<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, 1998

                                       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>
<CAPTION>
         California                                    5812                                 95-3302338
<S>                                          <C>                                      <C>
 (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 March 5, 1999: 14,474,602 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 March 5, 1999, was approximately $5,108,044.

                       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 25, 1999.


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                            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 11 restaurants, including eight 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 eight 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 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 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.

         The eight Jerry's Famous Deli restaurants in operation at December 31,
1998 had average sales of approximately $5.1 million per location for the year
ended December 31, 1998. Solley's had sales of approximately $3.5 million, and
the Rascal House restaurants had average annualized sales of approximately $7.3
million for 1998. In the September 1998 issue of The Los Angeles Business
Journal, six Jerry's Famous Deli restaurants were listed among the top 25
highest grossing restaurants in Los Angeles County. Epicure had sales of
approximately $10.8 million since its acquisition on April 1, 1998.

         The Company's current objectives are to continue to expand its Southern
California and Southern Florida operations, where it can take advantage of its
well-known brand names and operational style. The Company has also expanded into
a licensing agreement with a shopping mall food court operator. In addition, the
Company seeks to enter new areas with the acquisition of other well-established
deli-style restaurants and markets in larger metropolitan areas. The Company
intends to establish clusters of operations within specific regions to maximize
brand name recognition and benefit from operating and marketing efficiencies.
See "Business -- Market Niche" and "Business -- Future Development Strategy."
Management may consider additional public or private offerings of its common
stock and preferred stock as well as additional debt financing to fund its
future expansion efforts. There is no assurance that the Company's financial or
growth objectives can be achieved or that additional capital will be available
to finance the Company's business plan. See "Risk Factors."

         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.






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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
1,955,000 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 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 3,656,405 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 through December 31, 1998.
During 1998, the consulting agreement was extended to June 30, 1999.

         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 has begun delivery service, taking call-in orders for
take out, and taking charge cards, all of which were not previously done at
Rascal House.

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

RECENT DEVELOPMENTS

         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 934,509 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.



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Mr. Thal will continue to be utilized on a consulting basis as needed. 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 same
store sales decreases which have been reduced.

         In September 1998, the Company initiated a stock repurchase program to
buyback up to $300,000 in the Company's common stock, which it subsequently
increased to $1,000,000 in November 1998 and to $2,000,000 in March 1999. The
Company believes that at its current market price the Common Stock remains an
excellent value and that it is therefore in the best interest of the Company to
repurchase the shares. As of March 5, 1999, the Company had repurchased 
approximately 677,000 shares.

         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.

         The Company is currently in escrow in the sale of its Pasadena
facility. The sale is anticipated to close escrow in May 1999 and the Company 
does not anticipate any gain or loss. The are still contingencies related to the
sale, and thus there is no assurance that the sale will ultimately occur.

EXISTING FACILITIES

         The Company operates eight 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 nine Southern California restaurants in operation at the end of 1998
averaged approximately 7,458 square feet of dining and kitchen space and 323
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,



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

         Annual sales for 1998 for each of the eight Jerry's Famous Deli
restaurants open during all of 1998 ranged from approximately $3.0 million for
the Pasadena restaurant, with 295 seats, to approximately $7.2 million for the
Studio City restaurant, with 342 seats. Annual sales at Solley's in Sherman
Oaks, California totaled approximately $3.5 million, with 160 seats. Annual
sales at the Rascal House in Miami Beach for 1998 totaled $8.9 million, with 375
seats. Annualized sales for the newest restaurant in Boca Raton, Florida, which
opened on July 1, 1998, approximated $5.7 million, with 325 seats. 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.

INDUSTRY BACKGROUND

         Trade magazines estimate that 1998 restaurant industry sales were
approximately $336 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 1998,
full service restaurant sales exceeded $110 billion in 1998.

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. In addition, the Company may seek to
acquire similar gourmet market operations in other metropolitan areas in the
future and also develop additional locations.

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

         -        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;

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

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

         -        take-out, delivery and catering service.




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          The Studio City, Marina del Rey, West Hollywood, Pasadena, 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 offers 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 1998 accounted for
approximately 3% of the Company's restaurant revenues.

FUTURE DEVELOPMENT STRATEGY

         The Company's growth strategy is 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 has 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.

         Management 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 will 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 choosing 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 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 its future expansion plans.

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



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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
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



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all insurance coverage.
         The Company is applying 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, but will still be utilized on a consulting basis in the future.

         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 15% to 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. In light of the Company's
historical negative working capital, the Company was not able to take advantage
of all prompt payment discounts offered by vendors until the completion of the
Public Offering. Since the completion of the Public Offering, the Company has
been taking advantage of those discounts.

         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



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

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

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

EMPLOYEES

         As of February 21, 1999, the Company employed approximately 1,750
employees at its eleven 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.




                                       9
<PAGE>   10


         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 Pasadena and Marina del Rey Jerry's Famous Deli restaurants 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 is under contract to be sold (See Note 11 of Notes to Consolidated 
Financial Statements). 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.




                                       10
<PAGE>   11


         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 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.


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 1998.


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

Kenneth Abdalla                35            President and Director

Christina Sterling             54            Chief Financial Officer

Guy Starkman                   28            Director, Director of Operations, and Vice-President

Jason Starkman                 24            Director, Management Information Systems Director,
                                             Vice-President

Ami Saffron                    41            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.




                                       11
<PAGE>   12

         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 through June 1, 1999. 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.

         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 in
1989, and has been a Director of the Company since January 1995. He has been a
Director of Operations since 1989 and Vice-President of the Company 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.

         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

         Since October 22, 1995, the Company's Common Stock is traded on the
Nasdaq National Market. The high and low sales prices for the Common Stock for
during the eight most recent quarters are as follows:


<TABLE>
<CAPTION>
                                             High        Low
                                          --------    --------
<S>                                       <C>         <C>     
March 31, 1997                            $   5.38    $   3.38
June 30, 1997                             $   3.75    $   2.06
September 30, 1997                        $   4.63    $   2.06
December 31, 1997                         $   4.00    $   2.00

March 31, 1998                            $   3.50    $   2.25
June 30, 1998                             $   2.63    $   1.69
September 30, 1998                        $   2.03    $   0.84
December 31, 1998                         $   1.63    $   0.59
</TABLE>





                                       12
<PAGE>   13

         On March 5, 1999, the closing sale price for the Common Stock reported
on the Nasdaq National Market was $1.16 per share.

         As of March 5, 1999, there were 162 shareholders of record of the 
Common Stock.

DIVIDEND POLICY FOR COMMON STOCK

         The Company has not paid any dividends since its inception, except for
the distribution to the principal shareholder of the Company prior to and upon
the termination of the Company's S Corporation status in January 1995. It is the
current policy of the Company that it will retain earnings, if any, for
expansion of its operations, remodeling of existing restaurants and other
general corporate purposes and that it will not pay any cash dividends in
respect of the Common Stock in the foreseeable future. In addition, the
Company's line of credit with BankBoston requires the Bank's consent before the
payment of any dividends, which consent may not be unreasonably withheld.






                                       13
<PAGE>   14
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected financial data presented below is derived from the
consolidated December 31 (1998, 1997, 1996 and 1995) and combined (1994)
financial statements (hereafter "consolidated financial statements") of the
Company.
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                     -------------------------------------------------------------------------------
            DESCRIPTION                  1998             1997             1996            1995            1994
            -----------              -------------   --------------   --------------   -------------   -------------
                                     (DOLLARS IN THOUSANDS EXCEPT EARNINGS PER SHARE AND RESTAURANT OPERATING DATA)
<S>                                  <C>             <C>              <C>              <C>             <C>
INCOME STATEMENT DATA:
Revenues...........................   $    66,583      $    56,418      $    40,160      $   28,030      $   28,649
Cost of sales......................        22,408           17,508           12,480           9,168          10,019
                                      -----------      -----------      -----------      ----------      ----------
Gross profit.......................        44,175           38,910           27,680          18,862          18,630
Operating expenses.................        33,849           28,769           19,951          13,634          13,689
General and administrative
  expenses.........................         4,832            4,839            4,180           2,924           2,494
Restaurant concept discontinuation
  costs............................            --               --               --             137              --
Preopening expenses................           538               --               --              --              --
Depreciation and amortization......         3,730            3,870            2,114             977           1,152
                                      -----------      -----------      -----------      ----------      ----------
Income from operations.............         1,226            1,432            1,435           1,190           1,295
Interest income (expense), net.....        (1,255)            (600)            (366)           (110)           (222)
Other income (expense), net........          (167)            (135)            (206)           (111)           (138)
                                      -----------      -----------      -----------      ----------      ----------
Income (loss) before items below...          (196)             697              863             969             935
Income tax (provision) benefit.....            65             (134)            (284)           (187)            (22)
                                      -----------      -----------      -----------      ----------      ----------
Income (loss) before cumulative
  effect of a change in accounting
  principle........................          (131)             563              579             782             913
Cumulative effect of a change in
  accounting principle, net of
  tax benefit of 65,162............          (133)              --               --              --              --
                                      -----------      -----------      -----------      ----------      ----------
Net income (loss)..................   $      (264)     $       563      $       579      $      782      $      913
                                      ===========      ===========      ===========      ==========      ==========
Preferred stock....................
Cash dividends paid or accrued.....                                     $      (227)
Accounting deemed dividend(4)......                                          (5,000)
                                                                        -----------
                                                                             (5,227)
Net loss applicable to common
  stock............................                                     $    (4,648)
                                                                        ===========
Net income (loss) per share 
          Net income -- Basic......                                     $      0.06
                                                                        -----------
          Net income -- Diluted....                                     $      0.05
                                                                        -----------
Preferred stock: 
  Cash dividends paid or accrued...                                     $     (0.02)
  Accounting deemed dividend(4)....                                           (0.48)
                                                                        -----------
                                                                        $     (0.50)
                                                                        -----------
Basic
Net income (loss) per share        
  before cumulative effect of an 
  accounting change applicable to 
  common stock.....................   $     (0.01)     $      0.04      $     (0.44)
Cumulative effect of change in 
  accounting principle.............         (0.01)              --               --
                                      -----------      -----------      -----------
Net income (loss) per share 
  applicable to common stock.......   $     (0.02)     $      0.04      $     (0.44)
                                      -----------      -----------      -----------
Diluted
Net income (loss) per share 
  before cumulative effect of 
  an accounting change applicable 
  to common stock..................   $     (0.01)     $      0.04      $     (0.44)
Cumulative effect of change in 
  accounting principle.............         (0.01)              --               --
                                      -----------      -----------      -----------
Net income (loss) per share 
  applicable to common stock.......   $     (0.02)     $      0.04      $     (0.44)
                                      -----------      -----------      -----------
Weighted average common shares 
  outstanding - Basic..............    14,869,747       13,369,998        10,412,062
Weighted average common shares 
  outstanding - Diluted............    14,926,907       13,419,095        10,525,521
</TABLE>
 
