UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark one)

     [X ] ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998

     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

                         COMMISSION FILE NUMBER 0-27148
                                ----------------

                    NEW WORLD COFFEE - MANHATTAN BAGEL, INC.
                 (Name of Small Business Issuer in its Charter)

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

                  246 INDUSTRIAL WAY WEST, EATONTOWN, NJ 07724
                     (Address of Principal Executive Offices)

                                 (732) 544-0155
                           (Issuer's Telephone Number)

     Securities registered under Section 12(B) of the Exchange Act:

                                                      NAME OF EACH EXCHANGE ON
     Title of Each Class                                  WHICH REGISTERED:
     Common Stock, $.001 par value                            NASDAQ

     Securities registered under Section 12(G) of the Exchange Act: NONE

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(D) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. YES x  NO 

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B is not contained in this form,  and no disclosure  will be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments of this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year. $17,282,524

     The aggregate market value of the voting stock held by  non-affiliates  per
the closing stock price as of April 7, 1999 is $18,054,348.

     As of April 7, 1999,  20,185,831  shares of common stock of the issuer were
outstanding.
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain  statements  in  this  Annual  Report  on  Form  10-KSB  constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of  1995  (the  "Reform  Act").  The  words  "forecast",
"estimate", "project", "intent", "expect", "should", and similar expressions are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance, or achievements of New World Coffee - Manhattan
Bagel,  Inc. ("New World" or "the Company") to be materially  different from any
future  results,  performance  or  achievements,  expressed  or  implied by such
forward-looking statements.

     The Company is dependent  upon the success of existing  and new  franchised
and Company-owned  stores and alternative  distribution  outlets; the success of
the Company  and its master  franchisees  in getting new stores or other  retail
locations  opened;  the  ability of the Company  and its master  franchisees  to
attract new qualified franchisees;  of which there can be no assurance, and such
other factors as competition, commodity pricing and economic conditions.

     The opening and success of stores will depend on various factors, including
the availability of suitable store sites and the negotiation of acceptable lease
terms for new locations, the ability of the Company or its franchisees to obtain
construction and other necessary permits in a timely manner, the ability to meet
construction  schedules,  the financial and other  capabilities of the Company's
franchisees  and  master  franchisees,  competition  and  general  economic  and
business conditions.

     The Company's  business is subject to changes in consumer taste,  national,
regional and local economic conditions,  demographic trends and the type, number
and location of competing  businesses.  Competition is increasing  significantly
with an increasing  number of national,  regional and local stores competing for
franchisees and store locations as well as customers.

     The  Company's  future  results may also be  negatively  impacted by future
pricing of the key  ingredients  for its frozen bagel dough,  cream  cheeses and
coffee beverages.

     The success of sales units in alternative distribution locations, including
convenience  stores,  supermarkets,  military  bases and  other  non-traditional
locations,  will  depend,  in  addition  to the  factors  affecting  traditional
franchisee and Company-owned stores, on the consumer traffic at the locations in
which they are located.

     The opening  and  remodeling  of stores,  as well as opening of sales units
within  alternative  locations,  may be subject to potential  delays  caused by,
among other things,  permits,  weather, the delivery of equipment and materials,
and the availability of labor.

<PAGE>
TEM 1.  BUSINESS

General

     New  World  Coffee  -  Manhattan  Bagel,  Inc.  is the  one of the  largest
franchisors of coffee bars and bagel bakeries in the United States.  It operates
and  franchises  coffee bars,  bagel bakeries and  integrated  coffee  bar/bagel
bakeries in 18 states in the Northeastern,  Southeastern and Southwestern United
States, the District of Columbia,  and internationally.  The first Company-owned
New World Coffee store opened in 1993 and the first  franchised New World Coffee
store  opened in 1997.  At  December  27,  1998,  the  Company's  retail  system
consisted  of  approximately  335 stores,  including  27  Company-owned  and 308
franchised  and  licensed  stores.  The Company  acquired the stock of Manhattan
Bagel  Company,  Inc. - Debtor in Possession on November 24, 1998,  resulting in
the addition of 6 Company-owned and 285 franchised and licensed  Manhattan Bagel
stores.

     The Company is  vertically  integrated  with bagel  dough and cream  cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford,  CT. The Company's products are sold to franchised,  licensed
and   Company-owned   stores   as  well  as  to   wholesale,   supermarket   and
non-traditional outlets.

     The Company is a Delaware corporation and was organized in November 1992.

Industry Overview

     The US  market  for  specialty  coffee is large,  fragmented  and  growing.
According to the National  Coffee  Association's  1998 National  Coffee Drinking
Trends  report,  approximately  65% of all consumers (age 10+) drink coffee on a
weekly basis,  they drink an average of 3.0 cups per day, and the overall number
of  coffee  drinkers  has  grown  from  approximately  140  million  in  1990 to
approximately  168 million in 1999.  The gourmet  coffee segment of the industry
has  experienced  strong growth over the past decade and is expected to continue
to grow through the end of the century.  Research from CREST, a market  research
firm,  indicates  specialty shop category  traffic growth increased by 49%, 11%,
19% and 16%, annually, from 1995 through 1998.

     The US market for bagels is also large,  fragmented and growing.  According
to the American Bagel  Association  sale of bagels has grown rapidly,  from $429
million in 1993 to $2.3 billion in 1996. According to CREST, bagel shop category
traffic  increased by 10%, 29%, 29% and 18%,  annually,  from 1995 through 1998.
Management  believes  this  growth  has  been  driven  by (i)  greater  consumer
awareness and  appreciation of gourmet coffee,  specialty drinks and fresh baked
bagels as a result of their increasing availability,  (ii) increasing demand for
all fresh  premium  food  products  where  the  differential  in price  from the
commercial  brands is small compared to the  improvement in product  quality and
taste,  (iii) a switch by  consumers  to low fat baked items such as bagels from
high fat fried  alternatives,  and (iv) the  popularity of coffee bars and bagel
stores as gathering places.

<PAGE>

Business Strategy

     The  Company's  objective  is to be a leading  coffee  cafe chain and bagel
bakery chain in each market in which it operates,  and to support and extend its
consumer brands and leverage its manufacturing  infrastructure through alternate
distribution channels. The key elements of this strategy include:

     Differentiated  Retail Brands.  The Company's  strategy is to differentiate
and reinforce its retail brands in a way that will engender customer loyalty and
position the Company as a leading specialty retailer in each of its markets. The
New World Coffee  brand is  differentiated  from  competitors  by the  Company's
roasting style,  which management  believes delivers a more full flavored,  less
bitter  coffee.  In addition,  as a coffee cafe (versus a coffee bar) the stores
offer a broader and deeper  selection of high quality food items  throughout the
day.  The  Company's  Manhattan  Bagel  brand is  positioned  as a  purveyor  of
authentic  "New York style" boiled and baked bagels,  and of breakfast and lunch
sandwiches.  The Company is expanding this positioning to include a selection of
specialty coffees, and a menu of cool blended drinks.

     Quality  Products.  The Company's  strategy is to provide the consumer with
superior quality products,  primarily coffee,  bagels and cream cheeses which it
believes is a primary  factor in a consumer's  decision to patronize its stores,
and enables it to build a high quality brand identity.  The Company's vertically
integrated  strategy enables it to supply its stores with high quality specialty
coffees,  frozen  bagel dough and cream  cheeses,  and to control the quality of
product sold in the stores.  The Company's  coffee and bagel products have won a
number of quality and "Best of" awards,  which assists the Company in developing
its high quality brand identity.

     Growth  Through  Franchising.  The  Company's  strategy is to grow  through
franchising to secure a leading  position in its markets.  The Company  believes
that it can grow more rapidly  through  franchising  than through  Company-owned
operations due to lower financial and human resource constraints. The Company is
committed to  maintaining  a strong  franchise  system by  attracting  qualified
operators, expanding in a controlled manner and ensuring that franchisees adhere
to the Company's high standards.  The Company's  franchising efforts are focused
on  attracting  new  franchisees,  adding  additional  locations  with  existing
franchisees,  and developing co-branding  opportunities with other complementary
retailers. The Company devotes significant resources to provide franchisees with
assistance in site selection, store design, training and store marketing.

     Efficient  Production  System.  The  Company's  strategy is to leverage its
manufacturing  and  distribution  systems to deliver lower  operating  costs and
improved product quality.  The Company believes that its centralized  production
of bagel, cream cheese, and coffee products allows for more consistent, superior
products,  better  quality  control and more rapid  development,  production and
deployment  of new products  into stores  systemwide.  In  addition,  the system
significantly  simplifies  store level  operations,  and eliminates the need for
franchisees to commit substantial capital and labor to raw material  procurement
or production.

     Inviting Stores.  The Company's  strategy is to deliver a store environment
for each  concept  which is  conducive to  capturing  important  day parts.  The
Company's objective is a comfortable and inviting store with layouts designed to
process a large volume of transactions  during the time critical day parts.  The
Company is making an  investment  in upgrading  the design of both its Manhattan
Bagel and New World Coffee stores in 1999.

<PAGE>

     Training  and  Development.  The  Company's  strategy  is to  place  strong
emphasis on identifying and retaining qualified  franchisees and employees,  and
invest substantial resources in training them in customer service,  beverage and
food preparation,  and sales skills. The Company believes that the friendliness,
speed and  consistency  of service and the product  knowledge  of the  Company's
franchisees  and  employees  are critical  factors in  developing  the Company's
quality brand identity and to building a loyal customer base

     Wholesale  Sales.  The  Company's  strategy  is to leverage  its  efficient
manufacturing  systems,  quality  products  and  brand  names  in  developing  a
significant  wholesale  business.  The Company believes that food  distributors,
chain  grocery  stores,  food service  outlets and similar  customers  offer the
Company  opportunity to maximize its production  capacity and distribute product
through many more outlets than its franchised and Company-owned stores.

Expansion

     A total of 18 franchised  stores were opened during 1998. The Company plans
to open  approximately  20  franchised  stores in 1999,  primarily  in  existing
markets.  The Company has adopted a policy of not developing  stores for its own
operation and is in the process of franchising all stores currently  operated by
the Company.

     The ability of the Company's  franchisees to open new stores is affected by
a number of factors.  These factors include,  among other things,  selection and
availability  of suitable  store  locations,  negotiation  of suitable  lease or
financing  terms,  constraints on permitting and  construction of stores and the
hiring,  training and retention of management and other personnel.  Accordingly,
there can be no assurance  that the Company's  franchisees  will be able to meet
planned growth targets.

     The Company's  expansion strategy is to cluster stores in targeted markets,
thereby increasing consumer awareness and enabling the Company to take advantage
of operational,  distribution and advertising efficiencies. The Company believes
that  market  penetration  through  the  opening  of  multiple  stores  within a
particular market should result in increased average store sales in that market.
In determining which new markets to develop, the Company considers many factors,
including  its  existing  store base,  the size of the market,  demographic  and
population  trends,  competition,  availability and cost of real estate, and the
ability to supply product efficiently.

Retail Stores

     New World  Coffee.  New World Coffee stores are designed to be conducive to
capturing all three dayparts.  In addition,  the store atmosphere is designed to
be a comfortable and inviting cafe setting through the use of natural materials,
warm lighting,  appropriate music and a comfortable  seating area to promote the
stores use as  neighborhood  gathering  places.  The Company's  prototype  store
averages 1,400 - 1,800 square feet.

     New World Coffee stores offer,  over the course of any given year, up to 30
varieties and blends of fresh roasted  coffee,  in brewed and whole bean format,
from coffee  producing  countries  around the world.  Regular and  decaffeinated
"Coffees of the Day" are fresh  brewed daily with strict  brewing and  freshness
standards.  The stores also offer a broad range of Italian-style  beverages such
as espresso,  cappuccino,  caffe latte, caffe mocha and espresso  machiato.  New
World Coffee stores offer a selection of black,  herbal and fruit teas, with one
selection  offered  as the fresh  brewed  "Iced Tea of the Day," and also  offer
freshly squeezed orange and grapefruit juice. New World Coffee stores also offer
a broad and deep variety of fresh, high quality food items.  Breakfast offerings
include  bagels,  croissants,  muffins,  danishes  and scones,  lunch  offerings
include  Italian panini  sandwiches and soups and dessert items include  various
cakes and  cookies,  dessert  muffins,  brownies  and  biscotti.  Management  is
consistently  working with its  suppliers to develop a selection of quality food
items which will complement beverage sales.

