financial condition or results of operations.

        Although unlikely, given that the Company has not experienced any year
2000 issues to date, there can be no assurance that any future unforeseen year
2000 issues will not materially adversely affect the Company's results of
operations, liquidity and financial position or adversely affect the Company's
relationships with customers and vendors.

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 intends to
invest 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. The expansion of the Company's restaurant
operations in 1996, 1997 and 1998 has been funded with the proceeds of the
October 1995 Public Offering and the August and November 1996 sales of preferred
shares, along with bank financing. The reduction of the Company's debt during
1999 was funded with


                                       24
<PAGE>   25


the proceeds from the sale of the Pasadena facility. Management believes that
the Company has sufficient funds for a limited number of acquisitions, but may
need additional funding if it makes future acquisitions or develops of 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.

        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 62 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 and
Jason Starkman, Vice Presidents of the Company, are currently


                                       25
<PAGE>   26


29 and 25 years old, respectively. 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 three parking lots 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.

        CERTAIN DISCONTINUED RESTAURANT CONCEPTS HAVE BEEN UNSUCCESSFUL. Certain
other restaurant operations established by Isaac Starkman, the controlling
beneficial shareholder of the Company, have not met with success. In November
1984, Isaac Starkman established a casual dining restaurant named Starky's,
which combined a deli operation with pizza parlor and arcade at the top of the
Beverly Center, a large shopping mall in Los Angeles, California. Starky's had
no street visibility, and due to its location in an enclosed mall, had
restricted hours of operation and problems with hygienic conditions at the mall
which were outside of Management's control. A lawsuit was filed by Starky's
primarily related to the landlord's property maintenance which resulted in a
settlement subject to a confidentiality agreement and the closing of the
restaurant in December 1992. In addition, Jerry's Famous Pizza, a 2,300 square
foot pizza restaurant in Sherman Oaks, California ("Jerry's Famous Pizza"),
operated by Pizza by the Pound, Inc., a wholly-owned subsidiary acquired by the
Company in January, 1995, was not profitable. Management determined that it was
in the interest of shareholder value that the Company focus on its core business
of high volume deli style restaurants rather than confuse the financial markets'
perception of the Company by developing comparatively low volume restaurants in
the fast food pizza segment. As a result, the Company ceased operations of
Jerry's Famous Pizza.

        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 $4.25
an hour to $4.75 effective October 1, 1996, and again to $5.15 effective
September 1, 1997. In addition, the California minimum wage increased to $5.75
on April 1, 1998. President Clinton has proposed an additional increase in the
federal minimum wage to $6.15 an hour, which will be subject to congressional
approval. 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.


                                       26
<PAGE>   27


        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, 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


                                       27
<PAGE>   28


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 4,673,068 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.

        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
the declines during 1999 and including the first month of 2000 (unaudited),
however there is no guarantee that this trend will continue.

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

Not applicable.


                                       28
<PAGE>   29


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>
Report of Independent Accountants .......................................................   30

Consolidated Balance Sheets as of December 31, 1999 and 1998.............................   31

Consolidated Statements of Operations for the years
    ended December 31, 1999, 1998 and 1997...............................................   32

Consolidated Statements of Equity for the years
    ended December 31, 1999, 1998 and 1997...............................................   33

Consolidated Statements of Cash Flows for the years
    ended December 31, 1999, 1998 and 1997...............................................   34

Notes to Consolidated Financial Statements...............................................   35
</TABLE>


                                       29
<PAGE>   30


                        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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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, 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 the opinion expressed above.