                                       14

<PAGE>   15
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                     -------------------------------------------------------------------------------
            DESCRIPTION                  1998             1997             1996            1995            1994
            -----------              -------------   --------------   --------------   -------------   -------------
                                     (DOLLARS IN THOUSANDS EXCEPT EARNINGS PER SHARE AND RESTAURANT OPERATING DATA)
<S>                                  <C>             <C>              <C>               <C>              <C>
PRO FORMA DATA(1):
Pro forma net income per common
  share -- Basic...................                                                     $     0.08  
Pro forma common shares
  outstanding -- Basic.............                                                     $10,386,250
RESTAURANT OPERATING DATA(2):
For restaurants open for the full
  year:
  Average sales per restaurant.....   $5,286,187      $ 6,040,515      $ 6,842,542      $ 6,922,618      $7,027,555
  Average sales per seat...........   $   16,097      $    18,373      $    19,221      $    19,494      $   20,104
  Average sales per square foot....   $      655      $       780      $       939      $       922      $      951
  Total number of restaurants open
     for the full year.............           10                9                4                4               4
Total restaurants open at end of
  year.............................           11               10                9                4               4
BALANCE SHEET DATA (END OF YEAR):
Working capital (deficit)..........   $   (2,421)     $       208      $       103      $     3,845      $   (4,911)
Total assets.......................   $   48,993      $    37,978      $    36,563      $    18,782      $    7,541
Total debt (including current
  portion).........................   $   17,188      $     8,442      $     6,559      $     2,430      $    2,275
Minority interest(3)...............   $      555      $       480      $       441      $       263      $      188
Equity.............................   $   25,859      $    24,576      $    23,624      $    12,766      $      147
</TABLE>
 
     Net income per share is not presented for fiscal year 1994 as the Company
was privately held. 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. 
--------------- 
(1) Pro forma net income per common basic share was calculated using net income 
    and based on as if the 10,386,250 shares of common stock were outstanding
    for all of fiscal year 1995. The pro forma shares outstanding are based on
    (i) 7,460,000 shares outstanding at December 31, 1994, (ii) 40,000 shares
    issued on January 9, 1995, per the terms of a consulting agreement, (iii)
    931,250 shares sold through a private placement completed in March 1995 and
    (iv) an additional 1,955,000 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. Three restaurants were
    open for the full year in 1994, four for the full year in 1995 and 1996,
    nine for the full year 1997 and ten for the full year 1998. However, the
    West Hollywood restaurant, which opened on January 18, 1994, has been
    included in the Restaurant Operating Data for 1994 as if it were open for
    the entire year. 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 and the other
    general partner's 5% share of accumulated net income or loss and dividends.
 

                                       15
<PAGE>   16


(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, 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, 1998, 1997 and 1996 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 eleven restaurants and The Epicure Market. As of December 31, 1998,
the Company owned the following restaurants, except the Encino restaurant in
which it owns a general partner's and a limited partner's interest:

<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
             Pasadena, CA                         February 20, 1996
             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>

         * Closed for renovation in October and November and reopened in
December 1996 as a Jerry's Famous Deli.

         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.




                                       16
<PAGE>   17


         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 early
adoption of the new accounting principle results 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, Pasadena 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 7.55% limited partner. The general partners of JFD-Encino are entitled to 25%
of the net income, loss or dividends of the Encino restaurant and the limited
partners are entitled to the remaining 75% until the limited partners have
received a return of 100% of their capital plus a cumulative return of 10% per
annum. After payout of the limited partners' initial contributed capital, the
general partners are entitled to 65% of the net income or loss of the Encino
restaurant and the limited partners are entitled to the remaining 35%. The
Company consolidated the financial statements of the Encino restaurant and
separately stated the effect of minority interests in the Consolidated Balance
Sheets and Consolidated Statements of Operations based upon the Company's
current operating control of the Encino restaurant.





                                       17
<PAGE>   18
 
                             RESULTS OF OPERATIONS
 
     The following table presents for the last three fiscal years the
Consolidated Statements of Operations of the Company expressed as percentages of
total revenue.
 
<TABLE>
<CAPTION>
                                                              PERCENTAGE OF TOTAL REVENUES
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1998       1997       1996
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Revenues....................................................   100.0%     100.0%     100.0%
Cost of sales
  Food......................................................    31.9       28.5       28.2
  Other.....................................................     1.8        2.5        2.9
                                                               -----      -----      -----
Total cost of sales.........................................    33.7       31.0       31.1
                                                               -----      -----      -----
Gross profit................................................    66.3       69.0       68.9
Operating expenses
  Labor.....................................................    35.6       36.7       36.0
  Occupancy and other.......................................    15.3       14.3       13.6
                                                               -----      -----      -----
Total operating expenses....................................    50.9       51.0       49.6
General and administrative..................................     7.2        8.6       10.4
Preopening..................................................     0.8         --         --
Depreciation and amortization...............................     5.6        6.9        5.3
                                                               -----      -----      -----
Total expenses..............................................    64.5       66.5       65.3
                                                               -----      -----      -----
Income from operations......................................     1.8        2.5        3.6
Interest income.............................................     0.1        0.2        0.3
Interest expense............................................    (1.9)      (1.2)      (0.3)
Gain on sale of assets and other............................     0.0        0.0        0.2
                                                               -----      -----      -----
Income before items below...................................     0.0        1.5        2.8
Income tax benefit (provision)..............................     0.1       (0.3)      (0.7)
Minority interest...........................................    (0.3)      (0.2)      (0.7)
                                                               -----      -----      -----
Income (loss) before cumulative effect of change in
  accounting principle......................................    (0.2)       1.0        1.4
Cumulative effect of change in accounting principle.........    (0.2)        --         --
                                                               -----      -----      -----
          Net income (loss).................................    (0.4)%      1.0%       1.4%
                                                               =====      =====      =====
</TABLE>
 
                                       18
<PAGE>   19


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%.

         Based on the decreases in same store revenue, Management took
significant steps to not only try to reverse the decreases, but also investigate
other potential sources of revenue for the Company. 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
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. Since the consultant has completed his work in California,
he is currently focusing his efforts on the Company's Florida restaurants and
Epicure. The Company anticipates implementation of recommendations relating to
the Florida facilities in the second quarter of 1999. Management also 
attributes a portion of the decrease in sales to a reduction in the hours of 
operation from 24 hours a day in several locations during 1997.

         In addition, the Company has implemented a revised incentive program
for its General Managers. 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 restaurants performance, along with monetarily
rewarding them for attaining stated goals, all parties 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.

         As a result of the actions taken by management above, the Company has
been able to reduce the decrease in same store sales during the fourth quarter
of 1998 as compared to the third quarter of 1998. In addition, the same positive
trend has been evidenced in the first two months of same store sales (unaudited)
in 1999.

         With the addition of Epicure, the Company intends on diversifying its
presence in Southern Florida, and 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.

         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. The Company has initiated a more stringent monitoring of
the purchasing at its





                                       19
<PAGE>   20


Florida facilities, and has decreased cost of sales in the first two months of
1999 (unaudited). 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 a 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 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 $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
totaling approximately $420,000. 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.