<PAGE>

     Manhattan  Bagel.  Manhattan  Bagel  stores are  designed  to  combine  the
authentic  tastes  of  a  bagel  bakery  with  the  comfortable   setting  of  a
neighborhood   meeting  place.   Manhattan  Bagel's  prototypical  store  blends
function, style and customer comfort with the Company's traditional red and blue
color scheme and simple  furnishings in a relaxed social  atmosphere.  Walls are
covered with murals designed to relate to the Manhattan  Bagel brand.  Manhattan
Bagel stores are  typically in leased  locations of  approximately  1,500 square
feet with ample parking and indoor seating for 30 - 40 customers. The Company is
in the  process  of  redesigning  its  prototype  store to  emphasize  its lunch
offerings, specialty coffee drinks and cool blends drinks menu.

     Manhattan Bagel stores offer,  over the course of any given year, more than
23  varieties  of fresh  baked  bagels,  as well as  bagel  sticks  and  bialys.
Manhattan's  bagels are baked fresh  throughout the day using a traditional boil
and bake  process  to  create a light,  "crunchy  on the  outside,  chewy on the
inside" bagel. Manhattan Bagel stores also offer 18 flavors of cream cheese, and
an extensive  variety of breakfast and lunch  sandwiches,  coffee,  soft drinks,
salads,  muffins and soups. In 1998, the Company  introduced a program,  "Bagel,
Wrapp or Roll,"  under  which it now  offers  all  sandwiches,  previously  only
available on bagels, on alternative carriers, such as french rolls or wrapps, in
order to enhance its lunch  business.  The program has met with strong  consumer
acceptance  and the Company  expects to continue to emphasize its lunch business
going  forward.  In  1999,  the  Company  expects  to  undertake  major  product
initiatives  to introduce a selection of specialty  coffee  drinks and a menu of
iced, cool and blended drinks to its stores.

Sourcing, Manufacturing & Distribution

     The Company  believes that  controlling the manufacture and distribution of
coffee,  bagels and cream  cheeses is key to ensuring  both product  quality and
enhancing  profitability.  To  support  this  strategy,  the  Company  has  made
significant investments in processing technology, formulations and manufacturing
capacity.

     Bagel  Production.  The  Company has  significant  know-how  and  technical
expertise  for  manufacturing  and  freezing  mass  quantities  of raw bagels to
produce a high-quality  product more commonly  associated with smaller bakeries.
The  Company  believes  this system  enables  stores to provide  customers  with
consistent,   superior   products.   The  Company   currently   operates   bagel
manufacturing facilities in Eatontown, NJ, and Los Angeles, CA.

     Cream Cheese Production.  The Company blends and supplies a wide variety of
cream cheeses,  including low fat and no fat cream cheeses to substantially  all
of the Manhattan  Bagel stores.  The Company  purchases  plain cream cheese from
independent suppliers and mixes in ingredients at its manufacturing  facilities.
The Company produces cream cheeses in various size containers.

     Coffee Sourcing.  The Company  purchases only the highest grades of Arabica
coffee available from the best crops by Coffee Sourcing.  The Company  purchases
only the  highest  grades of  Arabica  coffee  available  from the best crops by
evaluating crop samples on an ongoing basis and making  purchase  commitments on
the  basis of  quality,  taste  and  availability.  The  Company  makes  forward
commitments  for the  purchase  of all of its  coffee  to help  ensure  adequate
supply.  The  Company  has  long-standing  relationships  with  coffee  brokers,
allowing it access to the world's best green coffees.

     Coffee  Roasting.  The  Company's  roasting  process  varies based upon the
variety,  origin and physical  characteristics  of the coffee and is designed to
develop the optimal flavor and aromatics of each coffee. The Company has several
roastmasters who are directly responsible for overseeing the roasting process.

     Distribution.  The Company's products are typically delivered to the stores
by truck either directly from the manufacturing  facility or through third party
distributors.  The Company's  coffee is delivered to each New World Coffee store
at least twice a week,  generally within 24 hours of roasting.  This enables the
Company to control the freshness of the coffee sold in its stores.

<PAGE>

Marketing

     The Company's store level marketing  programs target the trade area of each
store,  making  extensive use of  distinctive  print material in direct mail and
couponing.  In markets in which franchisees have a significant  presence,  local
marketing efforts are supplemented with radio advertising.

     In addition to local store marketing,  Company-owned  and franchised stores
are generally  required to contribute  2.5% of sales to the  respective  brand's
marketing  fund,  which  provides the stores with  marketing  support  including
in-store point of purchase,  sales  promotions,  new product  introductions  and
seasonal  specials,  along with possible print and other mass media advertising,
in order to increase consumer interest and build sales.

     The Company also provides stores with catalogs for uniforms and promotional
items and pre-approved, print marketing materials.

Franchise Program

     General.  The Company considers  franchising to be the key to its continued
growth.  As of December 27. 1998, there were 308 franchised  stores operating in
18 states,  the  District  of  Columbia  and  internationally.  Additionally,the
Company  had  franchise   agreements  signed  for  approximately  12  additional
franchised  stores.  There can be no assurance  that all of these stores will be
opened.

     Approval.  Franchisees  are  approved on the basis of business  background,
operating experience and financial resources.

     Franchise Agreements.  The Company's franchise agreements typically provide
for a ten year term, a  non-refundable  franchise fee of $30,000 for the initial
store and $25,000 for each  additional  store,  a 5% royalty,  a marketing  fund
contribution of 2.5%, a required local advertising and promotion  expenditure of
1.5%, and a $5,000 minimum grand opening expenditure.

     The  Company  has the right to  terminate  any  franchise  agreement  for a
variety of reasons,  including a franchisee's  failure to make payments when due
or  failure  to adhere to the  Company's  policies  and  standards.  Many  state
franchise laws limit the ability of a franchisor to terminate or refuse to renew
a franchise. See "Business-Government Regulation".

     The unit franchise agreements generally preclude the Company from operating
or  franchising  stores within an exclusive  territory,  except that the Company
reserves the right to engage in certain special distribution arrangements within
the specified territory.

     Master Franchises. Prior to its acquisition,  Manhattan Bagel Company, Inc.
pursued a strategy  of  developing  new  territories  through the sale of master
franchises.   A  master  franchisee  is  responsible  for  selling   franchises,
negotiating leases,  supervising the design and building of new stores, training
franchisees and supervising them after the locations are opened,  and collecting
the initial  franchise fee and royalties,  all in accordance  with the Company's
quality control guidelines.  In return, the master franchisee retains two-thirds
of the initial franchise fee and royalties payable by the individual franchisees
in the master franchisees territory, and remits to the Company one third of such
amounts.  Master  franchisees have minimum sales  requirements to maintain their
exclusive rights in their respective territories.

     In 1998,  the Company  terminated  three master  franchise  agreements  and
recovered  the  following  territories:  Florida;  Maryland,  Virginia  and  the
District of Columbia;  Western New York, Erie,  Pennsylvania,  and northeastern,
Ohio. The Company currently has two master franchise  agreements in operation in
North Carolina,  South Carolina and Georgia;  and in Northern  California.  Both
master   franchisees  are  in  default  of  their  exclusive   rights  to  their
territories.

<PAGE>

     Franchise  Store  Development.  The Company  furnishes each franchisee with
assistance  in  selecting   sites  and   developing   stores  and  the  physical
specifications for typical stores.  Each franchisee is responsible for selecting
the  location  for  its  stores,  with  the  Company's   assistance,   based  on
accessibility and visibility of the site, targeted demographic factors, existing
traffic patterns,  availability of parking and proximity of compatible retailers
and  competition.  The Company provides  prototypical  store design plans to the
franchisees.

     Franchise  Training and  Support.  Every  franchisee  is required to have a
principal  operator  or  manager  approved  by the  Company  who  satisfactorily
completes the  Company's  two-week  training  program and who devotes his or her
full business time and efforts to the operation of the franchisee's  stores.  In
addition to this program,  the Company provides on-site training for up to seven
days during the opening of franchisee's  stores and ongoing support  thereafter.
The Company's franchise consultants, reporting to the Vice President - Franchise
Operations,  maintain open communication with the franchise community,  relaying
operating  and marketing  information  and new ideas between the Company and its
franchisees.

     Franchise Operations.  All franchisees are required to operate their stores
in  compliance  with  the  Company's  policies,  standards  and  specifications,
including  matters  such  as  menu  items,  ingredients,   materials,  supplies,
services,  fixtures,  furnishings,  decor and signs.  Each  franchisee  has full
discretion to determine the prices to be charged to its customers.

     Franchise  Advisory Council.  The Company has a Franchise  Advisory Council
for each of New World Coffee and  Manhattan  Bagel that  consists of  franchisee
representatives.  The Advisory  Councils hold quarterly  meetings to discuss new
product development, new marketing ideas, operations,  growth and other relevant
issues.

     Reporting.  The  Company  collects  weekly  and  monthly  sales  and  other
operating  information from its franchisees.  The Company's agreements generally
permit the Company to  electronically  debit the franchisees'  bank accounts for
the payment of royalties, marketing fund contributions and purchases of products
from the Company.

Trademarks and Service Marks

     The Company's  rights in its trademarks and service marks are a significant
part of its business.  The Company is the owner of the federal  registration  of
the  trademarks  "Manhattan  Bagel(R)",  "New World  Coffee(R)"  (trademark  and
servicemark),  "New  World  Coffee  &  Bagels(R)",  "Summertime  Blend(R)",  and
"Serious  Coffee(R)".  The Company also has applied for the  registration of the
federal servicemark  "Willoughby's  Coffee & Tea(R)" (With Design).  Some of the
Company's marks are also registered in several foreign countries. The Company is
aware of a number of  companies  which  use  various  combinations  of the words
"Manhattan"  or "Bagel" in their names,  some of which may have senior rights to
the  Company  for such use,  but none of which,  either  individually  or in the
aggregate,  are  considered to  materially  impair the use by the Company of its
mark.  The Company is aware of the use of the name "New World Coffee" by another
person in  California.  It is the  Company's  policy to  vigorously  oppose  any
infringement of its trademarks.

Competition

     The coffee and bagel  industries  are intensely  competitive  and there are
many well established competitors with substantially greater financial and other
resources than the Company.  Although competition in the specialty coffee market
is  currently  fragmented,   the  Company  competes  and,  in  the  future  will
increasingly  compete with Starbucks,  the market's leading  retailer.  Although
competition in the bagel market is fragmented,  the Company competes and, in the
future will increasingly compete with Dunkin Donuts,  Einstein/Noah Bagel Corp.,
and Bruegger's Bagels. In addition to current competitors, one or more new major
competitors  with  substantially  greater  financial,  marketing,  and operating
resources  than the  Company  could  enter the  market  at any time and  compete
directly against the Company. In addition, in virtually every major metropolitan
area in which the  Company  operates  or  expects  to enter,  local or  regional
competitors already exist.

     The Company's  coffee  beverages  compete  directly with all restaurant and
beverage  outlets  that serve  coffee and a growing  number of espresso  stands,
carts and stores.  The Company's  whole bean coffees  compete  directly  against
specialty coffees sold at retail through supermarkets,  specialty retailers, and
a growing  number of specialty  coffee  stores.  The  Company's  bagel  products
compete  directly  against all  restaurant and bakery outlets that serve bagels,
including  the bakery  section of  supermarkets,  and a growing  number of bagel
bakeries.  The  Company  believes  that its  customers  choose  among  retailers
primarily on the basis of product  quality,  service and  convenience  and, to a
lesser extent,  on price. The Company also expects that competition for suitable
sites for new  stores  will be  intense.  The  Company  competes  against  other
specialty  retailers  and  restaurants  for  these  sites,  and  there can be no
assurance that  management  will be able to continue to secure adequate sites at
acceptable  rent levels.  The Company also  competes  with many  franchisors  of
restaurants and other business concepts with respect to the sale of franchises.