        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 15, 2000


                                       30
<PAGE>   31


                            JERRY'S FAMOUS DELI, INC.
                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                      ----------------------------
                                                                                          1999             1998
                                                                                      -----------      -----------
<S>                                                                                   <C>              <C>
ASSETS
Currents assets
   Cash and cash equivalents                                                          $ 1,184,329      $   985,382
   Accounts receivable, net                                                               519,948          424,400
   Inventory                                                                            1,382,784        1,394,899
   Prepaid expenses                                                                       349,105          449,737
   Deferred income taxes                                                                  288,725          269,327
   Income taxes receivable                                                                201,700          267,321
                                                                                      -----------      -----------
          Total current assets                                                          3,926,591        3,791,066

Property and equipment, net                                                            30,155,403       33,534,787

Deferred income taxes                                                                     312,531          629,801
Goodwill and covenants not to compete                                                   9,184,526        9,701,723
Other assets                                                                            1,569,138        1,335,331
                                                                                      -----------      -----------

          Total assets                                                                $45,148,189      $48,992,708
                                                                                      ===========      ===========

LIABILITIES AND EQUITY
Current liabilities
   Accounts payable                                                                   $ 3,378,452      $ 3,099,839
   Accrued expenses                                                                     1,414,934        1,411,457
   Sales tax payable                                                                      404,613          421,897
   Current portion of long-term debt                                                    1,700,955        1,279,371
                                                                                      -----------      -----------
          Total current liabilities                                                     6,898,954        6,212,564

Long-term debt                                                                         11,042,092       15,908,582
Deferred rent                                                                             456,774          457,525
                                                                                      -----------      -----------

          Total liabilities                                                            18,397,820       22,578,671

Minority interest                                                                         677,053          554,899

Commitments and contingencies (Note 6)

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, 4,673,068
      and 4,836,300 shares issued and outstanding in 1999 and 1998, respectively       24,575,522       25,271,737
   Equity                                                                               1,497,794          587,401
                                                                                      -----------      -----------
          Total equity                                                                 26,073,316       25,859,138
                                                                                      -----------      -----------

          Total liabilities and equity                                                $45,148,189      $48,992,708
                                                                                      ===========      ===========
</TABLE>


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


                                       31
<PAGE>   32


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



<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                                --------------------------------------------------
                                                                    1999               1998               1997
                                                                ------------       ------------       ------------
<S>                                                             <C>                <C>                <C>
Revenues                                                        $ 70,674,459       $ 66,583,196       $ 56,418,387
Cost of sales                                                     24,728,815         22,408,272         17,507,824
                                                                ------------       ------------       ------------
      Gross profit                                                45,945,644         44,174,924         38,910,563

Operating expenses
   Labor                                                          24,991,931         23,687,543         20,714,670
   Occupancy and other                                             9,161,824          9,240,066          7,402,068
   Occupancy -- related party                                      1,063,031            921,303            652,067
General and administrative expenses                                4,748,235          4,832,438          4,839,537
Preopening expense                                                        --            537,699                 --
Depreciation expense                                               2,671,508          3,065,335          2,999,517
Amortization expense                                                 684,459            664,513            871,004
                                                                ------------       ------------       ------------
      Total expenses                                              43,320,988         42,948,897         37,478,863
                                                                ------------       ------------       ------------

      Income from operations                                       2,624,656          1,226,027          1,431,700

Other income (expense)
   Interest income                                                    24,110             36,560             83,822
   Interest expense                                               (1,237,130)        (1,291,805)          (684,118)
   Other income (expense), net                                         5,953                 --             (1,627)
                                                                ------------       ------------       ------------
      Income (loss) before items below                             1,417,589            (29,218)           829,777
Income tax (provision) benefit                                      (287,492)            65,119           (134,005)
Minority interest                                                   (219,704)          (167,260)          (132,602)
                                                                ------------       ------------       ------------
Income (loss) before cumulative effect of a change in
  accounting principle                                               910,393           (131,359)           563,170
Cumulative effect of change in accounting, net of tax
  benefit of $65,162                                                      --           (132,299)                --
                                                                ------------       ------------       ------------
Net income (loss)                                               $    910,393       $   (263,658)      $    563,170
                                                                ============       ============       ============

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

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


Weighted average common shares outstanding - Basic                 4,719,274          4,956,582          4,456,666
Weighted average common shares outstanding - Diluted               4,724,468          4,975,636          4,473,032
</TABLE>