                                       20
<PAGE>   21


Fiscal Year 1997 Compared to Fiscal Year 1996

         Total revenues increased $16,258,000, or 40.5%, to $56,418,000 for 1997
from $40,160,000 for 1996. Contributing to this increase are full year revenues
of approximately $27,900,000 from the five new restaurants and bakery opened or
purchased during 1996 as compared to approximately $12,400,000 for 1996. Also,
the Costa Mesa restaurant, which opened in August 1997, contributed
approximately $1,880,000 to the increase in revenues. Same store sales decreased
approximately $1,220,000, due mainly to the opening of the Westwood and Woodland
Hills restaurants, as described below. In addition, the Company also reduced the
hours of operation from 24 hours a day in several locations during 1997.

         Net income decreased approximately $16,000, or 3%, for 1997, to
approximately $563,000 from approximately $579,000 in 1996. The implementation
of the Company's expansion plan during 1996, which resulted in more than double
the number of restaurants from four to nine in one year, in addition to the
opening of the Company's tenth restaurant in August 1997, continued to impact
the Company's earnings for 1997. This was due to three factors which generally
impact the first year of each new restaurant operations. First, 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. Second, all preopening
expenses, such as training and food supply costs to perform testing of
equipment, are amortized over the first twelve months after opening each new
restaurant. Third, Jerry's Famous Deli restaurants have relatively high fixture
and restaurant equipment costs, which are necessary to create the atmosphere and
expansive menu which are the highlights of the Jerry's Famous Deli concept.

         Notwithstanding the temporary effect of new restaurant openings on
earnings, management believes that, if the proper locations have been selected,
the new restaurant openings will create significant opportunities for increasing
operating cash flow and future earnings. Management believes that the new
restaurant locations opened in 1996, along with the Costa Mesa restaurant opened
in August 1997, present very attractive opportunities for growth in the
Company's core market of Southern California. Although the opening of two of the
new locations (Woodland Hills and Westwood) had some impact on same store sales
of two existing locations (Encino and West Hollywood), management believes that
the opportunities presented in the new locations will outweigh the negative
impact on existing stores.

         Cost of sales, which includes the cost of food, beverages and supplies
increased $5,028,000, or 40.3%, to $17,508,000 in 1997 from $12,480,000 in 1996,
primarily from full year sales at the new restaurants, but, as a percentage of
revenues, remained relatively consistent. Most significantly, the cost of food,
which comprises over 90% of cost of sales, increased as a percentage of sales to
28.5% from 28.2% in 1996. Management attributes this increase in food costs
primarily to slight increases in certain of its primary menu ingredients during
1997. In addition, the Company has not been able to take full advantage of its
program of more effective large-quantity buying with its Florida restaurant,
Rascal House, in which many food items are purchased locally.

         Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased $8,819,000, or 44.2%, to approximately $28,769,000 in 1997
from $19,951,000 in 1996. As a percentage of revenues, operating expenses
increased 1.4 percentage points to 51.0% in 1997 from 49.6% in 1996. Labor
costs, the largest component of operating expenses, increased .7 percentage
points to 36.7% of revenues in 1997 from 36.0% in 1996. After Rascal House
restaurant experienced a 1997 second quarter seasonal decline in revenue without
a comparable decrease in labor costs, management's corrective action in June
1997, as discussed in the Company's June 30, 1997 Form 10-Q, brought about, as a
percentage of revenues for that restaurant, a 1.5% decrease in labor expense for
the 1997 third quarter and an additional 1.1% decrease in labor expense for the
1997 fourth quarter. Management believes that the minimum wage increases on
October 1, 1996, March 1, 1997 (California only) and September 1, 1997 to $5.15
from $4.25 an hour, which affected approximately one-third of the employees in
each restaurant, have not had a significant impact on labor expense for the 1997
period. Although rent expense, the next largest component of operating expenses,
increased



                                       21
<PAGE>   22


$717,000 in 1997, as a percentage of revenues, it decreased .2 percentage
points, to 4.7% from 4.9%. The opening of the Pasadena and Miami Beach
restaurants, where the Company owns the real property and the purchase of the
Marina del Rey restaurant property, which the Company formerly rented, have
decreased rent expense while increasing depreciation expense for 1997 and 1996.

         General and administrative expenses increased approximately $660,000,
or 15.8%, to approximately $4,840,000 in 1997 from approximately $4,180,000 in
1996. As a percentage of revenues, general and administrative expenses decreased
1.8 percentage points, to 8.6 % from 10.4%. A portion of the increase related to
$190,000 of additional costs incurred in 1997 related 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. The Company also had a full year of
liability coverage and related expenses in 1997 for the five restaurants opened
during 1996, which increased when compared to 1996.

         Depreciation expense increased $1,291,000, or 75.5%, to approximately
$3,000,000 or 5.3% of revenues in 1997, from $1,709,000 or 4.3% of revenues in
1996. The increase in depreciation during 1997 was primarily due to the
acquisition or opening of three restaurants, whose property is owned by the
Company, and to the full year's effect of depreciation for leasehold
improvements and equipment for all five new restaurants opened in 1996.
Amortization expense increased approximately $466,000, or 115%, to $871,000 in
1997 from $405,000 in 1996, which included a full year of amortization charge of
$592,000 from the amortization of preopening costs of the new restaurants and
$262,000 from the amortization of goodwill and covenants not to compete arising
from the acquisition of the Sherman Oaks, Woodland Hills and Rascal House
restaurants.

         The $65,000 decrease in interest income in 1997 over 1996, arose
primarily as a result of the utilization of cash for new restaurants, and the
corresponding reduction in cash and cash equivalents in 1997. Interest expense
increased approximately $170,000, due mainly to the Rascal House mortgage and
Bank of America term loan. Minority interests, which decreased $146,000 in 1997,
represents the interests of the limited partners and the co-general partner in
the Encino restaurant.

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. The Company seeks
to exploit its brand names for ancillary income from licensing and possibly
third party retail sales. This is a new initiative and the outlook is not yet
clear.

LIQUIDITY AND CAPITAL RESOURCES

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

         Since the completion of the 1995 Public Offering, the policy of the
Company has been to reinvest positive cash flow for restaurant development and
general working capital, and more recently, the Company's stock repurchase
program. Net cash flow from operating activities increased to approximately
$4,964,998 for 1998 from approximately $1,679,000 for 1997 and approximately
$3,437,000 for 1996. 



                                       22
<PAGE>   23


         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.

         Prior to the Public Offering, the Company financed its expansion from
bank borrowings, cash flow and a private placement in January 1995 which was
primarily used to pay off a bank debt and trade payables. The Company has used
the additional capital raised in the Public Offering primarily for the
development and construction of new restaurants.

         The purchase and renovation of the Pasadena restaurant property, which
opened in February 1996, was funded through proceeds from a $1,219,000 loan from
United Mizrahi Bank. This loan, which has been reduced to a balance of $665,000
at December 31, 1998 as a result of monthly payments of principal and a paydown
with proceeds from the sale of preferred stock, bears interest at the bank's
reference rate plus 1.0% and matures in April 2001.

         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 purchase of the two Solley's Deli restaurants in Sherman Oaks and
Woodland Hills was funded from a $2,500,000 draw down by the Company on its line
of credit with Bank of America. In September 1996, this $2,500,000 was converted
into a term loan, which bore interest at the bank's reference rate plus 1.5%
(9.75% per annum at December 31, 1997) and was paid off during 1998 in
conjunction with proceeds received from the BankBoston credit facility.

         In August and November of 1996, the Company issued a total of 12,000
Preferred Shares, resulting in net proceeds of approximately $10,992,000. A
substantial majority of the proceeds from the sale of the Preferred Shares was
used for the acquisition of Rascal House and for the renovation of the Woodland
Hills restaurant, the construction of the Costa Mesa restaurant and a paydown of
the United Mizrahi Bank loan.

         The Company also 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 are collateralized by the fixtures and equipment of the Pasadena
restaurant.

         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, and the balance is intended to be used
primarily for the development and acquisition of new restaurants. During 1998,
the loan interest rate was capped at 9.39%.

         The Company entered into a $4,000,000 revolving line of credit
agreement with Bank Leumi USA in October 1997. The line bore interest at the
bank's reference rate plus 1.25%. Any borrowings between the agreement date and
January 1, 1999 were subject to interest repayment only. The debt was repaid in
full in September 1998 in conjunction with the new BankBoston credit facility.

         The Company also entered into a $2,000,000 non-revolving line of credit
with Bank of America, NTSA in October 1997, collateralized by the machinery,
equipment and inventory of the Company. The line bore interest at the bank's
reference rate plus 1.25%. The debt was repaid in full in September 1998 in
conjunction with the new BankBoston credit facility.




                                       23
<PAGE>   24


         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 8.50%
at December 31, 1998. The debt is collateralized by assets of the Company and
includes certain financial covenants. The Company has utilized approximately
$400,000 of the credit line in conjunction with the repurchase of its Common
Stock.

         Management believes that cash on hand, proceeds from the pending 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, primarily for development or
acquisition of new restaurants, cannot be projected with certainty. Additional
capital expenditures will be required as 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.