<PAGE>

Government Regulation

     The Company and its franchisees are subject to various  federal,  state and
local laws  affecting the  operation of their  respective  businesses.  Each New
World  Coffee  store and  Manhattan  Bagel  store is  subject to  licensing  and
regulation  by a number  of  governmental  authorities,  which  include  health,
safety,  sanitation,  building and fire agencies in the state or municipality in
which the store is  located.  Difficulties  in  obtaining  or failures to obtain
required licenses or approvals could delay or prevent the opening of a new store
in a particular area. The Company's  manufacturing,  commissary and distribution
facilities  are licensed and subject to regulation by state and local health and
fire  codes,  and the  operation  of its  trucks is  subject  to  Department  of
Transportation  regulations.  The  Company is also  subject to federal and state
environmental regulations.

     The Company is subject to Federal Trade Commission  ("FTC")  regulation and
various  state laws which  regulate  the offer and sale of  franchises.  Several
state  laws  also  regulate  substantive  aspects  of the  franchisor-franchisee
relationship. The FTC requires the Company to furnish to prospective franchisees
a franchise offering circular  containing  prescribed  information.  A number of
states in which the Company might consider franchising also regulate the sale of
franchises  and require  registration  of the franchise  offering  circular with
state    authorities.    Substantive    state    laws    that    regulate    the
franchisor-franchisee  relationship  presently exist in a substantial  number of
states,  and bills have been  introduced  in Congress from time to time (some of
which are now  pending)  which  would  provide  for  federal  regulation  of the
franchisor-franchisee  relationship  in certain  respects.  The state laws often
limit, among other things, the duration and scope of non-competition  provisions
and the ability of a franchisor to terminate or refuse to renew a franchise.

<PAGE>

Employees

     At December 27, 1998, the Company had 532 employees, of whom 258 were store
personnel,  197 were plant and support services personnel, and 77 were corporate
personnel.  Most store personnel work part time and are paid on an hourly basis.
The Company has never  experienced  a work  stoppage and its  employees  are not
represented  by a labor  organization.  The Company  believes  that its employee
relations are good.

ITEM 2.  PROPERTIES

     As of  December  27, 1998 the Company  and its  franchisees  and  licensees
operated 335 stores,  consisting of 47 New World Coffee and 288 Manhattan  Bagel
stores as follows.

STORE LOCATIONS
-------------------------------------------------------------------------------
STATE                     Company            Franchised            Total
--------------            -------            ----------            -----
Alabama                      0                   1                    1
California                   2                  27                   29
Connecticut                  6                   7                   13
Delaware                     0                   5                    5
Florida                      0                  23                   23
Georgia                      0                  14                   14
Germany                      0                   1                    1
Israel                       0                   1                    1
Maryland/DC                  0                   5                    5
Massachusetts                0                   2                    2
Michigan                     0                   8                    8
Nevada                       0                   3                    3
New Jersey                   0                  65                   65
New York                    18                  45                   63
North Carolina               0                  15                   15
Ohio                         0                   6                    6
Pennsylvania                 1                  54                   55
South Carolina               0                   3                    3
Texas                        0                   5                    5
Virginia                     0                  18                   18
TOTAL
--------------           --------             --------            ------
                            27                 308                  335
<PAGE>

     Information   with  respect  to  the  Company's   headquarters,   training,
manufacturing and distribution facilities is presented below.

<TABLE>
<CAPTION>


------------------              -------------------------------------                         -----------------
Location                        Facility                                                      Size
------------------              -------------------------------------                         -----------------
<S>                            <C>                                                            <C>   

Eatontown, NJ (a)               Corporate Headquarters                                        101,000 sqft
                                Bagel University/Coffee University
                                Bagel/Cream Cheese Manufacturing
                                Distribution

Los Angeles, CA (b)             Regional Offices                                              8,500 sqft
                                Bagel/Cream Cheese Manufacturing
                                Distribution

Los Angeles, CA (c)             Regional Offices                                              24,000 sqft
                                Bagel/Cream Cheese Manufacturing
                                Distribution

Greenville, SC (d)              Bagel/Cream Cheese Manufacturing                              12,500 sqft

Branford, CT (e)                Office/Training Facilities                                    3,800 sqft
                                Coffee Roasting Plant                                         1,600 sqft

------------------              -------------------------------------                         -----------------
</TABLE>

     (a) This  facility  is leased.  Lease  term ends  January  31,  2005 and is
subject to two 5 year extension options.

     (b) This facility is leased  through June 30, 1999. The Company is planning
to close this facility upon the completion of its new Los Angeles, CA facility.

     (c) This facility is under  construction  and is expected to be operational
May 1999.  This  facility is leased,  with an initial lease term through June 1,
2007 and two 5 year options.

     (d) This  facility  is located  on a 1.45 acre  parcel of land owned by the
Company. This facility is currently closed.

     (e) This facility is leased through October 31, 2000.

     The Company  believes  that its current  facilities  are  adequate  for its
present and contemplated operations.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is subject to claims and legal  actions in the ordinary  course
of its business. The Company believes that all such claims and actions currently
pending against it are either adequately  covered by insurance or would not have
a material  adverse effect on the Company if decided in a manner  unfavorable to
the Company.

<PAGE>

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

     On March 24, 1999, a special meeting of the stockholders of the Company was
held at the  offices of the  company  pursuant  to a Notice of Meeting and Proxy
Statement  dated  February 18, 1999. At the special  meeting,  the  stockholders
approved  a change  of the name of the  Company  to New  World  Coffee-Manhattan
Bagel,  Inc.  and an increase in the  authorized  common  stock from  20,000,000
shares,  par value $.001 per share to  50,000,000  shares of common  stock,  par
value $.001 per share.

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

     The  Company's  Common  Stock  is  quoted  on the  NASDAQ  National  Market
("Nasdaq") under the symbol "NWCI".  The following table sets forth the range of
high and low  closing  sale  prices  (based on  transaction  data as reported by
NASDAQ)  for the  Common  Stock  for each  fiscal  quarter  during  the  periods
indicated.

<TABLE>
<CAPTION>


               Fiscal 1997                                                           High         Low
<S>                                                                                 <C>          <C>

First Quarter (From December 30, 1996 to March 30, 1997)                             $2.88        $1.75
Second Quarter (From March 31, 1997 to June 29, 1997)                                $2.13        $1.19
Third Quarter (From June 30, 1997 to September 28, 1997)                             $2.13        $0.94
Fourth Quarter (From September 29, 1997 to December 28, 1997)                        $2.62        $1.50

               Fiscal 1998                                                           High          Low

First Quarter (From December 29, 1997 to March 29, 1998)                             $2.00        $1.28
Second Quarter (From March 30, 1998 to June 28, 1998)                                $1.91        $1.50
Third Quarter (From June 29, 1998 to September 27, 1998)                             $1.75        $0.81
Fourth Quarter (From September 28, 1998 to December 27, 1998)                        $1.50        $0.75

               Fiscal 1999                                                           High          Low

First Quarter (From December 28, 1998 to March 28, 1999)                             $1.38        $0.75

</TABLE>

     On April 7, 1999,  the  closing  price for the  Company's  Common  Stock as
reported by NASDAQ was $1.00 a share.

     As of April 7, 1999, there were  approximately 329 holders of record of the
Common  Stock.  This  number does not include  individual  stockholders  who own
Common  Stock  registered  in the  names of a  nominee  under  nominee  security
listings.

     The  Company  has not  declared  or  paid  any  cash  dividends  since  its
inception,  and does not  intend to pay any cash  dividends  in the  foreseeable
future.

<PAGE>

     ITEM 6.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS

General

     The Company is the one of the largest  franchisors of coffee bars and bagel
bakeries in the United  States.  It operates and franchises  coffee bars,  bagel
bakeries  and  integrated  coffee  bar/bagel   bakeries  in  18  states  in  the
Northeastern,  Southeastern  and  Southwestern  United  States,  the District of
Columbia,  and  internationally.  The first Company-owned New World Coffee store
opened in 1993 and the first  franchised  New World Coffee store opened in 1997.
At December 27, 1998, the Company's retail system consisted of approximately 335
stores,  including 27 Company-owned and 308 franchised and licensed stores.  The
Company  acquired  the  stock of  Manhattan  Bagel  Company,  Inc.  - Debtor  in
Possession  on November 24, 1998,  resulting in the addition of 6  Company-owned
and 285 franchised and licensed Manhattan Bagel stores.

     The Company is  vertically  integrated  with bagel  dough and cream  cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford,  CT. The Company's products are sold to franchised,  licensed
and   Company-owned   stores   as  well  as  to   wholesale,   supermarket   and
non-traditional outlets.

     The Company is a Delaware corporation and was organized in November 1992.

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

Results of Operations

     Year Ended December 27, 1998 Compared To Year Ended December 28, 1997

     All  revenue  and  expense   figures  below  reflect  the  results  of  the
acquisition of Manhattan Bagel Company, Inc. on November 24, 1998.

     Revenues. Total revenues increased 8.9% to $17,282,524 for fiscal 1998 from
$15,867,868 for fiscal 1997.  Manufacturing  revenues increased to $2,193,145 or
12.7% of revenues. There were no such comparable revenues in 1997. Royalties and
franchise  related  revenues  increased to $2,728,137 or 15.8% of total revenues
from $820,515 or 5.2% of total revenues for the comparable  1997 period.  Retail
sales decreased  17.9% to $12,361,242  for fiscal 1998 from  $15,047,353 for the
comparable  1997 period,  primarily  due to the sale of  Company-owed  stores to
franchisees.  Comparable store sales for the 23  Company-owned  and 3 franchised
stores  open for both  periods  increased  by (6.7%) and 5.8% for  fiscal  1998,
respectively.

     Costs and Expenses. Retail costs as a percentage of retail sales for fiscal
1998  increased  to 87.8%  from 87.3% for fiscal  1997  primarily  due to a 1.1%
increase in  miscellaneous  store  expenses,  and a 0.5%  increase in  personnel
costs,  which were  partially  offset by a 1.0% decrease in cost of goods due to
more efficient  purchasing.  Manufacturing  costs of sales and related  overhead
expenses were 73.3% of manufacturing revenues in 1998.

<PAGE>

     Depreciation  and  amortization  expenses as a percentage of total revenues
for fiscal 1998 decreased to 8.5% from 14.4% for fiscal 1997 primarily due to an
increase in the Company's  revenue  base,  the sale of  Company-owned  stores to
franchisees and the Company's compliance with FASB 121

     General and  administrative  expenses as a percentage of total revenues for
fiscal 1998  increased to 20.0% from 18.8% for fiscal 1997  primarily due to the
acquisition of Manhattan  Bagel and additional  training costs incurred from the
sale of Company-owned stores to franchisees.

     In 1998 the Company recorded the following charges:  a $4,235,266  non-cash
charge in compliance with FASB 121; a $1,874,212  restructuring  charge relating
to the closing of its New York office and costs  associated with the elimination
of duplicate corporate  functions;  and a $350,000 provision for store closings.
In 1997, in compliance with FASB 121, the Company  recorded a non-cash charge of
$3,480,977.  See Note 4 Impairment of "Long-Lived  Assets" on page F-10 and Note
10 "Store Provisions for Store Closings and Reorganization Costs" on page F-12.

     Interest  expense,  net for fiscal  1998  increased  to $925,467 or 5.4% of
revenues  from  $424,533  or 2.7% of  revenues  for fiscal  1997.  Approximately
$624,000 of the 1998 expense is  attributable  to interest and  financing  costs
relating to the Manhattan Bagel Company, Inc. acquisition.

     Net Loss.  Net loss for fiscal 1998  increased to  $7,491,610 or 43.3% as a
percentage  of revenues,  from  $6,736,157 or 42.5% of revenues for fiscal 1997.
The primary  components  of this  increase were an increase of 13.5% in one-time
provisions  and  non-cash  charges and an increase of 2.8% in interest  expense,
which were partially  offset by improvements in income from operations of 14.0%.
Net loss  before  one-time  charges for fiscal  1998 was  $1,032,132  or 6.0% of
revenues compared to $2,955,180 or 18.6% of revenues for fiscal 1997.