                                       32
<PAGE>   33


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


<TABLE>
<CAPTION>
                                                                            Jerry's Famous Deli, Incorporated
                                                            -------------------------------------------------------------------
                                                                      Common Stock                       Preferred Stock
                                                            -----------------------------         -----------------------------
                                                               Shares                               Shares
                                                             Issued and                           Issued and
                                                            Outstanding          Amount           Outstanding         Amount
                                                            -----------     -------------         -----------      ------------
<S>                                                         <C>             <C>                   <C>              <C>
Balance, December 31, 1996                                   3,612,687       $ 14,175,109             10,000       $  9,153,078

   Net income
   Common stock issued on exercise of warrants                  21,667             65,000
   Preferred stock converted to common stock                 1,046,531          9,153,078            (10,000)        (9,153,078)
   Purchase and retirement of Company's common stock           (10,833)          (103,203)
   Common shares issued for consulting services                 66,667            434,500
                                                            ----------       ------------          ---------        -----------
Balance, December 31, 1997                                   4,736,719         23,724,484                 --                 --

   Net loss
   Common shares issued in purchase of market                  311,503          2,395,147
   Purchase and retirement of Company's common stock          (211,921)          (847,894)
                                                            ----------       ------------          ---------        -----------
Balance, December 31, 1998                                   4,836,301         25,271,737                 --                 --

   Net income
   Purchase and retirement of Company's common stock          (163,233)          (696,215)
                                                            ----------       ------------          ---------        -----------
Balance, December 31, 1999                                   4,673,068       $ 24,575,522                 --                 --
                                                            ----------       ------------          ---------        -----------
</TABLE>



<TABLE>
<CAPTION>
                                                         Contributed
                                                           Capital           Retained
                                                          (Deficit)          Earnings             Total
                                                        ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>
Balance, December 31, 1996                              $   (838,457)      $  1,134,298       $ 23,624,028

   Net income                                                                   563,170            563,170
   Common stock issued on exercise of warrants                                                      65,000
   Preferred stock converted to common stock                  (7,952)                               (7,952)
   Purchase and retirement of Company's common stock                                              (103,203)
   Common shares issued for consulting services                                                    434,500
                                                        ------------       ------------       ------------
Balance, December 31, 1997                                  (846,409)         1,697,468         24,575,543

   Net loss                                                                    (263,658)          (263,658)
   Common shares issued in purchase of market                                                    2,395,147
   Purchase and retirement of Company's common stock                                              (847,894)
                                                        ------------       ------------       ------------
Balance, December 31, 1998                                  (846,409)         1,433,810         25,859,138

   Net income                                                                   910,393            910,393
   Purchase and retirement of Company's common stock                                              (696,215)
                                                        ------------       ------------       ------------
Balance, December 31, 1999                              $   (846,409)      $  2,344,203       $ 26,073,316
                                                        ------------       ------------       ------------
</TABLE>

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

                                       33
<PAGE>   34


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


<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                1999               1998               1997
                                                                           ------------       ------------       ------------
<S>                                                                        <C>                <C>                <C>
Cash flows from operating activities:
   Net income (loss)                                                       $    910,393       $   (263,658)      $    563,170
   Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
      Depreciation                                                            2,671,508          3,065,335          2,999,517
      Amortization                                                              684,459            664,513            871,004
      Preopening                                                                     --            537,699                 --
      Gain on sale of assets                                                     (8,500)                --             (2,756)
      Minority interest                                                         219,704            167,260            132,602
      Deferred income taxes                                                     280,327           (312,392)           (63,063)
      Changes in assets and liabilities:
         Accounts receivable                                                    (95,548)          (151,889)            74,637
         Inventory                                                               12,115           (460,898)          (104,381)
         Prepaid expenses                                                       100,632          1,265,973           (808,485)
         Preopening costs                                                            --            105,318           (148,011)
         Other assets                                                          (371,139)          (127,021)          (157,847)
         Organization costs                                                          --             92,143                 --
         Accounts payable                                                       278,613            628,413         (1,154,119)
         Accrued expenses                                                         3,477            (22,759)          (215,711)
         Sales tax payable                                                      (17,284)            19,677            (32,159)
         Deferred rent and income taxes receivable                               64,870           (242,716)          (275,527)
                                                                           ------------       ------------       ------------
            Total adjustments                                                 3,823,234          5,228,656          1,115,701
                                                                           ------------       ------------       ------------
            Net cash provided by operating activities                         4,733,627          4,964,998          1,678,871
                                                                           ------------       ------------       ------------