YEAR 2000 COMPLIANCE

         As a result of computer programs being written using two digits, e.g.,
"98" to define a year instead of four digits, certain systems may require
modifications to function properly. Date-sensitive software may recognize the
year "00" as the year 1900 rather than the year 2000. This would result in
errors and miscalculations or even system failure causing disruptions in
everyday business activities and transactions. Software is termed "Year 2000"
compliant when it is capable of performing transactions correctly in the year
2000 and beyond.

         Based on a recent assessment of the Company's computer systems, which
primarily include the financial accounting software and our restaurant
point-of-sale ("POS") systems, the Company has developed a plan to ensure that
its computer systems will function properly with respect to dates related to the
year 2000 and beyond. The Company has contracted with a computer consulting
company to assist in this process. Many of the Company's computer systems are
already Year 2000 compliant, or have an existing upgrade available from the
software vendor that is or will be Year 2000 compliant. All systems that are not
currently Year 2000 compliant will either be upgraded to be Year 2000 compliant
or replaced with alternative systems that are Year 2000 compliant over the next
six months. While achieving Year 2000 compliance will be a major task, it is not
expected to have a material impact on the Company's financial condition or
results of operations.

         The Company is actively monitoring the progress of its significant
vendors and customers in their efforts to be Year 2000 compliant. There is no
guarantee that the systems of other companies on which the Company relies will
be corrected on a timely basis and thus may have a material adverse impact on
the Company.

         Information received from our primary bank and credit card processor
indicates that they will be Year 2000 compliant prior to January 1, 2000.

         The Company is reviewing the possible scenarios in the event of Year
2000 noncompliance and is currently developing a contingency plan to support the
Company's operations. The worse case scenario is that a number of our
restaurants will be unable to operate for a few days based on food supplier,
credit card processing, and banking delays.

         We believe we have an effective plan in place to resolve the Year 2000
issue in a timely manner. However, due to the lack of historical experience with
Year 2000 issues, it is difficult to predict with certainty what will actually
happen after December 31, 1999.




                                       24
<PAGE>   25



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.

RECENT ACCOUNTING STANDARDS

         SFAS 133, Accounting for Derivative Instruments and Hedging Activities

         This Statement is not applicable to the Company for the year ended
December 31, 1998.

         Statement of Position ("SOP") 98-5

         In April 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a draft Statement of
Position (SOP) entitled "Reporting on the Costs of Start-Up Activities." The
final SOP was issued during April 1998 and is effective for fiscal years
beginning after December 15, 1998, with earlier adoption encouraged. The SOP
requires entities to expense as incurred all start-up and preopening costs that
are not otherwise capitalizable as long-lived assets. Restatement of previously
issued financial statements is not permitted by the SOP, and entities are not
permitted to report the pro forma effects of the retroactive application of the
new accounting standard.

         The Company's early adoption of the new SOP in 1998 requires 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.

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.

         LIMITED OPERATING HISTORY WITH MULTIPLE RESTAURANTS. The Company was
founded in 1978 with the opening of its Studio City restaurant. Three additional
restaurants were opened in 1989, 1991 and 1994, respectively, and have each been
in operation for over two years. Two additional restaurants were opened in
February and June 1996, respectively, two additional restaurants (Solley's) were
acquired as of June 30, 1996, and one additional restaurant (Rascal House) was
acquired September 9, 1996. The Costa Mesa restaurant opened August 19, 1997,
and the newest restaurant was opened in July 1998. Accordingly, the Company has
a limited operating history in its



                                       25
<PAGE>   26


current size and configuration, and there is no assurance that such restaurants,
or the Company as a whole, will be profitable in the future.

         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. Management believes that the
Company has sufficient funds for a limited number of acquisitions, but may need
additional funding for future acquisitions and development 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.







                                       26
<PAGE>   27


         UNCERTAIN ABILITY TO MANAGE GROWTH AND EXPANSION. In order to achieve
growth, Management believes that the Company must develop new restaurants. The
Company's expansion plan calls for the addition of several new restaurants per
year. Management has limited experience opening restaurants at the current
expansion plan rate. 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. 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.

         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 61 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 28 and 24 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



                                       27
<PAGE>   28

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 employees working in restaurants operated
by the Company receives salaries equal to the federal minimum wage.

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

         POTENTIAL UNINSURED LOSSES. The Company has comprehensive insurance,
including general liability, fire and extended coverage, which the Company
considers adequate. However, there are certain types of losses which may be
uninsurable or not economically insurable. Such hazards may include earthquake,
hurricane and flood losses. While the Company currently maintains limited
earthquake coverage, it may not be economically feasible to do so



                                       28
<PAGE>   29

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 which the Company may encounter in
renewing such licenses in one jurisdiction may adversely affect its licensing
status on a federal, state or municipal level in other relevant jurisdictions.

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




                                       29
<PAGE>   30


         NO DIVIDENDS. It is the current policy of the Company that it will
retain earnings, if any, for expansion of its operations, remodeling of existing
restaurants and other corporate purposes, and it will not pay any cash dividends
in respect of the Common Stock in the foreseeable future.

         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 14,508,902 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.

         RECENT 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 stricter 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 six 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 and Pasadena restaurants have also been inspected recently by the
appropriate local health department authorities and received "no violations
observed" ratings, which are comparable to an "A" rating.

         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.

         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 in the first two months of 1999 (unaudited), however there is no
guarantee that this trend will continue.



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

Not applicable.






                                       30
<PAGE>   31


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                                  Page
                                                                                  ----
<S>                                                                              <C>
Report of Independent Accountants ..............................................   32

Consolidated Balance Sheets as of December 31, 1998 and 1997....................   33

Consolidated Statements of Operations for the years
     ended December 31, 1998, 1997 and 1996.....................................   34

Consolidated Statements of Equity for the years
     ended December 31, 1998, 1997 and 1996.....................................   35

Consolidated Statements of Cash Flows for the years
     ended December 31, 1998, 1997 and 1996.....................................   36

Notes to Consolidated Financial Statements......................................   37
</TABLE>






                                       31
<PAGE>   32



                        REPORT OF INDEPENDENT ACCOUNTANTS


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


In our opinion, the accompanying consolidated balance sheets and the related
statements of income, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of Jerry's Famous Deli, Inc. and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 26, 1999


                                       32
<PAGE>   33

                            JERRY'S FAMOUS DELI, INC.
                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                            1998              1997
                                                                                        -----------       -----------
<S>                                                                                     <C>               <C>        
ASSETS
Currents assets
   Cash and cash equivalents                                                            $   985,382       $ 2,264,308
   Accounts receivable, net                                                                 424,400           272,511
   Inventory                                                                              1,394,899           525,200
   Prepaid expenses                                                                         449,737         1,729,687
   Preopening costs                                                                              --           105,318
   Deferred income taxes                                                                    269,327            63,063
   Prepaid income taxes                                                                     267,321            24,605
                                                                                        -----------       -----------
          Total current assets                                                            3,791,066         4,984,692
Property and equipment, net                                                              33,534,787        29,835,529
Organization costs                                                                               --            92,143
Deferred income taxes                                                                       629,801           725,983
Goodwill and covenants not to compete, net                                                9,701,723         1,757,342
Other assets                                                                              1,335,331           581,917
                                                                                        -----------       -----------
          Total assets                                                                  $48,992,708       $37,977,606
                                                                                        ===========       ===========

LIABILITIES AND EQUITY
Current liabilities
   Accounts payable                                                                     $ 3,099,839       $ 2,195,980
   Accrued expenses                                                                       1,411,457         1,426,073
   Sales tax payable                                                                        421,897           402,220
   Current portion of long-term debt                                                      1,279,371           752,063
                                                                                        -----------       -----------
          Total current liabilities                                                       6,212,564         4,776,336
Long-term debt                                                                           15,908,582         7,690,219
Deferred rent                                                                               457,525           455,129
                                                                                        -----------       -----------
          Total liabilities                                                              22,578,671        12,921,684
Minority interest                                                                           554,899           480,379

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, 14,508,902
      and 14,210,155 shares issued and outstanding in 1998 and 1997, respectively        25,271,737        23,724,484
   Equity                                                                                   587,401           851,059
                                                                                        -----------       -----------
          Total equity                                                                   25,859,138        24,575,543
                                                                                        -----------       -----------
          Total liabilities and equity                                                  $48,992,708       $37,977,606
                                                                                        ===========       ===========
</TABLE>