Year Ended December 28, 1997 Compared To Year Ended December 29, 1996

     Revenues.  Total revenues  increased  39.9% to $15,867,868  for fiscal 1997
from $11,340,199 for fiscal 1996.  Company owned store revenues  increased 32.7%
to $15,047,353 for fiscal 1997 from  $11,340,199 for the comparable 1996 period.
Royalties and franchise related revenues were $820,515 or 5.2% of total revenues
for fiscal 1997.  There were no such revenues for fiscal 1996.  Comparable store
sales  for the 17 New  World  stores  open  for  both  periods  increased  4.6%.
Comparable store sales for the Company's converted coffee bar/bagel bakery store
increased 32.6% for fiscal 1997.

     Costs  and  Expenses.  Cost of  sales  and  related  occupancy  costs  as a
percentage of store  revenues for fiscal 1997  decreased to 54.4% from 57.1% for
fiscal 1996. The primary components were a decrease of 0.3% in cost of goods due
to better purchasing and waste control through implementation of the POS System,
improved coffee pricing due to vertical integration, improved vendor pricing due
to greater  economies of scale, and a 2.4% decrease in related occupancy expense
as a percentage of store  revenues due to the  Company's  focus on seven day and
residential/shopping area stores.

     Store operating  expenses as a percentage of store revenues for fiscal 1997
increased to 32.9% from 31.1% for fiscal  1996.  The primary  components  were a
1.1%  increase in personnel  costs and a 0.7%  increase in  miscellaneous  store
expenses.

     Depreciation  and  amortization  expenses as a percentage of total revenues
for fiscal 1997  increased to 14.4% from 11.9% for fiscal 1996  primarily due to
increased  amortization  resulting  from the  acquisition of  Willoughby's,  the
Company's coffee roaster since inception.

<PAGE>

     General and  administrative  expenses as a percentage of total revenues for
fiscal 1997 decreased to 18.8% compared to 24.2% of revenues for fiscal 1996.

     In 1997,  in  accordance  with FASB 121,  the  Company  recorded a non-cash
charge of  $3,480,977.  In 1996,  the  Company  recorded a  provision  for store
closings and  reorganization  costs of  $1,800,000,  of which  $1,014,888  was a
non-cash  writedown of the fixed  assets in five  unprofitable  stores,  four of
which were not in residential areas.

     Interest  expense,  net for fiscal  1997  increased  to $424,533 or 2.7% of
revenues,  from  $74,349 or 0.7% of  revenues  for fiscal  1996.  This  increase
resulted primarily from the interest paid for 1996 acquisitions.

     Net Loss.  Net loss of $6,736,157  decreased as a percentage of revenues to
42.5% from 50.0% or $5,670,951 for fiscal 1996.  The primary  components of this
decrease were  improvements in general and  administrative,  cost of goods sold,
and occupancy  expenses of 5.4%, 2.1%, and 3.4%,  respectively.  Net loss before
one-time  charges for fiscal 1997 was $2,955,180 or 18.6% of revenues.  Net loss
before one-time charges for fiscal 1996 was $2,820,951 or 24.9% of revenues.

<PAGE>

Income Taxes

     The  Company  accounts  for  income  taxes  under  Statement  of  Financial
Accounting  Standards  No. 109 (SFAS  109).  Realization  of  deferred  taxes is
dependent on future events and earnings,  if any, the timing and extent of which
are  uncertain.  Accordingly,  the benefit of deferred tax assets has been fully
reserved as of December 27, 1998 and  December  28, 1997.  At December 27, 1998,
the Company had net operating loss  carryforwards of  approximately  $11,600,000
available to offset future taxable income. This does not include any benefit for
net operating  loss  carryforwards  resulting from the purchase of The Manhattan
Bagel Company, Inc. which is still being evaluated by the Company. These amounts
expire at various times through 2012. As a result of ownership changes resulting
from recent sales of equity  securities  and recent  acquisitions  the Company's
ability to use the loss  carryforwards  is subject to  limitations as defined in
Sections 382 of the Internal Revenue Code of 1986, as amended.

Liquidity and Capital Resources

     On or about May 24,  1998,  July 2, 1998 and  November 20, 1998 the Company
completed private placements of 1,454,120,  862,068 and 555,000 shares of Common
Stock, respectively, realizing approximately $1,576,000, $1,000,000 and $500,000
in net proceeds after commissions and costs.

     On November 19, 1998 the Company  completed a $5 million  debt  transaction
with BET  Associates,  L.P.  The  funds  were  used for the  acquisition  of The
Manhattan  Bagel  Company,  Inc.  The  note has a  3-year  maturity  with a base
interest rate of 12%.  Additional fees may be incurred relative to the timing of
the refinancing of this debt.

     On November 24, 1998 the Company  completed a $5.5 million debt transaction
with  The  Manhattan  Bagel  Creditors  Trust  pursuant  to the  acquisition  of
Manhattan  Bagel Company,  Inc. The note has a 3-year  maturity with an interest
rate of 9%.

     On December 23,  1998,  the  Company,  through its wholly owned  subsidiary
Manhattan  Bagel  Company,  Inc.  completed a $2.8  million  refinancing  of its
Economic  Development  Agency bonds. These bonds have a 10-year maturity with an
interest rate of 9%.

     The above indebtedness,  totaling $13.3 million is secured by first, second
and third security  interests on the assets of the Company and its subsidiaries.
The Company may refinance some or all of this indebtedness and incur an increase
in the amount of funded  debt,  in 1999,  to better  leverage its asset base and
reduce borrowing costs.  There can be no assurance that such refinancing will be
accomplished, or as to the amount refinanced or the cost of such refinancing.

<PAGE>

     The  Company  plans to  satisfy  any of its  capital  requirements  in 1999
through  cash  flow  from  operations  and the sale of  Company-owned  stores to
franchisees which should generate additional cash.

     At December 27, 1998, the Company had working capital of $469,490  compared
to a working capital deficit of $97,705 at December 28, 1997.

     The Company had net cash used in operating  activities  of  $2,662,022  for
fiscal 1998 and net cash used in operating  activities of $1,392,487  for fiscal
1997.  The primary use of cash in  operating  activities  relates to  additional
costs the Company has agreed to absorb  subsequent to the  reorganization of the
Mahattan Bagel  Company,  Inc.  Additionally  the Company has  determined  that
approximately  $4,100,000 of additional  costs relating to the acquisition  will
not become due during the current year. Should some or all of these costs become
due during the  current  year,  this would have an adverse  effect on  operating
cash.

     The Company had net cash used in investing  activities  of  $2,253,082  for
fiscal  1998  and  $1,714,840  for  fiscal  1997.  The  primary  use of cash for
investing activities was for the acquisition of Manhattan Bagel Company, Inc.

     The Company had net cash provided by financing activities of $9,035,718 for
fiscal 1998 and $2,836,554 for fiscal 1997. The primary use of cash in operating
activities  relates  to  additional  costs  the  Company  has  agreed  to absorb
subsequent  to  the   reorganization  of  the  Manhattan  Bagel  Company,   Inc.
Additionally,  the Company  has  determined  that  approximately  $4,100,000  of
additional  costs  relating  to the  acquisition  will not become due during the
current year. Should some or all of the costs become due during the current year
thes would have an adverse effect on operating cash.

Hardware and Software System, Year 2000 Compliance

     Headquarters  computer  systems  are  presently  believed  to be year  2000
compliant.  As a consequence of the Manhattan Bagel Company,  Inc.  acquisition,
the accounting systems of the combined entity are being upgraded with completion
anticipated  by August,  1999.  Such upgraded  software has been certified to be
year 2000 compliant. Conversion of accounting data to the new accounting systems
presents  problems  which are customary to any data  conversion  and the Company
anticipates  running its  accounting  systems in parallel  until it is confident
that the new systems are operating properly.  The Company believes that the full
conversion will take place by October 1999.

     The  Company is also  planning  to  implement  a  manufacturing  management
information system. This software has been certified by the vendors as year 2000
compliant.  Manufacturing  controls are  presently  being carried out on systems
which are believed to be year 2000 compliant. With respect to manufacturing data
from locations outside of the Company's headquarters in Eatontown, NJ, that data
will continue to be transmitted to  headquarters  and will not add an additional
level of year 2000 risk.

     The Company maintains communication with point-of-sale terminals in its New
World Coffee stores  (Company-owned  and  franchised).  The computer systems and
software  utilized  for this  purpose are not year 2000  compliant.  In order to
become year 2000  compliant,  it will be necessary to effect the purchase of new
hardware and the installation of upgrades to the existing software. The software
vendor  has  certified  that its  upgrade  will  render the  software  year 2000
compliant.  The  Company  anticipates  implementing  the  upgrades in its stores
during the period ending  December 31, 1999. It is possible that these  upgrades
will not be  completed by such date.  In that event,  the  automated  feature of
information  retrieval  may be  adversely  affected and the Company will have to
revert to a manual version of reporting until the upgrades can be completed. The
Company does not anticipate that this will have a material adverse effect on its
operations.

     It is the Company's  intention to eventually effect automated data transfer
between  Manhattan  Bagel  franchisees  and the Company's  headquarters.  At the
present time data  collection  from the  franchisees  is carried out on a manual
basis and will continue until hardware and software systems can be installed.

<PAGE>

Seasonality and General Economic Trends

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

ITEM 7.  FINANCIAL STATEMENTS

     Information  in  response  to  this  item  is set  forth  in the  Financial
Statements beginning on page F-1 of this filing.

     ITEM 8. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING AND
FINANCIAL DISCLOSURES

         None.
<PAGE>

                                    PART III

     ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, KEY EMPLOYEES, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     The  directors,  key employees  and  executive  officers of the Company and
their ages as of the date of this 10-KSB are as follows:

<TABLE>
<CAPTION>

Name                                        Age         Position with the Company
----------------------                    ------        -------------------------------------------------
<S>                                       <C>           <C>

R. Ramin Kamfar                             35          Chairman and Chief Executive Officer and Director
Sanford Nacht                               66          President and Chief Operating Officer
Jerold E. Novack                            43          Chief Financial Officer, Treasurer and Secretary
Jason Gennusa                               40          Vice President - Manufacturing
Andrew Gennusa                              33          Vice President - Construction
Michael Ryan                                43          Vice President - Franchise Services
Rocco Fiorentino                            43          Vice President - Business Development
Barry Levine                                49          Vice President - Coffee
Robert Williams                             49          Vice President - Coffee
Keith F. Barket/(1)/(2)                     37          Director
Karen Hogan/(1)                             37          Director
Edward McCabe/(2)                           60          Director
Leonard Tannenbaum                          27          Director

</TABLE>

(1) Member of Audit Committee
(2) Member of Compensation Committee
-------------------------------------

     Mr.  Kamfar has served as a Director  since  founding  the  Company  and as
Chairman  and Chief  Executive  Office  since  December  1998.  From May 1996 to
December  1998,  he  served as  President  and Chief  Executive  Officer  of the
Company.  Between  October 1993 and May 1996,  Mr.  Kamfar served in a number of
functions, including Co-President and Co-Chief Executive Officer of the Company.
Between 1988 and 1993, he worked in the  Investment  Banking  Division of Lehman
Brothers  Inc.,  New York,  NY, most recently as a Vice  President in the firm's
Private  Placement Group.  Prior to Lehman Brothers,  Mr. Kamfar worked at First
Growth  (U.K.)  Ltd.  where he gained  experience  in real  estate  finance  and
development.  Mr. Kamfar has a B.S. degree with  distinction in Finance from the
University of Maryland and an M.B.A. degree with distinction in Finance from The
Wharton School at the University of Pennsylvania.

     Mr.  Nacht has  served as  President  and Chief  Operating  Officer  of the
Company since December 1998. From September 1997 to December 1998, Mr. Nacht, as
President of Sterling  Management  Group, LLC,  Princeton,  NJ, served Manhattan
Bagel  Company,  Inc. as a management and  operations  consultant.  From 1995 to
1997,  Mr.  Nacht was  employed by York  Management  Services,  Inc.,  a private
investment and turnaround management company located in Somerset, NJ, in various
positions  including  President and Chief Executive Officer.  From 1990 to 1994,
Mr. Nacht was Chief  Executive  Officer for Gordon  Construction,  New York, New
York.  From 1974 to 1985, Mr. Nacht served as a regional  Master  Franchisor for
ERA Real Estate,  where he developed the New Jersey and Pennsylvania markets for
ERA.  Mr.  Nacht has an  undergraduate  degree  from the  Wharton  School at the
University of Pennsylvania and an M.B.A. degree from Pace University.