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                                                    (1,221,867)        (1,560,854)        (2,413,169)
   Additions to improvements--land, building and leasehold                   (1,965,497)        (1,469,628)        (2,843,124)
   Proceeds from sales of fixed assets                                            8,500                 --              7,000
                                                                           ------------       ------------       ------------
            Net cash provided by (used in) investing activities                 703,991        (13,354,841)        (5,249,293)

Cash flows from financing activities:
   Borrowings on long-term debt                                               2,178,988         16,965,000          2,500,000
   Payments on long-term debt                                                (6,623,894)        (8,219,329)          (634,937)
   Financing costs                                                                   --           (694,120)                --
   Capital lease payments                                                            --                 --            (20,722)
   Dividends paid to minority shareholders                                      (97,550)           (92,740)           (93,221)
   Proceeds from exercise of 65,000 warrants, net of related costs                   --                 --             57,048
   Registration costs of the Company's common stock                                  --                 --            (15,500)
   Purchase of Company's common stock                                          (696,215)          (847,894)          (103,203)
                                                                           ------------       ------------       ------------
            Net cash (used in) provided by financing activities              (5,238,671)         7,110,917          1,689,465
                                                                           ------------       ------------       ------------

            Net increase (decrease) in cash and cash equivalents                198,947         (1,278,926)        (1,880,957)
Cash and cash equivalents, beginning of year                                    985,382          2,264,308          4,145,265
                                                                           ------------       ------------       ------------
Cash and cash equivalents, end of year                                     $  1,184,329       $    985,382       $  2,264,308
                                                                           ============       ============       ============
</TABLE>


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


                                       34
<PAGE>   35


                   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. includes nine Southern California restaurant locations: Studio
City (established in 1978), Encino (established in 1989), Marina del Rey
(established in 1991), West Hollywood (established in 1994), Pasadena
(established in February 1996 and sold in May 1999), Westwood (established in
June 1996), Sherman Oaks and Woodland Hills (both purchased in July 1996) and
Costa Mesa (established in August 1997). 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%.

        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.


                                       35
<PAGE>   36


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. Accumulated amortization at December 31, 1997
was approximately $592,000.

        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, 1999 and 1998 was approximately
$907,000 and $488,000, respectively. The Company periodically evaluates the
recorded value of its operating assets, including goodwill, and recognizes
impairments when the estimated future undiscounted cash flows from the use of
the assets are less than the recorded values.

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, 1999 and 1998 was
approximately $496,000 and $398,000, 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


                                       36
<PAGE>   37


period, if less.

        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 will
also approximate industry practice. The following are the estimated useful
lives:

<TABLE>
<S>                                                                <C>
          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
</TABLE>


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 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 and 1997, 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.

ADVERTISING

        Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1999, 1998 and 1997 was approximately $367,000,
$254,000 and $135,000, 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


                                       37
<PAGE>   38


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.

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.

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.

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 years ended December 31, 1998 and 1997 assume the purchase of assets and
operations of Epicure had occurred as of the beginning of the respective
periods.

<TABLE>
<CAPTION>
                                                   Pro Forma                 Pro Forma
                                                  Year ended                Year ended
                                                Deember 31, 1998          December 31, 1997
                                                ----------------          -----------------
                                                    (in thousands except per share data)
<S>                                                  <C>                        <C>
Revenues                                             $70,729                    $70,017
Net income                                           $   108                    $   975
Net income per share - basic                           $0.02                      $0.22
Net income per share - diluted                         $0.02                      $0.22
</TABLE>


                                       38
<PAGE>   39


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.