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













                                       33
<PAGE>   34


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





<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                    ------------------------------------------
                                                                        1998            1997           1996
                                                                    ------------   ------------   ------------
<S>                                                                 <C>            <C>            <C>         
Revenues                                                            $ 66,583,196   $ 56,418,387   $ 40,159,715
Cost of sales                                                         22,408,272     17,507,824     12,480,215
                                                                    ------------   ------------   ------------
      Gross profit                                                    44,174,924     38,910,563     27,679,500
Operating expenses
   Labor                                                              23,687,543     20,714,670     14,481,675
   Occupancy and other                                                 9,240,066      7,402,068      5,059,545
   Occupancy -- related party                                            921,303        652,067        409,167
General and administrative                                             4,832,438      4,839,537      4,179,939
Preopening                                                               537,699             --             --
Depreciation                                                           3,065,335      2,999,517      1,708,720
Amortization                                                             664,513        871,004        405,457
                                                                    ------------   ------------   ------------
      Total expenses                                                  42,948,897     37,478,863     26,244,503
                                                                    ------------   ------------   ------------
      Income from operations                                           1,226,027      1,431,700      1,434,997
Other income (expense)
   Interest income                                                        36,560         83,822        148,525
   Interest expense                                                   (1,291,805)      (684,118)      (514,118)
   Other income (expense), net                                                --         (1,627)        71,939
                                                                    ------------   ------------   ------------
      Income (loss) before items below                                   (29,218)       829,777      1,141,343
Income tax benefit (provision)                                            65,119       (134,005)      (284,184)
Minority interest                                                       (167,260)      (132,602)      (278,446)
                                                                    ------------   ------------   ------------
Income (loss) before cumulative effect of a change in
accounting principle                                                    (131,359)       563,170        578,713

Cumulative effect of change in accounting, net of tax
 benefit of $65,162                                                     (132,299)            --             --
                                                                    ------------   ------------   ------------
Net income (loss)                                                   $   (263,658)  $    563,170   $    578,713
                                                                    ============   ============   ============

Preferred stock:
      Cash dividends paid or accrued                                                                  (226,648)
      Accounting deemed dividend                                                                    (5,000,000)
                                                                                                  ------------
                                                                                                    (5,226,648)
                                                                                                  ------------
      Net loss applicable to common stock                                                         $ (4,647,935)
                                                                                                  ============

Net income per share:
      Net income - Basic                                                                          $       0.06
                                                                                                  ------------
      Net income - Diluted                                                                        $       0.05
                                                                                                  ------------
      Preferred stock
            Cash dividends paid or accrued                                                        $      (0.02)
            Accounting deemed dividend                                                                   (0.48)
                                                                                                  ------------
                                                                                                  $      (0.50)
Basic
Net income (loss) per share before cumulative effect of an 
accounting change applicable to common stock                        $      (0.01)  $       0.04   $      (0.44)
Cumulative effect of change in accounting principle                        (0.01)            --             --
                                                                    ------------   ------------   ------------
Net income (loss) per share applicable to common stock              $      (0.02)  $       0.04   $      (0.44)
                                                                    ------------   ------------   ------------
Diluted
Net income (loss) per share before cumulative effect of an 
accounting change applicable to common stock                        $      (0.01)  $       0.04   $      (0.44)
Cumulative effect of change in accounting principle                        (0.01)            --             --
                                                                    ------------   ------------   ------------
Net income (loss) per share applicable to common stock              $      (0.02)  $       0.04   $      (0.44)
                                                                    ------------   ------------   ------------
Weighted average common shares outstanding - Basic                    14,869,747     13,369,998     10,412,062
Weighted average common shares outstanding - Diluted                  14,926,907     13,419,095     10,525,521
</TABLE>



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



                                       34
<PAGE>   35

                            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, 1995                                  10,386,250         12,664,752                 --                 --  

   Net income                                                                                                                    
   Issuance of preferred stock                                                                        12,000         10,992,694  
   Preferred stock converted to common stock                   516,812          1,839,616             (2,000)        (1,839,616) 
   Purchase and retirement of Company's common stock           (65,000)          (329,259)                                       
   Purchase of limited partners' interest                                                                                        
   Distributions to preferred shareholders                                                                                       
                                                           -----------        -----------        -----------        -----------  
Balance, December 31, 1996                                  10,838,062         14,175,109             10,000          9,153,078  

   Net income                                                                                                                    
   Common stock issued on exercise of warrants                  65,000             65,000                                        
   Preferred stock converted to common stock                 3,139,593          9,153,078            (10,000)        (9,153,078) 
   Purchase and retirement of Company's common stock           (32,500)          (103,203)                                       
   Common shares issued for consulting services                200,000            434,500                                        
                                                           -----------        -----------        -----------        -----------  
Balance, December 31, 1997                                  14,210,155         23,724,484                 --                 --  

   Net loss                                                                                                                      
   Common shares issued in purchase of market                  934,509          2,395,147                                        
   Purchase and retirement of Company's common stock          (635,762)          (847,894)                                       
                                                           -----------        -----------        -----------        -----------  
Balance, December 31, 1998                                  14,508,902         25,271,737                 --                 --  
                                                           -----------        -----------        -----------        -----------  



<CAPTION>
                                                             Contributed          
                                                                Capital          Retained
                                                               (Deficit)         Earnings            Total
                                                             -----------         ---------        ----------
<S>                                                          <C>                 <C>             <C>       
Balance, December 31, 1995                                     (680,761)           782,234        12,766,225

   Net income                                                                      578,713           578,713
   Issuance of preferred stock                                                          --        10,992,694
   Preferred stock converted to common stock                                            --                --
   Purchase and retirement of Company's common stock                                                (329,259)
   Purchase of limited partners' interest                      (157,696)                --          (157,696)
   Distributions to preferred shareholders                                        (226,649)         (226,649)
                                                            -----------        -----------       -----------
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
                                                            -----------        -----------       -----------
</TABLE>






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





                                       35
<PAGE>   36

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



<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,
                                                                         ----------------------------------------------------
                                                                              1998                 1997               1996
                                                                         ------------        ------------        ------------
<S>                                                                      <C>                 <C>                 <C>         
Cash flows from operating activities:
   Net income (loss)                                                     $   (263,658)       $    563,170        $    578,713
   Adjustments to reconcile net income (loss) to net cash provided 
      by operating activities
      Depreciation                                                          3,065,335           2,999,517           1,708,720
      Amortization                                                            664,513             871,004             405,457
      Preopening                                                              537,699                  --                  --
      (Gain) loss on sale of assets                                                --              (2,756)              4,106
      Minority interest                                                       167,260             132,602             278,446
      Deferred income taxes                                                  (312,392)            (63,063)           (158,360)
      Changes in assets and liabilities
         Accounts receivable -- related party                                      --                  --              16,020
         Accounts receivable                                                 (151,889)             74,637            (131,223)
         Inventory                                                           (460,898)           (104,381)           (227,437)
         Prepaid expenses                                                   1,265,973            (808,485)           (248,552)
         Preopening costs                                                     105,318            (148,011)           (737,041)
         Other assets                                                        (127,021)           (157,847)           (206,089)
         Organization costs                                                    92,143                  --             (50,478)
         Accounts payable                                                     628,413          (1,154,119)          1,487,112
         Accrued expenses                                                     (22,759)           (215,711)            884,787
         Sales tax payable                                                     19,677             (32,159)            202,329
         Deferred rent and prepaid income taxes                              (242,716)           (275,527)           (369,134)
                                                                         ------------        ------------        ------------
            Total adjustments                                               5,228,656           1,115,701           2,858,663
                                                                         ------------        ------------        ------------
            Net cash provided by operating activities                       4,964,998           1,678,871           3,437,376
                                                                         ------------        ------------        ------------

Cash flows from investing activities:
   Purchase of Epicure Market                                              (8,564,359)
   Acquisitions of restaurants                                             (1,760,000)                 --          (7,722,964)
   Additions to equipment                                                  (1,560,854)         (2,413,169)         (4,547,960)
   Additions to improvements--land, building and leasehold                 (1,511,329)         (2,958,726)         (8,472,807)
   Deductions to construction-in-progress                                      41,701             115,602           3,720,918
   Purchase of land                                                                --                  --              (2,642)
   Purchase of building and related purchase option payments                       --                  --            (744,137)
   Proceeds from sales of fixed assets                                             --               7,000              20,151
                                                                         ------------        ------------        ------------
            Net cash used in investing activities                         (13,354,841)         (5,249,293)        (17,749,441)

Cash flows from financing activities:
   Proceeds from issuance of preferred stock, net                                  --                  --          10,992,694
   Borrowings from credit facility                                                 --                  --           1,080,525
   Borrowings on long-term debt                                            16,965,000           2,500,000           2,500,000
   Payments on long-term debt                                                (813,610)           (634,937)           (118,428)
   Payoffs on long-term debt                                               (7,405,719)                 --          (1,385,000)
   Financing costs                                                           (694,120)                 --                  --   
   Payments and advances to related parties, net                                   --                  --          (1,154,036)
   Capital lease payments                                                          --             (20,722)            (43,140)
   Dividends paid to minority shareholders                                    (92,740)            (93,221)           (100,660)
   Dividends paid to preferred stock shareholders                                  --                  --             (42,082)
   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                                        (847,894)           (103,203)           (329,259)
   Purchase of limited partner interest                                            --                  --            (157,696)
                                                                         ------------        ------------        ------------
            Net cash provided by financing activities                       7,110,917           1,689,465          11,242,918
                                                                         ------------        ------------        ------------

            Net decrease in cash and cash equivalents                      (1,278,926)         (1,880,957)         (3,069,147)
Cash and cash equivalents, beginning of year                                2,264,308           4,145,265           7,214,412
                                                                         ------------        ------------        ------------
Cash and cash equivalents, end of year                                   $    985,382        $  2,264,308        $  4,145,265
                                                                         ============        ============        ============
</TABLE>


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



                                       36
<PAGE>   37

                   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), Westwood (established in June 1996), Sherman
Oaks, Woodland Hills (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).