<PAGE>

     Mr.  Novack joined the Company as Vice  President-Finance  in June 1994 and
has served as Chief Financial  Officer since January 1999. From 1991 to 1994, he
served  as Vice  President/Controller  of The  Outdoor  Furniture  Store,  Inc.,
Woodridge,  NJ a  specialty  retail  chain.  From  1988 to 1991,  he  served  as
Controller  for  Richmond  Ceramic  Tile,  Inc.,  New York,  NY a  retailer  and
distributor  of ceramic tile.  From 1985 to 1988, Mr. Novack served as Assistant
Controller for Brooks  Fashion  Stores,  Inc.,  New York, NY a specialty  retail
chain.  Prior to 1985,  Mr.  Novack  served as Import  Division  Controller  for
Mercantile  Stores  Company,  Inc., New York, NY a department  store chain.  Mr.
Novack has a B.S. degree in Accounting from Brooklyn College, City University of
New York.

     Mr.  Jason  Gennusa  has served as Vice  President  -  Manufacturing  since
November 1998. Mr. Gennusa is a co-founder of Manhattan Bagel Company,  Inc. and
served as President of that company since 1987.

     Mr.  Andrew  Gennusa  has served as Vice  President  -  Construction  since
November 1998. Mr. Gennusa is a co-founder of Manhattan Bagel Company,  Inc. and
served as a Vice President of that company since 1987.

     Mr. Ryan has served as Vice  President - Franchise  Services of the Company
since  November 1998.  From 1995 to November 1998, Mr. Ryan served  initially as
Director of Operations,  and subsequently as Vice President - Franchise Services
of Manhattan  Bagel  Company,  Inc.  From 1994 to 1995, he served as Director of
Operations  for T.J.  Cinnamons,  Secaucus,  New Jersey.  From 1973 to 1994,  he
served in various  capacities at Dunkin  Donuts,  most  recently as  Development
Manager.

     Mr.  Fiorentino has served as Vice  President - Development  since November
1998.  From May 1996 to  November  1998,  Mr.  Fiorentino  served as Director of
Business  Development  of Manhattan  Bagel  Company,  Inc. From 1985 to 1996, he
served as President of Specialty Bakeries, Inc., Moorestown, NJ, a franchisor of
Bagel  Builders,  a company  which he  co-founded  and sold to  Manhattan  Bagel
Company, Inc. in 1996.

     Mr.  Levine  joined the Company as Vice  President-Coffee  in October 1996.
From 1985 to 1996, he served as  co-founder  and co-Chief  Executive  Officer of
Willoughby's,  Branford,  CT where  he  jointly  directed  coffee  sourcing  and
roasting,  site  selection,  store design,  operations,  strategic  planning and
development.  From  1980 to 1987 he  co-founded  and  operated  New  York  Bread
Express,  New York, NY a wholesale baked goods distributor.  Prior to that time,
Mr. Levine held various positions in the publishing industry.

     Mr. Williams joined the Company as Vice  President-Coffee  in October 1996.
From 1985 to 1996, he served as  co-founder  and co-Chief  Executive  Officer of
Willoughby's,  Branford,  CT where  he  jointly  directed  coffee  sourcing  and
roasting,  site  selection,  store design,  operations,  strategic  planning and
development.  From  1980 to 1987 he  co-founded  and  operated  New  York  Bread
Express,  New York, NY a wholesale baked goods  distributor.  Prior to that time
Mr. Williams held various positions in the publishing industry.

     Mr.  Barket has served as a director  of the Company  since June 1995.  Mr.
Barket is the  Managing  Director - Real  Estate for Angelo,  Gordon & Co.,  New
York,  NY.  From 1988 to 1997,  Mr.  Barket was a Managing  Director of Amerimar
Enterprises Inc., New York, NY, a real estate investment and development company
during  which time he was involved in a variety of office,  retail,  residential
and hotel projects. From 1984 to 1986, he worked as a senior tax accountant with
Arthur  Andersen & Co., New York, NY. Mr. Barket has B.A. degree from Georgetown
University  and an M.B.A.  degree from The Wharton  School at the  University of
Pennsylvania.

<PAGE>

     Mr. McCabe has served as Director of the Company since  February  1997. Mr.
McCabe is Chief Executive Officer of Powerhouse Partnership, Inc., New York, NY,
an advertising  and  communications  company.  From 1991 to 1998, Mr. McCabe was
Chief  Executive  Officer of McCabe & Company,  New York, NY, an advertising and
communications company. From 1967 to 1986 he served in various capacities,  most
recently as President and Worldwide Creative Director at Scali, McCabe,  Sloves,
Inc. New York, NY, an advertising agency he co-founded.

     Ms. Hogan has served as a director of the Company since December 1997. From
1992 to 1997, Ms. Hogan served as Senior Vice President, Preferred Stock Product
Management at Lehman Brothers,  Inc., New York, NY. From 1985 to 1992, Ms. Hogan
served as Vice President, New Product Development Group at Lehman Brothers, Inc.
Ms Hogan has a B.S.  degree from the State  University of New York at Albany and
an M.B.A. degree in Finance and Economics from Princeton University.

     Mr.  Tannenbaum,  C.F.A., 27, has served as a director of the Company since
March 1999. Mr. Tannenbaum is currently a managing partner at NYFM Capital,  LLC
which he founded in 1999.  From April 1997 to 1999, he was a principal  with LAR
Management,  Inc.,  which  manages a $50,000,000  hedge fund.  From June 1996 to
April 1997, he was an associate with Pilgrim Baxter, a mutual fund manager. From
1994 to 1996,  he was an  Assistant  Vice  President  and  analyst  in the Small
Company Group at Merrill Lynch.  Mr.  Tannenbaum is also a director of Westower,
Inc. and General Devices,  Inc., each a publicly traded company.  Mr. Tannenbaum
is the  designee of BET  Associates,  L.P. Mr.  Tannenbaum  is a graduate of The
Wharton  School of The  University  of  Pennsylvania,  where he received a BS in
Strategic Management and an MBA in Finance.

     All directors currently serve for one-year terms and until their successors
have been elected and qualified.  Officers are elected annually and serve at the
discretion of the board.  There are no family  relationships  between any of the
directors or  executive  officers of the Company  except that Jason  Gennusa and
Andrew Gennusa are brothers.

<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation

     The  following   table   provides   certain   information   concerning  the
compensation  earned by the  Company's  Chief  Executive  Officer  for  services
rendered  in all  capacities  to the  Company  during  1998,  and any  executive
officers of the Company who received  compensation  in excess of $100,000 during
1997 and 1998 ("Named Executive Officers").

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                                                          Long Term
                                                                                                        Compensation
                                                           Annual Compensation                             Awards
                                                                                        Securities
                                                                                        Underlying        All Other
                                                                     Other Annual        Options/     Compensation ($)
   Name and Principal Position        Salary ($)     Bonus ($)     Compensation ($)      SARs (#)
<S>                                  <C>             <C>           <C>                  <C>                <C>   

R. Ramin Kamfar.................       $137,500         $68,750       $24,000(1)                 -            -
   Chairman and Chief Executive
   Officer

Sanford Nacht...................       $236,666(2)     $200,000             -              250,000            -
   President and Chief Operating
   Officer

Jerold E. Novack................       $118,462        $100,000       $12,000(1)                 -            -
   Chief Financial Officer

Barry Levine....................       $107,885               -        $6,000(1)            40,000            -
   Vice President - Coffee

Robert Williams.................       $107,885               -        $6,000(1)            40,000            -
   Vice President - Coffee
-----------------
</TABLE>

     (1) Represents car and commuting allowances for the respective individuals.

     (2) Includes  $220,000 paid by Manhattan  Bagel Company,  Inc. prior to its
acquisition by the Company on November 24, 1998.

<PAGE>

Stock Option Grants

     Set forth  below is  information  on grants of stock  options for the Named
Executive Officers for the period December 28, 1997 to December 27, 1998.

                              OPTION GRANTS IN 1998

                                Individual Grants
<TABLE>
<CAPTION>


                                                                                                 Potential Realizable
                                  Number of      Percentage of                                         Value At Assumed
                                 Securities      Total Options     Exercise                          Annual Rates of
                                 Underlying        Granted to        Price                             Stock Price
                                   Option         Employees in      ($ per       Expiration            Appreciation
                                   Granted        Fiscal Year       share)          Date           for Option Term (1)
                                                                                                   5%           10%
<S>                              <C>             <C>                 <C>          <C>           <C>           <C>

Sanford Nacht...........          250,000         30.1%             $1.00         11/24/08      $157,224      $398,435
Barry Levine............           40,000          4.8%             $1.00         10/20/08       $25,156       $63,750
Robert Williams.........           40,000          4.8%             $1.00         10/20/08       $25,156       $63,750
</TABLE>

----------------------

     (1) The potential  realizable  value is calculated based on the term of the
option at the time of grant (ten years).  Assumed stock price appreciation of 5%
and 10% is based on the fair value at the time of grant.

Fiscal Year-End Option Values

     The  following  table sets forth  certain  information  with respect to the
stock  options  held at  December  27,  1998 by the  Company's  Named  Executive
Officers.

                               1998 OPTION VALUES
<TABLE>
<CAPTION>
                                            Number of
                                      Securities Underlying                         Value of Unexercised
                                       Unexercised Options                          In-the-Money Options
                                           At Year End                               at Year End ($) (1)
          Name                  Exercisable          Unexercisable           Exercisable           Unexercisable
<S>                              <C>                   <C>                    <C>                   <C> 

R. Ramin Kamfar.......            193,735               174,999               $12,027                 -
Jerold E. Novack......            173,324                20,000                    -                  -
Sanford Nacht.........                 -                250,000                    -               $31,250
Barry Levine..........            120,000                    -                 $5,000                 -
Robert Williams.......            120,000                    -                 $5,000                 -
</TABLE>

-------------------------

     (1)......Calculated  based on an assumed  share  price of $1.125 per share,
less the exercise price payable for such shares.

<PAGE>

Employment Contracts

     As of February 1999, the Company  approved a new employment  agreement with
Mr. Kamfar, the Company's  Chairman and Chief Executive  Officer.  The agreement
expires  on  December  31,  2000 but is  automatically  renewed  for  additional
one-year  periods  commencing  each January 1 unless  either party gives written
notice to the other of its desire not to renew such term,  which  notice must be
given no later than  ninety  (90) days prior to the end of each term on any such
renewal. The agreement provides for a compensation package of $175,000 per year,
and an annual  performance  bonus of up to 50% of the base  salary for  calendar
year  1999  and any  subsequent  calendar  year.  Each  bonus  is  based  on the
attainment of certain corporate and individual goals. Pursuant to the agreement,
Mr. Kamfar has agreed to maintain the  confidentiality  of any  confidential  or
proprietary information of the Company.

     In the event that the Company  terminates Mr.  Kamfar's  employment  upon a
change in control or terminates Mr. Kamfar's employment other than for cause, he
will be paid  severance  compensation  equal to two times his annual base salary
(at the rate  payable at the time of such  termination)  plus an amount equal to
the greater of two times the amount of his bonus for the calendar year preceding
such  termination or 25% of his base salary.  For a period of one year following
Mr. Kamfar's  voluntary  termination or termination for cause, Mr. Kamfar cannot
perform  services for, have an equity interest (except for an interest of 10% or
less in an entity whose securities are listed on a national securities exchange)
in any  business  (other than the  Company)  or  participate  in the  financing,
operation,  management or control of, any firm,  corporation or business  (other
than the Company) that engages in the  marketing or sale of specialty  coffee as
its principal business.