Preferred Stock

        The Company is authorized to issue 5,000,000 shares of preferred stock.
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,
                                                          -------------------------------
                                                               1999               1998
                                                          ------------       ------------
<S>                                                       <C>                <C>
Land improvements ..................................      $     61,149       $     61,149
Buildings and improvements .........................         5,528,604          7,209,444
Leasehold improvements .............................        17,468,376         16,578,647
Fixtures and equipment .............................        14,594,610         14,446,726
Transportation equipment ...........................           261,262            115,741
                                                          ------------       ------------
                                                            37,914,001         38,411,707
Less:  Accumulated depreciation and amortization ...       (13,448,366)       (11,606,417)
Land ...............................................         5,665,868          6,552,065
Construction-in-progress ...........................            23,900            177,432
                                                          ------------       ------------
                                                          $ 30,155,403       $ 33,534,787
                                                          ============       ============
</TABLE>


                                       39
<PAGE>   40


        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.

5. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                   -------------------------------
                                                                                       1999               1998
                                                                                   ------------       ------------
<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 8.33% at December 31, 1999; due September 2003                    $  7,330,000       $ 10,000,000
Note payable and line-of-credit to a bank; collateralized by
   Pasadena property; interest rate at bank's reference rate Plus 1%; paid in
   full with proceeds from Pasadena restaurant facility sale                                 --          1,630,000
Note payable to a bank; collateralized by real property;
   interest rate 9.39% at December 31, 1999; due August 2004                          2,111,111          2,277,778
Notes collateralized by real property; monthly interest
        payments at interest rate of 9%; principal due
        March 2001                                                                    3,250,000          3,250,000
Other                                                                                    51,936             30,175
                                                                                   ------------       ------------
                                                                                     12,743,047         17,187,953
Less: Current maturities                                                             (1,700,955)        (1,279,371)
                                                                                   ------------       ------------
Total long-term debt                                                               $ 11,042,092       $ 15,908,582
                                                                                   ============       ============
</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:

<TABLE>
<S>                                               <C>
2000............................................  $   1,700,955
2001............................................      4,951,588
2002............................................      1,700,946
2003............................................        911,319
2004............................................      2,200,465
Thereafter......................................      1,277,774
                                                      ---------
Total                                              $ 12,743,047
                                                   ============
</TABLE>

        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.

        Fair values were estimated based on quoted market prices, where
available, or on current rates offered to the Company for debt with similar
terms and maturities. At December 31, 1999 and 1998, the fair value of the
Company's financial instruments approximates carrying value.


                                       40
<PAGE>   41


6. 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,
1999, 1998 and 1997 was $3,235,829, $3,281,949 and $2,671,479, 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:

<TABLE>
<S>                                                                   <C>
2000...............................................................  $3,080,124
2001...............................................................   3,094,516
2002...............................................................   3,104,416
2003...............................................................   2,577,649
2004...............................................................   1,665,328
Thereafter.........................................................  14,783,443
                                                                    -----------
        Total                                                       $28,305,476
                                                                    ===========
</TABLE>

        Rental payments made to related parties for the years ending December
31, 1999, 1998 and 1997 were approximately $1,063,000, $921,000 and $652,000,
respectively. At December 31, 1999, the Company had future minimum payments due
to related parties of approximately $10,236,000.

        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, 1999 and 1998 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.