         From its inception on April 15, 1981 and through December 31, 1994, Mr.
Isaac Starkman owned Jerry's Famous Deli, L.A., Inc. ("JFDLA"), the co-general
partner of JFD--Encino. On January 12, 1995, Mr. Starkman contributed the shares
of JFDLA to JFD--Inc. for no additional consideration. JFDLA owns 80% of the
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. The other co-general
Partner is Valley Deli, Inc., an unrelated California corporation.

         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 Isaac Starkman, who is also
the Chief Executive Officer and the beneficial controlling shareholder of the
Company, for approximately $158,000. This resulted in a change in minority
interest to 72.45% from 80.00%.

         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.

Reclassification

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


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.





                                       37
<PAGE>   38


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 include 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 Startup Activities", which requires preopening costs to be expensed as
incurred. The early adoption resulted in approximately $538,000 being expensed
which would have been classified as amortization 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 the new SOP in 1998 requires 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 (EXCESS OF COSTS OVER NET ASSETS ACQUIRED)

         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, 1998 and 1997 was approximately
$488,000 and $142,000, 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 purchases 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, 1998 and 1997 was 
approximately $398,000 and $240,000, respectively.

PROPERTY AND EQUIPMENT

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

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

         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>





                                       38
<PAGE>   39


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

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 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. For May 1, 1996 to December 31, 1996, 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 January 1,
1996 to April 30, 1996, the minority interest represents the limited partners'
75% 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, 1998, 1997 and 1996 was approximately $254,000,
$135,000 and $189,000, respectively.

USE OF ESTIMATES AND ASSUMPTIONS

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

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.




                                       39
<PAGE>   40


IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

         SFAS 133, Accounting for Derivative Instruments and Hedging Activities

         This Statement is not applicable to the Company for the year ended
December 31, 1998.

NET INCOME PER SHARE

         In February 1997, the FASB issued (SFAS) No. 128, "Earnings Per Share."
SFAS No. 128 supersedes and simplifies the previous computational guidelines
under Accounting Principles Board Opinion ("APB") No. 15, "Earnings Per Share."
Among other changes, SFAS No. 128 eliminates the presentation of primary EPS and
replaces it with basic EPS for which common stock equivalents are not considered
in the computation. It also revises the computation of diluted EPS.

         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. Net income per share and weighted average shares
outstanding for all prior periods have been restated in accordance with SFAS No.
128.

2. ACQUISITIONS

         On July 1, 1996, the Company acquired two delicatessen restaurants
operated under the name "Solley's" and located in Woodland Hills and Sherman
Oaks, California for $2,325,000 cash. The Company purchased certain assets along
with the operations of the restaurants. Also included in the purchase was a
limited five-year covenant not to compete of one of the sellers and former owner
of Solley's Inc.

         Also, on September 9, 1996, the Company purchased for $4,934,000 cash
Wolfie Cohen's Rascal House ("Rascal House"), a delicatessen restaurant located
in Miami Beach, Florida. The purchase included the real estate, fixtures and
equipment and other costs associated with the closing. The restaurant continues
to operate under the same name.

         Both acquisitions were accounted for using the purchase method of
accounting. Accordingly, portions of the purchase prices were allocated to the
net assets acquired based on their estimated fair values with the balances of
the purchase prices, approximately $3,406,000, recorded as excess of cost over
net assets acquired and amortized on a straight-line basis over 30 years for
Rascal House and over the remaining lives of their leases for Woodland Hills (15
years) and Sherman Oaks (18 years).

         Subsequent to the Rascal House acquisition and upon completion (in May
1997) of the related appraisal of the land and building, a purchase price
reallocation was recorded. The purchase price reallocation resulted in an
increase of $1,950,000 to the value of the land and a decrease of $100,000 to
the value of the building, with a



                                       40
<PAGE>   41
 
corresponding decrease of $1,850,000 to goodwill. The cumulative financial
statement impact of the purchase price reallocation was reflected in the 1997
third quarter resulting in a decrease in depreciation and amortization expense
of approximately $30,000.
 
     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 934,509
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
                                                             DECEMBER 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...............................       $  0.01             $  0.07
Net income per share - Diluted.............................       $  0.01             $  0.07
</TABLE>
 
 3. STOCK OFFERINGS AND EQUITY
 
  Common Stock
 
     In March 1995, the Company and the shareholder completed a private
placement, issuing 1,056,250 shares of common stock, at a price of $4.00 per
share. From the above 1,056,250 shares of common stock, the shareholder sold
125,000 shares. The net proceeds to the Company of $3,289,000 (net of issuance
costs of $436,000) were used to pay down certain debt and current operating
liabilities.
 
     On October 20, 1995, an initial public offering of common stock of the
Company (the "common stock") was completed. Of the shares of common stock
offered thereby, 1,700,000 shares were sold by the Company and 400,000 shares
were sold by The Starkman Family Trust (the "Selling Shareholder"). An
additional 1,096,250 shares of common stock owned by certain non-affiliated
shareholders (the "Non-Affiliated Selling Security Holders") and one independent
director of the Company (the "Selling Director") were concurrently registered
with the above referenced shares offered by the Company and the Selling
Shareholder, but not through the underwriters, and were also eligible for sale
following the offering.
 
     The 1,700,000 shares of common stock sold by the Company generated
approximately $8,030,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $2,170,000. The
 
                                       41
<PAGE>   42
 
Company did not receive any of the proceeds from the Selling Shareholder,
Selling Director or Non-Affiliated Selling Security Holder shares.
 
     On November 17, 1995, the underwriters exercised in full the over-allotment
option to purchase up to an additional aggregate of 255,000 shares from the
Company and an additional aggregate of 60,000 shares from the Selling
Shareholder. The over-allotment shares sold by the Company generated
approximately $1,206,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $324,000. The Company did not receive any of
the proceeds from the Selling Shareholder shares. Also, the underwriters have
not exercised their warrant for the Company to issue and sell an additional
170,000 shares of common stock at the exercise price of $7.80 per share.
 
     The Company has used the proceeds from the public offering primarily to pay
off certain indebtedness and for certain improvements and equipment for
additional restaurant sites.
 
     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 December 1996, 516,812 shares of common stock were issued upon
conversion of 2,000 shares of preferred stock. From December 13 through December
20, 1996, the Company purchased and subsequently retired 65,000 shares of its
own stock for market prices ranging from $4.52 to $5.38 per share.
 
     In March 1997, 3,139,593 shares of common stock were issued upon conversion
of 10,000 shares of preferred stock. In April 1997, the Company purchased and
subsequently retired 32,500 shares of its own stock for market prices ranging
from $3.06 to $3.56 per share.
 
     In April 1998, the Company issued 934,509 shares of common stock valued at
$2,395,147 in conjunction with the purchase of Epicure. From September 21, 1998
to December 16, 1998, the Company purchased and subsequently retired 635,762
shares of its own common stock for market prices ranging between $.88 and $1.47
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.
 
     On August 22, 1996, the Company entered an agreement with Waterton
Management LLC ("Waterton") for the purpose of raising additional capital to
support further growth. Under the agreement with Waterton, the Company granted
Waterton an option, subject to certain conditions, to purchase, directly or
through one or more of its affiliates, a maximum of 19,000 Series A Preferred
Shares of the Company ("Series A Preferred shares") at a purchase price of
$1,000 per share and a maximum 205,833 common stock purchase warrants (the
"Warrants") for nominal consideration. The Company completed the sale to Yucaipa
Waterton Deli Investors, LLC ("Yucaipa") of 6,000 Series A Preferred Shares and
a Warrant for 65,000 shares on August 30, 1996, resulting in net proceeds of
approximately $5,537,000. On November 8, 1996, Waterton designated Jerry's
Investors, LLC ("JILLC") to exercise its right to purchase an additional 6,000
Preferred shares and a warrant for 65,000 shares of common stock (as to which
JILLC designated Waterton as holder), resulting in net proceeds of approximately
$5,455,000. A substantial majority of the proceeds of the sale of Series A
Preferred Shares was used for the acquisition of "Wolfie Cohen's Rascal House,"
and to renovate the Woodland Hills and Costa Mesa restaurant properties.
 
     Each Series A Preferred Share had a right to dividends of $80.00 per share
per year, payable quarterly in arrears, in cash or shares of common stock. Each
Series A Preferred Share had a liquidation preference of
 
                                        42

<PAGE>   43
 
$1,000 per share, and was convertible at the option of the holder, at any time
commencing ninety days following the initial issuance of shares, or is
automatically converted on August 30, 1999, into common stock, at a conversion
price equal to a 17% discount from the average market price of the common stock
for the five days preceding the conversion, provided that the maximum conversion
price is $6.00 per share and the minimum conversion price is $3.00 per share.
The holders of Series A Preferred Shares had no voting rights except as required
by law. However, the Company agreed to seek, and ultimately did obtain approval
from Nasdaq to issue a new class of Series B Preferred Shares, into which the
Series A Preferred Shares were converted in January 1997. The Series B Preferred
Shares are substantially identical to the Series A Preferred Shares, except that
each Series B Preferred Share has voting rights equal to 109 shares of common
stock. The Warrants are exercisable at any time for a period of three years from
issuance at an exercise price of $1.00 per share.
 