     Mr. Kamfar's employment  agreement defines a "change of control" as: 1) the
acquisition  of more than 40% of the  voting  stock of the  Company  by a single
person or group;  2) a change in the  majority  of the Board of  Directors  as a
result of a cash tender offer, merger, sale of assets or contested election;  3)
the  approval  by  shareholders  of the  Company  of a merger  or sale of all or
substantially  all of the Company's  assets;  4) the closing of a transaction in
which more than 50% of the Company's voting power is transferred and 5) a tender
offer  which  results  in a person  or a group  acquiring  more  than 40% of the
Company.

     As of February 1999, the Company  approved a new employment  agreement with
Mr. Novack, the Company's Chief Financial Officer. The agreement expires on June
30, 2000.  The  agreement  provides for a  compensation  package of $130,000 per
year, increasing to $150,000 per year on July 1, 1999, and an annual performance
bonus  of 25% to 50% of the  base  salary  based on the  attainment  of  certain
corporate,  departmental and individual  goals.  Pursuant to the agreement,  Mr.
Novack  has  agreed to  maintain  the  confidentiality  of any  confidential  or
proprietary information of the Company.

     In the event that the Company terminates Mr. Novack's employment other than
for cause, he will be paid severance  compensation  equal to his base salary (at
the rate payable at the time of such  termination)  for a period of nine months.
In the event Mr. Novack terminates his employment  voluntarily,  he will be paid
severance compensation equal to his base salary (at the rate payable at the time
of such  termination)  for a period  of six  months.  For a  period  of one year
following Mr.  Novack's  voluntary  termination  or termination  for cause,  Mr.
Novack  cannot  perform  services for,  have an equity  interest  (except for an
interest of 5% or less in an entity  whose  securities  are listed on a national
securities  exchange) in any business (other than the Company) or participate in
the  financing,  operation,  management or control of, any firm,  corporation or
business that engages in the marketing or sale of specialty  coffee or bagels as
its principal business.

<PAGE>

     As of November 24, 1998, the Company  entered into an employment  agreement
with Mr. Nacht, the Company's  President.  The agreement  expires on December 1,
2000, but is automatically renewed for additional one-year periods unless either
party  gives  notice to the other of its desire  not to renew  such term,  which
notice must be given no later than ninety (90) days prior to the commencement of
any such renewal.  The agreement provides for a compensation package of $160,000
per year, an annual service bonus equal to twenty-five (25%) percent of the base
salary payable during each fiscal year, and an annual performance bonus of up to
twenty-five (25%) percent of the base salary payable during each fiscal year. In
lieu of any of the foregoing  bonus  provisions for the year ending December 31,
1998, Mr. Nacht is entitled to a guaranteed bonus of (i) $100,000 payable within
ten days after the  effective  date of the plan of  reorganization  of Manhattan
Bagel Company,  Inc. and (ii) $100,000 payable during calendar year 1999, at the
same time as 1998 bonuses are paid to other  executive  employees of the Company
but in no event later than March 31, 1999. Pursuant to the agreement,  Mr. Nacht
has agreed to maintain the  confidentiality  of any  confidential or proprietary
information of the Company.

     In the event that the Company  terminates Mr. Nacht's employment other than
for cause,  he will be paid  severance  compensation  equal to his  annual  base
salary  (at the rate  payable at the time of such  termination)  for a period of
nine months.  In the event the Company  elects not to  automatically  extend Mr.
Nacht's  employment for one year at the end of each term of his employment,  Mr.
Nacht will be paid  severance  compensation  equal to his annual base salary (at
the rate  payable at the time of such  termination)  for a period of six months.
For a period of two years following Mr. Nacht's termination for any reason other
than an unremedied material default by the Company,  Mr. Nacht cannot,  directly
or  indirectly,  within 50 miles of any  location  operated  by the Company or a
franchisee,  conduct  or  have an  interest  in,  or  consult  for or  have  any
relationship with any business 25% or more of the sales of which are represented
by sales of coffee and bagels.

     As of November 24, 1998, the Company  entered into an employment  agreement
with Mr. J. Gennusa, the Company's Vice President - Manufacturing. The agreement
expires on November  23,  2000,  but is  automatically  renewed  for  additional
one-year periods unless either party gives notice to the other of its desire not
to renew such term,  which  notice  must be given no later than ninety (90) days
prior to the  commencement  of any such renewal.  The  agreement  provides for a
compensation  package of $132,500 per year, an annual performance bonus of up to
twenty-five  (25%) percent of the base salary payable during each fiscal year if
the  annual  operating  budget  of the  Company  for such  fiscal  year has been
achieved,  and an annual performance bonus of up to twenty-five (25%) percent of
the base salary  payable  during each  fiscal year if the  operating  budget for
which Mr. J. Gennusa is responsible is achieved. In addition, Mr. J. Gennusa has
been granted  options to purchase up to 250,000  shares of the Company's  common
stock at an exercise  price of $1.656,  which options  expire ten years from the
date of grant. Pursuant to the agreement,  Mr. J. Gennusa has agreed to maintain
the  confidentiality  of any  confidential  or  proprietary  information  of the
Company. In the event that Mr. J. Gennusa's  employment  agreement is terminated
for any reason other than the  expiration of its term,  the Company shall not be
obligated to pay any  compensation  or expenses or provide other  benefits other
than those accrued to the date of termination.

     As of November 24, 1998, the Company  entered into an employment  agreement
with Mr. A. Gennusa, the Company's Vice President - Construction.  The agreement
expires on November  23,  2000,  but is  automatically  renewed  for  additional
one-year periods unless either party gives notice to the other of its desire not
to renew such term,  which  notice  must be given no later than ninety (90) days
prior to the  commencement  of any such renewal.  The  agreement  provides for a
compensation  package of $132,500 per year, an annual performance bonus of up to
twenty-five  (25%) percent of the base salary payable during each fiscal year if
the  annual  operating  budget  of the  Company  for such  fiscal  year has been
achieved,  and an annual performance bonus of up to twenty-five (25%) percent of
the base salary  payable  during each  fiscal year if the  operating  budget for
which Mr. A. Gennusa is responsible is achieved. In addition, Mr. A. Gennusa has
been granted  options to purchase up to 250,000  shares of the Company's  common
stock at an exercise  price of $1.656,  which options  expire ten years from the
date of grant. Pursuant to the agreement,  Mr. A. Gennusa has agreed to maintain
the  confidentiality  of any  confidential  or  proprietary  information  of the
Company. In the event that Mr. A. Gennusa's  employment  agreement is terminated
for any reason other than the  expiration of its term,  the Company shall not be
obligated to pay any  compensation  or expenses or provide other  benefits other
than those accrued to the date of termination.


<PAGE>

Directors' Compensation

     Each  non-employee  director  of the Company is paid $1,000 for each of the
quarterly Board meetings of each calendar year,  $500 for each additional  Board
meeting held in the same calendar year and $250 for each committee meeting. Such
payments  are made in Common Stock of the Company.  Employee  directors  are not
compensated for service provided as directors.  Additionally,  each non-employee
director receives stock options to purchase 10,000 shares of Common Stock on the
date on which such person  first  becomes a  director,  and on October 1 of each
year if, on such date,  he or she shall have  served on the  Company's  Board of
Directors for at least six months.  The exercise  price of such options shall be
equal to the market  value of the shares of Common  Stock on the date of grant.
All directors are  reimbursed  for  out-of-pocket  expenses  incurred by them in
connection with attendance of Board meetings and committee meetings.

Indemnification of Directors and Officers and Related Matters

     The Company's  Certificate of Incorporation  limits,  to the maximum extent
permitted  by the General  Corporation  Law of the State of Delaware  ("Delaware
Law"), the personal liability of directors and officers for monetary damages for
breach  of  their  fiduciary  duties  as  directors  and  officers  (other  than
liabilities arising from acts or omissions which involve intentional misconduct,
fraud or knowing  violations of law or the payment of distributions in violation
of Delaware Law). The  Certificate of  Incorporation  provides  further that the
Company  shall  indemnify  to the fullest  extent  permitted by Delaware Law any
person made a party to an action or  proceeding  by reason of the fact that such
person was a director, officer, employee or agent of the Company. Subject to the
Company's  Certificate  of  Incorporation,  the Bylaws  provide that the Company
shall  indemnify  directors  and officers for all costs  reasonably  incurred in
connection with any action, suit or proceeding in which such director or officer
is made a party by virtue of his being an officer  or  director  of the  Company
except where such director or officer is finally  adjudged to have been derelict
in the performance of his duties as such director or officer.

     At present,  there is no pending  litigation  or  proceeding  involving any
director,  officer,  employee or agent of the Company where indemnification will
be required or permitted.  The Company is not aware of any threatened litigation
or  proceeding  which may result in a claim for such  indemnification.  

<PAGE>

     ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth certain  information  regarding  beneficial
ownership of the  Company's  Common Stock as of April 7, 1999 (i) by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than five percent of the Company's Common Stock,  (ii) by each of the Named
Executive Officers,  (iii) by each of the Company's directors and nominees,  and
(iv) by all directors and executive  officers as a group.  The Company  believes
that the persons and entities named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially  owned by
them, subject to community property laws, where applicable.

<TABLE>
<CAPTION>


                                                                                       Shares
                                                                                    Beneficially
Name and Address of Beneficial Owner                                                   Owned                Percentage
<S>                                                                                  <C>                      <C>  

Fidelity Management & Research...........................................             1,459,600                7.5%
   82 Devonshire Street
   Boston, MA  02109

R. Ramin Kamfar..........................................................            724,762(1)                3.6%
   Chairman and Chief Executive Officer
   And Director

Sanford Nacht                                                                             - (2)                   *
     President and Chief Operating Officer

Jerold E. Novack ........................................................            517,407(3)                2.5%
   Vice President - Finance

Barry Levine ............................................................            184,656(4)                   *
   Vice President - Coffee

Robert Williams .........................................................            184,656(4)                   *
   Vice President - Coffee

Keith F. Barket .........................................................             60,212(5)                   *
   Director

Edward McCabe ...........................................................             32,185(6)                   *
   Director

Karen Hogan .............................................................             46,037(7)                   *
   Director

Leonard Tannenbaum ......................................................                 7,500                   *
   Director

All directors and executive officers   
   As a group (11 persons)...............................................             2,817,415               13.2%
</TABLE>

____________________
*Less than one percent (1%).

<PAGE>

     (1)  Includes  193,735  shares  which may be acquired  upon the exercise of
options  which will be  exercisable  within 60 days.  Does not  include  141,666
shares underlying stock options which are not exercisable within 60 days.

     (2) Does not include 250,000 shares  underlying stock options which are not
exercisable within 60 days.

     (3)  Includes  298,324  shares  which may be acquired  upon the exercise of
options  which will be  exercisable  within 60 days.  Does not  include  145,000
shares underlying stock options which are not exercisable within 60 days.

     (4)  Includes  120,000  shares  which may be acquired  upon the exercise of
presently exercisable options.

     (5)  Includes  40,000  shares  which may be acquired  upon the  exercise of
presently exercisable options.

     (6)  Includes  30,000  shares  which may be acquired  upon the  exercise of
presently exercisable options.

     (7)  Includes  20,000  shares  which may be acquired  upon the  exercise of
presently exercisable options.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On August  29,  1997,  the  Company  sold two stores to 723 Food  Corp.,  a
corporation owned by Jerold E. Novack and Richard Windisch.  Mr. Novack is Chief
Financial  Officer of the Company.  Mr.  Windisch  served as the Company's  Vice
President - Operations  from January 1998 to February 1999,  and, from September
1994 to July 1996. The stores  included an existing  operation and another store
which was partially constructed. The purchase price was $575,000, which was part
in cash and notes.  This  transaction  was approved by the Board of Directors of
the Company.  The Company  believes  that the terms of this  transaction  are as
favorable  to  the  Company  as  those  which  could  have  been  obtained  from
unaffiliated third parties.

     In fiscal year ended December 28, 1997, Capico International, a corporation
for which Ronald Hari, a former director of the Company, serves as President and
Chief  Executive  Officer,  was paid a consulting  fee of $70,000 by the Company
with  respect  to  assistance  in  developing   international   and   multi-unit
franchising.