7. INCOME TAXES

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

<TABLE>
<CAPTION>
                                             1999            1998            1997
                                          ---------       ---------       ---------
<S>                                       <C>             <C>             <C>
Federal:
Current tax provision ..............      $   5,580       $ 141,839       $ 503,551
Deferred tax provision (benefit) ...        197,058        (471,779)       (443,431)
                                          ---------       ---------       ---------
                                            202,638        (329,940)         60,120
State:
Current tax provision ..............          1,585          40,271         113,143
Deferred tax provision (benefit) ...         83,269         159,388         (39,258)
                                          ---------       ---------       ---------
                                             84,854         199,659          73,885
                                          ---------       ---------       ---------
Total ..............................      $ 287,492       $(130,281)      $ 134,005
                                          =========       =========       =========
</TABLE>


                                       41
<PAGE>   42


        The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities as of December 31, 1999 and
1998, respectively, are comprised of the following:

<TABLE>
<CAPTION>
                                                 1999              1998
                                             -----------       -----------
<S>                                          <C>               <C>
Current deferred tax assets
  Deferred rent .........................    $   195,682       $   196,004
  Vacation accrual ......................         40,099            41,787
  Other .................................         52,944            31,536
                                             -----------       -----------
  Current deferred tax assets, net ......    $   288,725       $   269,327
                                             ===========       ===========
Non-current deferred tax assets
  Property and equipment ................     (1,318,073)         (754,518)
  Intangible assets .....................        571,281           643,252
  FICA tip credit .......................        741,140           481,222
  AMT credit ............................        355,678           373,457
  NOL carryforward ......................        130,271            44,235
  Other .................................       (167,766)         (157,847)
                                             -----------       -----------
  Non-current deferred tax assets, net ..    $   312,531       $   629,801
                                             ===========       ===========
</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,
                                                     -----------------------------------------
                                                        1999            1998            1997
                                                     ---------       ---------       ---------
<S>                                                  <C>             <C>             <C>
Federal income tax provision (benefit) at the
      statutory rate ..........................      $ 405,581       $(133,939)      $ 237,040
State income taxes, net of federal income tax
  benefit .....................................         61,672         131,775          48,764
FICA tip credit ...............................       (171,546)       (133,719)       (150,801)
Other .........................................         (8,215)          5,602            (998)
                                                     ---------       ---------       ---------
Provision for (benefit from) income taxes .....      $ 287,492       $(130,281)      $ 134,005
                                                     =========       =========       =========
</TABLE>

8.   SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                              ------------------------------------------
                                                                  1999            1998            1997
                                                              ----------      ----------      ----------
<S>                                                           <C>             <C>             <C>
Supplemental cash flow information:
  Cash paid for:
  Interest ................................................   $1,255,300      $1,295,710      $  650,580
  Income taxes ............................................   $   54,000      $  223,000      $  432,500
Supplemental information on noncash investing and
 financing activities:
  Common Stock issued in purchase of Epicure ..............           --      $2,395,147              --
  Preferred Stock converted into Common Stock .............           --              --      $9,153,000
  Common Stock issued in connection
    with a consulting agreement ...........................           --              --         450,000
  Reallocation of purchase price on Florida property
    and land ..............................................           --              --       1,950,000
  Write-off of fully depreciated capital leases, equipment
    and leasehold improvements ............................           --              --         268,000
</TABLE>


                                       42
<PAGE>   43


9. 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, 1999, 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. All these options were
outstanding at December 31, 1999 and 360,222 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 and May 26, 1999 an additional
667 options, for each year were granted to these directors at an exercise price
of $7.50, $5.91 and $3.84 per share, respectively. All these options were
outstanding at December 31, 1999 and 5,333 options were exercisable.

<TABLE>
<CAPTION>
                                                               Weighted Average
Shares Under Option                         Shares               Exercise Price
-------------------                        --------            -----------------
<S>                                        <C>                 <C>
Outstanding at
   December 31, 1996                       216,567                   $21.24
Granted                                    125,067                   $10.89
Exercised                                        -                        -
Canceled                                   (63,667)                  $26.61
                                           -------
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
                                           =======                   ======
Excercisable at
   December 31, 1999                       360,222                   $11.70
                                           =======                   ======
</TABLE>

        At December 31, 1999, the 386,967 outstanding shares under option have a
range of exercise prices from $3.57 to $24.00 and a weighted average contractual
life of approximately 6 years.