     In December 1996, Yucaipa converted 2,000 shares at a conversion price of
$3.87 per share into 516,812 shares of common stock.
 
     On March 27, 1997, the holders of the Series B Preferred Shares converted
all remaining 10,000 shares outstanding to 3,139,593 shares of common stock at a
conversion price of approximately $3.19 per share.
 
 4. PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           ---------------------------
                                                               1998           1997
                                                           ------------    -----------
<S>                                                        <C>             <C>
Land improvements........................................  $     61,149    $    59,508
Buildings and improvements...............................     7,209,444      6,984,415
Leasehold improvements...................................    16,578,647     13,343,547
Fixtures and equipment...................................    14,446,726     11,754,738
Transportation equipment.................................       115,741         91,655
                                                           ------------    -----------
                                                             38,411,707     32,233,863
Less: Accumulated depreciation and amortization..........   (11,606,417)    (8,542,556)
Land.....................................................     6,552,065      5,925,089
Construction-in-progress.................................       177,432        219,133
                                                           ------------    -----------
                                                           $ 33,534,787    $29,835,529
                                                           ============    ===========
</TABLE>
 
                                       43
<PAGE>   44
 
 5. LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1998           1997
                                                             -----------    ----------
<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; 8.5% at December
  31, 1998; due September 2003.............................  $10,000,000    $       --
Note payable and line-of-credit to a bank; collateralized
  by the Pasadena property; interest rate at bank's
  reference rate plus 1.0%; 8.75% at December 31, 1998; due
  April 2001...............................................    1,630,000       775,000
Note payable to a bank; collateralized by machinery,
  equipment, inventory and receivables; interest rate at
  bank's reference rate plus 1.5%; 9.75% at December 31,
  1997.....................................................           --     1,931,815
Note payable to a bank; collateralized by real property;
  interest rate at 9.39% at December 31, 1998; due August
  2004.....................................................    2,277,778     2,444,444
Note collateralized by transportation vehicles and
  guaranteed by the principal shareholder; interest rate at
  9%; due September 1998...................................           --         3,145
Notes collateralized by transportation vehicles; interest
  rate at 5.9%; due November 2002..........................       30,175        37,880
Notes collateralized by real property; monthly interest
  payments at interest rate of 9%; principal due March
  2001.....................................................    3,250,000     3,250,000
                                                             -----------    ----------
                                                              17,187,953     8,442,284
Less: Current maturities...................................    1,279,371       752,063
                                                             -----------    ----------
          Total long-term debt.............................  $15,908,582    $7,690,221
                                                             ===========    ==========
</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 term loan
and revolver mature five years from inception and bear interest at the
Eurodollar rate plus a variable interest margin totaling approximately 8.5% at
December 31, 1998. The debt is collateralized by assets of the Company and
includes certain financial covenants.
 
     Of the Company's aggregate $2,800,000 revolving line of credit from Bank of
America available at December 31, 1995, $2,500,000 was converted in September
1996 to a term loan, $300,000 paid in August 1996 and the remaining balance paid
off in September 1998. The Company utilized its $965,000 revolving line of
credit with United Mizrahi Bank in conjunction with the purchase of Epicure.
 
     The Company entered into a $4,000,000 line of credit agreement with Bank
Leumi USA in October 1997. The Company also entered into a $2,000,000 line of
credit agreement with Bank of America in October 1997. There were no outstanding
balances on either of these credit facilities at December 31, 1997. On September
11, 1998, both lines of credit were repaid with proceeds received from the new
credit facility with BankBoston, N.A.
 
     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, 1998 and 1997, the fair value of the Company's
financial instruments approximates carrying value.
 
                                       44
<PAGE>   45
 
     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>
1999..........................    $ 1,279,371
2000..........................      1,869,373
2001..........................      7,289,371
2002..........................      3,098,729
2003..........................      2,206,667
Thereafter....................      1,444,442
                                  -----------
          Total...............    $17,187,953
                                  ===========
</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) minimum debt service coverage ratio.
 
 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, 1998,
1997 and 1996 was $3,281,949, $2,671,479 and $1,954,837, 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>
1999..........................    $ 3,117,716
2000..........................      3,080,124
2001..........................      3,094,516
2002..........................      3,104,416
2003..........................      2,577,649
Thereafter....................     16,448,770
                                  -----------
          Total...............    $31,423,191
                                  ===========
</TABLE>
 
     Rental payments made to related parties for the years ending December 31,
1998, 1997 and 1996 were approximately $921,000, $652,000 and $604,000,
respectively. At December 31, 1998, the Company had future minimum payments due
to related parties of $10,881,000.
 
     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, 1998 and 1997 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.
 
                                       45
<PAGE>   46
 
7. INCOME TAXES
 
     The significant components of income tax provision (benefit) attributable
to operations are summarized as follows:
 
<TABLE>
<CAPTION>
                                                    1998         1997         1996
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
Income tax provision (benefit)..................  $ (65,119)   $ 134,005)   $ 284,184
Tax effect of cumulative change in accounting
  principle.....................................    (65,162)          --           --
                                                  ---------    ---------    ---------
          Total.................................  $(130,281)   $ 134,005    $ 284,184
                                                  =========    =========    =========
</TABLE>
 
<TABLE>
<CAPTION>
                                                    1998         1997         1996
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
Federal:
  Current tax provision.........................  $ 141,839    $ 503,551    $ 325,429
  Deferred tax benefit..........................   (471,779)    (443,431)    (120,292)
                                                  ---------    ---------    ---------
                                                   (329,940)      60,120      205,137
State:
  Current tax provision.........................     40,271      113,143      117,115
  Deferred tax provision (benefit)..............    159,388      (39,258)     (38,068)
                                                  ---------    ---------    ---------
                                                    199,659       73,885       79,047
                                                  ---------    ---------    ---------
          Total.................................  $(130,281)   $ 134,005    $ 284,184
                                                  =========    =========    =========
</TABLE>
 
     The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities as of December 31, 1998 and
1997, respectively, are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                1998         1997
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current deferred tax assets
  State tax current year provision..........................  $  13,692    $  36,613
  Accounts receivable.......................................        708        3,652
  Vacation accrual..........................................     41,787       26,477
  Deferred rent.............................................    196,004           --
  Accrued worker's compensation and other...................     17,136      113,526
     Deferred tax liabilities...............................         --     (117,205)
                                                              ---------    ---------
     Current deferred tax assets, net.......................  $ 269,327    $  63,063
                                                              =========    =========
Non-current deferred tax assets
  Property and Equipment....................................         --      411,019
  Intangible assets.........................................    643,252       70,102
  FICA Tip Credit...........................................    481,222      278,617
  AMT Credit Carryforward...................................    373,457           --
  NOL Carryforward..........................................     44,235           --
Non-current deferred tax liabilities
  Property and Equipment....................................   (754,518)          --
  Other.....................................................   (157,847)     (33,755)
                                                              ---------    ---------
     Non-current deferred tax assets, net                     $ 629,801    $ 725,983
                                                              =========    =========
</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 AMT carryforward has an indefinite carryforward period. The NOL
carryforward expires through 2018.
 
                                       46
<PAGE>   47
 
     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,
                                                   ----------------------------------
                                                     1998         1997         1996
                                                   ---------    ---------    --------
<S>                                                <C>          <C>          <C>
Federal income tax expense (provision) at the
  statutory rate.................................  $(133,939)   $ 237,040    $293,385
State income taxes, net of federal income tax
  benefit........................................    131,775       48,764      52,171
FICA credit......................................   (133,719)    (150,801)    (61,849)
Permanent differences............................      8,984        2,930         477
Other............................................     (3,382)      (3,928)         --
                                                   ---------    ---------    --------
Income tax provision (benefit)...................  $(130,281)   $ 134,005    $284,184
                                                   =========    =========    ========
</TABLE>
 
 8. SUPPLEMENTAL CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                  -------------------------------------
                                                     1998          1997         1996
                                                  ----------    ----------    ---------
<S>                                               <C>           <C>           <C>
Supplemental cash flow information:
  Cash paid for:
     Interest...................................  $1,295,710    $  650,580    $ 489,734
     Income taxes...............................  $  223,000    $  432,500    $ 732,603
  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           --
     Building purchase under a collateralized
       note.....................................          --                  $3,250,00
     Increase in deferred costs capitalized to
       construction-in-progress or leasehold
       improvements.............................          --            --       57,031
     Issuance of 200,000 common shares 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           --
     Accrual of preferred stock dividends.......          --            --    $ 184,566
     Lease options paid in 1995 and exercised in
       1996 in conjunction with purchase of
       restaurant...............................          --            --    $  55,000
</TABLE>
 
 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, 1998, incentive stock option grants under
the Plan, to acquire 1,213,900 shares, were made to certain officers, directors
and key employees at exercise prices ranging from $1.97 to $8.00 per option. In
January 1997, the Company under its stock option plan canceled 173,500 options
previously issued at $9.00 and $8.50 per share and reissued replacement options
exercisable at $4.50 and $4.95 per share. All these options were outstanding at
December 31, 1998 and 824,033 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
 
                                       47
<PAGE>   48
 
receive non-qualified options to acquire 5,000 shares of common stock upon
appointment and shall receive options to acquire an additional 2,000 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 5,000 shares were
granted to each of the Company's two non-employee directors at an exercise price
of $6.00 per share. Furthermore, on May 27, 1997, an additional 2,000 options
were granted to these directors at an exercise price of $2.50 per share. Also,
on May 27, 1998, an additional 2,000 options were granted to these directors at
an exercise price of $1.97 per share. All these options were outstanding at
December 31, 1998 and 12,000 options were exercisable.
 