     On or about March 25, 1998,  the  officers of the Company,  R. Ramin Kamfar
and Jerold E.  Novack,  signed an  agreement  to  purchase  four stores from the
Company.  Mr. Kamfar is Chief Executive Officer of the Company and Mr. Novack is
Chief Financial Officer. The purchase price was $1,250,000. This transaction was
approved by the Board of Directors of the Company. The Company believes that the
terms of this  transaction  are as  favorable to the Company a those which could
have been obtained from unaffiliated third parties.

     Leonard Tannenbaum, a new director of the Company, is a limited partner and
ten (10%) owner in BET  Associates,  L.P.  ("BET").  On November 24,  1998,  the
Company  completed a $5 million dollar debt  transaction  with BET, which funds
were used for the acquisition of Manhattan Bagel. See  "Management's  Discussion
and Analysis - Liquidity and Capital  Resources." Mr.  Tannenbaum  serves on the
Company's Board of Directors as the designee of BET pursuant to the terms of the
foregoing transaction.

<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     3.1 Articles of incorporation (1)

     3.2 By-laws (2)

     4.1 Specimen Common Stock Certificate of Registrant (2)

     4.2  Form  of  Representatives'   Warrant  Agreement,   including  Form  of
Representatives Warrant (2)

     4.3 Certificate of Designation of Series B Preferred Stock (5)

     4.4 Registration  Rights Agreement by and among the Registrant and Barry H.
Levine and Robert B. Williams (4)

     4.5 Promissory Note by and between the Registrant and Robert B. Williams(4)

     4.6 Promissory Note by and between the Registrant and Barry H. Levine (4)

     10.1 1994 Stock Plan (2)

     10.2 Employment Agreement by and between the Registrant and Barry H. Levine
(4)

     10.3  Employment  Agreement  by and  between the  Registrant  and Robert B.
Williams (4)

     10.4 1999 Employment Agreement with R. Ramin Kamfar (to be filed)

     10.5 1999 Employment Agreement with Jerold Novack (to be filed)

     10.6 Stock  Purchase  Agreement  by and among  Barry H.  Levine,  Robert B.
Williams and Willoughby's Incorporated and the Registrant (4)

     10.7 Agreement with Willoughby's Incorporated (2)

     10.8 Investor Rights Agreement (2)

     10.9 Directors' Option Plan (2)

     10.10 Form of Franchise Agreement (6)

     10.11 Form of Store Franchise Sale Agreement (6)

     10.12  Manhattan  Bagel  Company,  Inc.  -  Debtor  in  Possession  Amended
Acquisition Agreement and Exhibits (7)

     10.13  Manhattan Bagel Company,  Inc. - Debtor in Possession  First Amended
Joint Plan of Reorganization (7)

     10.14  Manhattan  Bagel Company,  Inc. - Debtor in Possession  Confirmation
Order (7)

     10.15 1999 Employment Agreement with Sanford Nacht (to be filed)

     11.1  Statement  re  computation  of per share  earnings  (included  in the
Financial Statements forming a part of this 10-KSB)

<PAGE>

     21.1 List of Subsidiaries

     27.1 Financial Data Schedule

------------

     (1) Incorporated by reference to Exhibit 3.2 from Registrant's registration
statement on Form SB-2 (33-95764).

     (2) Incorporated by reference from Registrant's  registration  statement on
Form SB-2 (33-95764).

     (3) Incorporated by reference from Registrant's  Current Report on Form 8-K
dated July 12, 1996.

     (4) Incorporated by reference from Registrant's  Current Report on Form 8-K
dated November 12, 1996.

     (5) Incorporated by reference from Registrant's  Report on Form 10-KSB, for
the Fiscal Year Ended December 29, 1996.

     (6) Incorporated by reference from Registrant's  Report on Form 10-KSB, for
the Fiscal Year Ended December 28, 1997.

     (7) Incorporated by reference from Registrant's  Current Report on Form 8-K
dated November 24, 1998.



(b) Reports on Form 8-K

     During the fourth  quarter of 1998,  the Company filed a Report on Form 8-K
with respect to the  acquisition  of Manhattan  Bagel Company,  Inc.,  Debtor In
Possession.

<PAGE>

                                                   
                                   Signatures

     In accordance  with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                         New World Coffee-Manhattan Bagel, Inc.

                                         By: /s/Ramin Kamfar
                                             -------------------------------
                                             Ramin Kamfar
                                             Chief Executive Officer

Dated: April 12, 1999

     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  Registrant and in the capacities and on
the dated indicated.

<TABLE>
<CAPTION>

            Signature                                   Title                             Date
<S>                                <C>                                               <C>    

/s/Ramin R. Kamfar                 Chairman of the Board of Directors; Chief
----------------------             Executive Officer                               April 12, 1999
Ramin R. Kamfar                    

/s/Jerold E. Novack                Chief Financial Officer                         April 12, 1999
----------------------
Jerold E. Novack

/s/Ed McCabe                       Director                                        April 12, 1999
----------------------
Ed  McCabe

/s/Keith Barket                    Director                                        April 12, 1999
----------------------
Keith Barket

/s/Leonard Tannenbaum              Director                                        April 12, 1999
----------------------
Leonard Tannenbaum

/s/Karen Hogan                     Director                                         April 12, 1999
----------------------
Karen Hogan
</TABLE>

<PAGE>
                                             
                    NEW WORLD COFFEE - MANHATTAN BAGEL, INC.
                                AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                                         Page
<S>                                                                                                      <C>   

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                                  F-1

FINANCIAL STATEMENTS:

    Consolidated Balance Sheet as of December 27, 1998                                                    F-2

    Consolidated Statements of Operations for the Years Ended December 27, 1998 and December 28,                        
       1997                                                                                               F-3

    Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 27,                         
       1998 and December 28, 1997                                                                         F-4

    Consolidated Statements of Cash Flows for the Years Ended December 27, 1998 and December 28,                        
       1997                                                                                               F-5 - F-6

    Notes to Consolidated Financial Statements                                                            F-7 - F-19
</TABLE>

<PAGE>
                                                               

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

     To New World Coffee - Manhattan Bagel, Inc.:

     We have audited the  accompanying  consolidated  balance sheet of New World
Coffee - Manhattan Bagel,  Inc. (a Delaware  corporation) and subsidiaries as of
December  27,  1998,  and the related  consolidated  statements  of  operations,
changes in stockholders'  equity and cash flows for the years ended December 27,
1998 and December 28, 1997. 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 in accordance  with  generally  accepted  auditing
standards.  Those standards 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the financial position of New World Coffee - Manhattan
Bagel,  Inc. and  subsidiaries  as of December 27, 1998 and the results of their
operations  and their  cash  flows for the years  ended  December  27,  1998 and
December 28, 1997, in conformity with generally accepted accounting principles.






Arthur Andersen LLP
New York, New York
April 12, 1999



















                                      F-1

<PAGE>


            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 27, 1998




                                     Assets

<TABLE>
<CAPTION>

<S>                                     `                                                                   <C>    

Current Assets:
    Cash and cash equivalents                                                                                $5,269,627
    Franchise and other receivables, net                                                                        964,609
    Current maturities of notes receivable                                                                    2,103,079
    Inventories                                                                                               1,355,730
    Prepaid expenses and other current assets                                                                   206,073
    Assets held for resale                                                                                    1,633,053
                                                                                                              ---------
                 Total current assets                                                                        11,532,171

Property, plant and equipment, net                                                                            6,889,876
Notes and other receivables, net                                                                              1,391,929
Trademarks, net                                                                                               9,966,667
Goodwill, net                                                                                                 7,097,670
Deposits and other assets                                                                                     1,215,124
                                                                                                              ---------
                 Total Assets                                                                               $38,093,437
                                                                                                             ==========

                                         Liabilities And Stockholders' Equity
Current Liabilities:
    Accounts payable                                                                                         $1,750,647
    Accrued expenses                                                                                          7,279,646
    Current portion of long-term debt                                                                         1,633,624
    Current portion of obligations under capital leases                                                         398,764
                                                                                                              ---------
                 Total current liabilities                                                                   11,062,681 

Long-term debt                                                                                               13,530,749
Obligations under capital leases                                                                                115,591
Deferred rent                                                                                                   261,638
Other liabilities                                                                                             4,179,636
Commitments and contingencies (Note 13)
Stockholders' equity:
    Preferred stock, $.001 par value; 2,000,000 shares authorized; 0 shares issued and                                -
       outstanding
    Series A convertible preferred stock, $.001 par value; 400 shares authorized, 0 shares                              
       issued and outstanding                                                                                         -
    Series B convertible preferred stock, $.001 par value; 225 shares authorized, 58.5                                  
       shares issued and outstanding                                                                           
    Common stock, $.001 par value; 20,000,000 shares authorized; 19,442,644 shares issued                               
       and outstanding                                                                                           19,443
    Additional paid-in capital                                                                               33,694,196
    Accumulated deficit                                                                                     (24,770,496)
                                                                                                             ---------- 
                 Total stockholders' equity                                                                   8,943,143
                                                                                                             ----------  
                 Total liabilities and stockholders' equity                                                 $38,093,437
                                                                                                             ========== 
</TABLE>                                                 

     The accompanying  notes are an integral part of this  consolidated  balance
sheet.





                                      F-2

<PAGE>

            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
           FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>

                                                                                            1998             1997
<S>                                                                                       <C>              <C>  

Revenues:
    Retail sales                                                                           $12,361,242      $15,047,353
    Manufacturing revenues                                                                   2,193,145                -
    Franchise-related revenues                                                               2,728,137          820,515
                                                                                             ---------        ---------   
                                                                                            17,282,524       15,867,868



Retail costs                                                                                10,857,259       13,138,623
Manufacturing costs                                                                          1,606,635                -
General and administrative expenses                                                          3,461,839        2,978,532
Depreciation and amortization                                                                1,463,456        2,281,360
                                                                                             ---------       ----------
Loss before provision for store closing, reorganization and noncash charges                  (106,665)      (2,530,647)

Provision for store closings and reorganization costs                                        2,224,212          300,000
Noncash charge in connection with the realization of assets                                  4,235,266        3,480,977
                                                                                             ---------       ---------- 
         Operating loss                                                                     (6,566,143)      (6,311,624)
Interest expense, net                                                                          925,467          424,533
                                                                                             ---------       ----------  
         Net loss                                                                          ($7,491,610)     ($6,736,157)

Basic and diluted net loss per common share                                                    $(0.55)          $(0.80)
Weighted average number of common shares outstanding:
       Basic and diluted                                                                    13,715,692        8,442,198

</TABLE>

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












                                      F-3

<PAGE>


            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
           FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997

<TABLE>
<CAPTION>

                                               Series A           Series B                    Additional                 Total
                                           Preferred Stock   Preferred Stock  Common  Stock    Paid-in    Accumulated  Stockholders'
                                           Shares   Amount   Shares   Amount  Shares  Amount   Capital     Deficit        Equity
                                           ---------------   ---------------  --------------  ----------  -----------  -------------
<S>                                        <C>      <C>      <C>      <C>     <C>     <C>      <C>        <C>           <C>

BALANCE, December 29, 1996                  320    $ -        -     $  -    5,070,597 $5,071  $20,820,136 $(10,542,729) $10,282,478

Shares issued in connection
  with the exercise of stock options
  and bridge financing warrants              -      -         -        -       88,875     89        9,735         -            9,824
Issuance of Series B convertible  
  preferred stock and common stock 
  issued in connection with the 
  conversion of Series A convertible
  preferred stock                          (175)    -        137.50    -      194,440    194         (194)        -              -
Issuance of common stock, net of 
  offering expenses                          -      -         -        -    4,620,670  4,621    4,345,424         -        4,350,045
Common stock issued in connection with 
  the conversion of Series B convertible
  preferred stock                            -      -        (27.75)   -      213,425    213         (213)        -              -
Common stock issued in connection with
  the conversion of Series A                                                                                                   
  convertible preferred stock              (145)    -         -        -    1,411,654  1,412       (1,412)        -              -
Common stock issued in connection with
  the acquisition (Note 10)                  -      -         -        -       34,482     34          (34)       -              -
Net loss                                                                         -         -            -   (6,736,157)  (6,736,157)
                                           -----   -----     -----    -----  --------- -----       -------  -----------   ----------
BALANCE, December 28, 1997                   -      -        109.75    -   11,634,143 11,634   25,173,442  (17,278,886)   7,906,190