        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 1999, 1998 and 1997
consistent with the provisions of SFAS No. 123, the


                                       43
<PAGE>   44


Company's net earnings and earnings per share would have been reduced by
approximately $141,000 or $0.03 per share in 1999, $389,000 or $ 0.08 per share
in 1998 and $502,000 or $0.11 per share in per share in 1997. 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.

        The fair value of each option grant issued in 1999, 1998 and 1997 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 vary from four to ten years; and (e)
an expected volatility of 63.01%, 63.49% and 83.27%, 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.

10. 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 of approximately $35,000 per month in 1999, 1998 and
1997, 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 pays monthly rental payments in the amount of $16,000 to the
family partnership for use of three properties adjacent to the West Hollywood
restaurant. Two of these properties are used as parking lots and the third
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
has been extended through 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.

11. SUBSEQUENT EVENTS

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

        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
14,019,203 to approximately 4,673,068. 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.


                                       44
<PAGE>   45


12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

        Selected, summarized quarterly financial data for the four quarters of
fiscal years ended December 31, 1999 and 1998 are as follows:

<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

1998 (in thousands, except per share data)        First         Second          Third        Fourth
------------------------------------------      --------       --------       --------      --------
<S>                                             <C>            <C>            <C>           <C>
Revenues                                        $ 14,265       $ 16,095       $ 17,201      $ 19,023
Gross Profit                                       9,881         10,755         11,380        12,160
Net Income (Loss) before cumulative
    effect of accounting change                      185            108             10          (435)
Cumulative effect of accounting change              (132)            --             --            --
Net Income (Loss) Per Share, before
    change in accounting principle, -
    Basic, restated for stock split             $   0.04       $   0.02       $   0.00      $  (0.09)
Net Income (Loss) Per Share -
    Diluted, restated for stock split           $   0.01       $   0.02       $   0.00      $  (0.09)
</TABLE>


COMMON STOCK DATA


<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


1998                                First       Second       Third      Fourth
----                                ------      ------      ------      ------
<S>                                 <C>         <C>         <C>         <C>
Price range:
High                                $10.50      $ 7.88      $ 6.09      $ 4.88
Low                                 $ 6.75      $ 5.06      $ 2.53      $ 1.78
</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 19,
2000 which will be filed with the Securities and Exchange Commission no later
than 120 days after the close of the year ended December 31, 1999. Information
with respect to executive officers is included in Part I of this Form 10-K.


                                       45
<PAGE>   46


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 19, 2000, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1999.

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 19, 2000, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1999.

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 19, 2000, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1999.

                                     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


                                       46
<PAGE>   47


<TABLE>
<CAPTION>
Exhibit
Number                             Description
------                             -----------

<S>            <C>
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.

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


                                       47
<PAGE>   48


<TABLE>
<CAPTION>
Exhibit
Number                             Description
------                             -----------

<S>            <C>
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").


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.
</TABLE>


                                       48
<PAGE>   49


<TABLE>
<CAPTION>
Exhibit
Number                             Description
------                             -----------

<S>            <C>
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.

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

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 1999.
</TABLE>


                                       49
<PAGE>   50


                                   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, 2000.

                       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, 2000
-----------------------          Officer and Chairman of
 Isaac Starkman                  the Board



/s/ Kenneth Abdalla              President and Director                    March 29, 2000
-----------------------
Kenneth Abdalla


/s/ Guy Starkman                 Vice President and                        March 29, 2000
-----------------------          Director
Guy Starkman


/s/  Jason Starkman              Vice President and                        March 29, 2000
-----------------------          Director
 Jason Starkman


/s/ Christina Sterling           Chief Financial Officer                   March 29, 2000
-----------------------          and Principal Accounting
Christina Sterling               Officer


/s/  Paul Gray                   Director                                  March 29, 2000
-----------------------
Paul Gray


/s/  Stanley Schneider           Director                                  March 29, 2000
-----------------------
Stanley Schneider
</TABLE>


                                       50