                                       48
<PAGE>   49

<TABLE>
<CAPTION>
                                                      Weighted Average
              Shares Under Option          Shares      Exercise Price
              -------------------          -------    ----------------
<S>                                      <C>          <C>
              Outstanding at
                 December 31, 1995         407,000       $    6.44
              Granted ............         242,700       $    8.16
              Exercised ..........              --              --
              Canceled ...........              --              --
                                         ---------   
              Outstanding at
                 December 31, 1996         649,700       $    7.08
              Granted ............         375,200       $    3.63
              Exercised ..........              --              --
              Canceled ...........         191,000       $    8.87
                                         ---------   
              Outstanding at
                 December 31, 1997         833,900       $    5.12
              Granted ............         189,000       $    2.55
              Exercised ..........              --              --
              Canceled ...........          12,000       $    5.85
                                         ---------
              Outstanding at
                 December 31, 1998       1,010,900       $    4.63
                                         =========       =========
              Exercisable at
                 December 31, 1998         824,033       $    3.87
                                         =========       =========
</TABLE>

     At December 31, 1998, the 1,010,900 outstanding shares under option have a 
range of exercises prices from $1.97 to $8.00 and a weighted average 
contractual life of 6.4 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 to managerial and
other key employees 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
1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have been reduced by
approximately $389,000 or $0.03 per share in 1998, $502,000 or $0.04 per share
in 1997 and $555,000 or $0.06 per share in 1996. These pro forma amounts may not
be representative of future disclosures because the estimated fair value of
stock option 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 1998, 1997 and 1996 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 63.49% and 83.27%, and 65,01% respectively, of the
Company's stock.

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 1998, 1997 and
1996, respectively, to the family partnership. The Company has a two-year option
to purchase the Westwood properties at the then current fair market value and a
seven-year right of first refusal on either or both of these properties.

         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 through June 1999 in consideration for 200,000
shares of common stock to Kenneth Abdalla and $600,000 to his affiliated company

         Epicure pays monthly rental payments in the amount of $400,000 per year
to a Company which includes relatives of the previous owners.

11.  SUBSEQUENT EVENTS

         The Company is currently in escrow in the sale of its Pasadena
facility. The sale is anticipated to close escrow in May 1999 and the Company 
does not anticipate any gain or loss. There are still contingencies related to
the sale, and thus there is no assurance that the sale will ultimately occur.

         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.

         In March 1999, the Company finalized documentation on its first 401(k)
Plan (the "Plan"). The Plan, which




                                       49

<PAGE>   50
 
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. The Plan should be implemented by May 1, 1999.
 
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     Selected, summarized quarterly financial data for the four quarters of
fiscal year ended December 31, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                       FIRST     SECOND      THIRD     FOURTH
                                                      -------    -------    -------    -------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>        <C>        <C>        <C>
1998
  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 change in accounting
     principle......................................     (132)        --         --         --
                                                      -------    -------    -------    -------
  Net Income (Loss).................................       53        108         10       (435)
  Net Income (Loss) Per Share -- before change in
     accounting principle -- Basic and diluted......  $  0.01    $  0.01    $  0.00    $ (0.03)
  Cumulative effect of change in accounting
     principle......................................  $ (0.01)        --         --         --
  Net Income (Loss) Per Share -- Basic and
     diluted........................................  $  0.00    $  0.01    $  0.00    $ (0.03)
1997
  Revenues..........................................  $14,812    $13,026    $13,797    $14,784
  Gross Profit......................................   10,433      8,991      9,394     10,087
  Net Income (Loss).................................      406        154        104       (101)
  Net Income (Loss) Per Share -- Basic and
     diluted........................................  $  0.04    $  0.01    $  0.00    $ (0.01)
</TABLE>
 
  Common Stock Data
 
<TABLE>
<CAPTION>
                                                              FIRST    SECOND    THIRD    FOURTH
                                                              -----    ------    -----    ------
<S>                                                           <C>      <C>       <C>      <C>
1998
  Price range:
     High...................................................   $3 1/2    $2 5/8   $2 1/32   $1 5/8
     Low....................................................   $2 1/4    $1 11/16 $ 27/32   $ 19/32
1997
  Price range:
     High...................................................   $5 3/8    $3 3/4   $4 5/8    $4
     Low....................................................   $3 3/8    $2 1/16  $2 1/16   $2
</TABLE>
 
                                       50

<PAGE>   51
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 




                                       51

<PAGE>   52

                                    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 25,
1999 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.

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 25, 1999, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1998.

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 25, 1999, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1998.

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 25, 1999, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1998.


                                     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





                                       52
<PAGE>   53




<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 
</TABLE>





                                       53
<PAGE>   54



<TABLE>
<CAPTION>
 Exhibit
  Number                              Description
 -------                              -----------
<S>            <C>
                Registration Statement.

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

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

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

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

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

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

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

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

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

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

    10.19       Purchase Agreement, Pasadena, incorporated by reference to
                Exhibit 10.18 of the Registration Statement.

    10.20       Bank of America Loan Agreement dated October 28, 1997.

    10.21       United Mizrahi Bank Loan Agreement, incorporated by reference to
                Exhibit 10.20 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.

    10.25       Amendment to United Mizrahi Bank Loan Agreement dated March 1,
                1996, incorporated by reference to Exhibit 10.26 of the 1995
                10-K.
</TABLE>




                                       54
<PAGE>   55



<TABLE>
<CAPTION>
 Exhibit
  Number                              Description
 -------                              -----------
<S>            <C>
    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.

    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.

    10.35       Private Securities Subscription Agreement and Registration
                Rights Agreement, incorporated by reference to Exhibit 10.1 of
                the Waterton 8-K.

    10.36       Letter Agreements dated August 22, 1996 between the Company and
                Waterton Management, L.L.C., incorporated by reference to
                Exhibit 10.2 of the Waterton 8-K.

    10.37       Letter Agreement dated August 22, 1996 between The Starkman
                Family Trust and Waterton Management, L.L.C., incorporated by
                reference to Exhibit 10.3 of the Waterton 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.

    10.39       Asset Purchase Agreement, dated August 2, 1996, among the
                Company, One Hundred Seventy-Second Collins Corp., L. Jules
                Arkin, as Trustee of the L. Jules Arkin Living Trust, Rosalie
                Arkin and Stanley H. Arkin, as Trustees of The Norman Arkin
                Living Trust, Stanley H. Arkin, Lewis Zachary Cohen, Barbara R.
                Rodriguez, Robin Sherwood f/k/a Robyn Sherwood, Susan Spatzer
                and Steven Stamler, incorporated by reference to Exhibit 10.1 of
                the Company's Report on Form 8-K for
</TABLE>






                                       55
<PAGE>   56



<TABLE>
<CAPTION>
 Exhibit
  Number                              Description
 -------                              -----------
<S>            <C>
                September 9, 1996.

    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.

    10.41       Revolving Credit and Term Loan Agreement, dated as of October
                27, 1997, by and between Jerry's Famous Deli, Inc. and Bank
                Leumi USA, incorporated by reference to the Company's 1997 10-K.

    10.42       Asset Purchase Agreement, dated January 21, 1998, by and between
                the company and California Pizza Kitchen, Inc. relating to Boca
                Raton restaurant acquisition, incorporated by reference to the
                Company's 1997 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.

    21.1        Subsidiaries

    23.0        Consent of PricewaterhouseCoopers LLP

    27          Financial Data Schedule
</TABLE>


                (b)      The Company filed no Reports on Form 8-K during the
                         last quarter of 1998.






                                       56

<PAGE>   57



                                   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 30, 1999.

                                  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 30, 1999
 Isaac Starkman                           Officer and Chairman of the Board



    /s/  Kenneth Abdalla                  President and Director                             March 30, 1999
--------------------------------
Kenneth Abdalla


   /s/  Guy Starkman                      Vice President and Director                        March 30, 1999
--------------------------------
Guy Starkman                               


   /s/  Jason Starkman                    Vice President and Director                        March 30, 1999
--------------------------------
 Jason Starkman


   /s/  Christina Sterling                Chief Financial Officer and                        March 30, 1999
---------------------------------         Principal Accounting Officer
Christina Sterling


   /s/  Paul Gray                         Director                                           March 30, 1999
---------------------------------
Paul Gray

   /s/  Stanley Schneider                 Director                                           March 30, 1999
---------------------------------
Stanley Schneider
</TABLE>









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