Issuance of common stock, net of
 offering expenses                           -      -         -        -    4,353,477  4,354    4,374,209         -       4,378,563
Common stock issued in connection
 with the conversion of Series B                                                                                            
 convertible preferred stock                 -      -       (51.25)    -      481,111    481         (481)        -              -
Common stock issued in connection with 
 the acquisition (Note 10)                   -      -         -        -    2,973,913  2,974    4,147,026         -       4,150,000
Net loss                                                                         -         -         -      (7,491,610)  (7,491,610)
                                           -----   -----    -----    ----- ---------- -------  ----------  -----------   ----------
BALANCE, December 27, 1998                   -    $ -        58.5    $ -   19,442,644 $19,443 $33,694,196 $(24,770,496)  $8,943,143
                                           =====   =====    =====    ===== ========== =======  ==========  ===========   =========
 
</TABLE>

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







                                   F-4

<PAGE>
            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
           FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>

                                                                                              1998            1997
<S>                                                                                         <C>             <C>   

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                                ($7,491,610)     ($6,736,157)
    Adjustments to reconcile net loss to net cash used in operating activities
       Changes due to restructuring and store closing activities:
          Non-cash charge in connection with the realization of assets                         4,235,266       3,480,977
          Provision for store closing costs and restructuring charges                          2,224,212         300,000
       Write-off of fixed assets                                                                   -             778,139
       Depreciation and amortization                                                           1,463,456       2,281,360
       Employee compensation expense paid in common stock                                              -          98,158
       Imputed interest on notes payable                                                               -         121,039
       Gain on sales of fixed assets                                                         (1,623,442)       (444,018)
       Provision for uncollectable notes receivable                                              198,331               -
       Changes in operating assets and liabilities-
          Receivables                                                                             54,708        198,661
          Inventories                                                                             22,111       (181,884)
          Prepaid expenses                                                                      (54,366)          82,619
          Deposits and other assets                                                              564,041       (593,935)
          Accounts payable                                                                       163,956          55,478
          Accrued expenses                                                                    (2,235,537)       (890,738)
          Deferred rent                                                                         (183,148)       (169,500)
          Other Liabilities                                                                          --          227,314
                                                                                               ---------       ---------
                    Net cash used in operating activities                                     (2,662,022)     (1,392,487)
                                                                                               ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                                        (835,771)     (2,140,200)
    Proceeds from sales of fixed assets                                                        3,485,676         466,648
    Net cash paid for acquisitions                                                            (4,902,987)        (41,288)
                                                                                              ----------      ----------
                 Net cash used in investing activities                                        (2,253,082)     (1,714,840)
                                                                                              ----------      ---------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
    Additions to notes receivable                                                            (1,902,409)               -
    Receipt of payments on notes receivable                                                      546,199               -
    Shares issued in connection with the exercise of stock options and                                                   
       bridge financing warrants                                                                       -           9,735
    Issuance of common stock, net of offering expenses                                         4,203,570       3,247,265
    Proceeds from notes payable                                                                7,860,612               -
    Proceeds from capital leases                                                                  43,915               -
    Repayments of capital leases                                                                (386,963)       (171,696)
    Repayments of notes payable                                                               (1,329,207)       (248,750)
                                                                                               ---------        --------   
                    Net cash provided by financing activities                                  9,035,718       2,836,554
                                                                                               ---------       ---------
                    Net increase (decrease) in cash                                            4,120,614       (270,773)

CASH, beginning of year                                                                        1,149,013       1,419,786
                                                                                               ---------       ---------
CASH, end of year                                                                             $5,269,627      $1,149,013
                                                                                               =========       ========= 

</TABLE>




                                      F-5

 <PAGE>
            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
           FOR THE YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>

                                                                           1998                  1997
                                                                           ----                  ----
<S>                                                                       <C>                 <C> 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
    net of amount capitalized                                              $1,036,176          $362,815

NONCASH INVESTING AND FINANCING ACTIVITIES:
    Equipment disposed under capital leases                                    --               161,341
    Equipment acquired under capital leases                                    33,169           227,310
    Notes received from sale of fixed assets                                1,781,000           846,374
    Conversion of Series A, B, and C
     Convertible Preferred Stock to Common Stock                            4,230,054               --
    Conversion of Series A Convertible
     Redeemable Preferred Stock to Common Stock                                --             1,450,000
    Conversion of Series B Convertible                            
     Preferred Stock to Common Stock                                          512,500         1,750,000  
    Issuance of Series B Convertible
     Preferred Stock and Common Stock issued
     in connection with the conversion of 
     Series A Convertible Preferred Stock                                       --              275,000
    Issuance of notes related to acquisitions                              10,500,000               --
    Issuance of Common Stock related to acquisition                         4,150,000               --
    Issance of Common Stock as payment of promissory note                   1,392,500           231,250
    Issuance of Common Stock to vendors as payment
     for property, equipment and services rendered                            485,000           768,750

DETAILS OF ACQUISITION
    Assets acquired                                                        13,062,037               --
    Liabilities assumed                                                    (8,322,528)              --
    Notes issued                                                           (5,500,000)              --
    Estimated accruals at time of acquisition                              (3,600,000)              --
    Value of equity issued                                                 (4,825,000)              --
    Intangible assets acquired                                             17,114,336               --
                                                                           ----------       
        Cash paid for acquisition                                           7,928,845               --
                                                                           ----------       
        Cash acquired                                                       3,025,858               --
                                                                           ----------       
        Net Cash Paid for Acquisition                                       5,430,815               --


</TABLE>
   

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






                                      F-6
<PAGE>
 
            NEW WORLD COFFEE - MANHATTAN BAGEL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     DECEMBER 27, 1998 AND DECEMBER 28, 1997

1. Nature of Business, Organization and Significant Accounting Policies

Nature of Business and Organization

     New World Coffee - Manhattan  Bagel,  Inc.  operates and franchises  coffee
bars, bagel bakeries and integrated  coffee  bar/bagel  bakeries in 18 states in
the Northeastern,  Southeastern and Southwestern  United States, the District of
Columbia,  and  internationally.  The first Company-owned New World Coffee store
opened in 1993 and the first  franchised  New World Coffee store opened in 1997.
At December 27, 1998, the Company's retail system consisted of approximately 335
stores,  including 27 Company-owned and 308 franchised and licensed stores.  The
Company  acquired  the  stock of  Manhattan  Bagel  Company,  Inc.  - Debtor  in
Possession  ("MBC")  on  November  24,  1998,  resulting  in the  addition  of 6
Company-owned and 285 franchised and licensed Manhattan Bagel stores.

     The Company is  vertically  integrated  with bagel  dough and cream  cheese
manufacturing plants in Eatontown, NJ and Los Angeles, CA, and a coffee roasting
plant in Branford,  CT. The Company's products are sold to franchised,  licensed
and   Company-owned   stores   as  well  as  to   wholesale,   supermarket   and
non-traditional outlets.

     The Company is a Delaware corporation and was organized in November 1992.

Principles of Consolidation

     The consolidated  financial  statements  herein include the accounts of the
Company and its wholly owned subsidiaries.  All material  intercompany  accounts
and transactions have been eliminated.

Fiscal Year

     The Company's annual accounting period ends on the last Sunday in December.
The fiscal  year-end  dates for 1998 and 1997 are December 27, 1998 and December
28, 1997, resulting in years containing 52 weeks.

Cash and Cash Equivalents

     The Company  considers  securities  with maturities of three months or less
when purchased to be cash equivalents. The Company had cash equivalents totaling
$624,000 at December  27, 1998 which were  comprised  of money  market  accounts
which costs approximate market value.

Inventories

     Inventories  are  stated at the lower of cost or  market,  with cost  being
determined by the first-in, first-out method.


                                      F-7
<PAGE>

Property, Plant and Equipment

     Property,  plant and  equipment  are  recorded  at cost.  Expenditures  for
maintenance and repairs are generally charged to expense as incurred.  Leasehold
improvements are amortized over the shorter of their useful lives or the term of
the related leases by use of the straight line method.  Depreciation is provided
using the straight-line method over the following estimate useful lives:

        Leasehold improvements                              5 to 15 years
        Store equipment                                     3 to 7 years
        Furniture and fixtures                              5 to 7 years
        Office equipment                                    5 years

Trademarks

     Trademarks  resulting from the  acquisition of MBC are being amortized on a
straight-line basis over a period of 25 years.

Goodwill

     Goodwill  resulting  from the  acquisition  of MBC is being  amortized on a
straight-line basis over a period of 25 years.

Long-Lived Assets

     The Company's  policy is to record  long-lived  assets at cost,  amortizing
these costs over the expected useful lives of the related assets.  In accordance
with Statement of Financial  Accounting  Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," these  assets are  reviewed  on a periodic  basis for  impairment  whenever
events or changes in  circumstances  indicate  that the carrying  amounts of the
assets  may  not be  realizable.  Furthermore,  the  assets  are  evaluated  for
continuing  value and proper useful lives by comparison to expected  future cash
flows.  See Note 4 for  detail  of  impairments  identified  by the  Company  in
performing this evaluation.




                                      F-8
<PAGE>

Franchise Fee Revenue Recognition

     Pursuant to the franchise agreements, franchisees are generally required to
pay an initial  franchise fee and a monthly  royalty  payment equal to 5% of the
franchisee's gross sales.  Initial franchise fees are recognized as revenue when
the Company  performs  substantially  all of its initial services as required by
the franchise agreement. Royalty fees from franchisees are accrued as earned.

     Royalty income,  initial franchise fees and gains on sales of Company-owned
stores to  franchisees  are  included in franchise  revenues. 

Advertising Costs

     The Company expenses advertising costs as incurred.

Deferred Rent

     Certain of the  Company's  lease  agreements  provide  for  scheduled  rent
increases  during  the lease term or for rental  payments  commencing  at a date
other  than  initial  occupancy.  Provision  has  been  made for the  excess  of
operating lease rental expense, computed on a straight-line basis over the lease
term, over cash rentals paid.

Fair Value of Financial Instruments

     Franchise  notes  receivable  (Note 6) are estimated by discounting  future
cash flows  using the  current  rates at which  similar  loans  would be made to
borrowers  with  similar  credit  ratings.  The  fair  value  of  notes  payable
outstanding is estimated by discounting  the future cash flows using the current
rates offered by lenders for similar borrowings with similar credit ratings. The
carrying   amounts  of  franchise  and  other   receivables  and  notes  payable
approximate their fair value.

Reporting Comprehensive Income

     In 1998,  the  Company  adopted  SFAS  No.  130,  "Reporting  Comprehensive
Income."  SFAS No. 130  establishes  new rules for the  reporting and display of
comprehensive  income  and  its  components;  however,  the  adoption  of  this
Statement had no impact on the Company's net income or shareholders' equity.

     Effective  December 28, 1997,  the Company,  as required,  adopted SFAS No.
128, "Earnings Per Share." In accordance with SFAS No. 128, net  earnings/(loss)
per  common  share   amounts   ("basic   EPS")  are  computed  by  dividing  net
earnings/(loss)  by the weighted average number of common shares outstanding and
exclude any potential  dilution.  Net  earnings/(loss)  per common share amounts
assuming dilution ("diluted EPS") are computed by reflecting  potential dilution
of the  Company's  securities.  Basic and diluted EPS are the same for the years
ended  December  27,  1998  and  December  28,  1997,  respectively,  since  all
securities are considered antidilutive.

Segment Disclosure
   
     In June 1997, the FASB issued SFAS No. 131,  "Disclosure  about Segments of
an  Enterprise  and  Related   Information."  SFAS  131,  applicable  to  public
companies,  established new standards for reporting  information about operating
segments in annual financial  statements.  The disclosure prescribed by SFAS 131
is effective  beginning  with the year ended December 31, 1998. The Company does
not believe that it operates in more than one segment.  Net  Earnings/(Loss) Per
Common Share

Income Taxes

     The Company provides for federal and state income taxes using the liability
method in accordance with the Financial Accounting Standards Board ("FASB") SFAS
No. 109.  SFAS No. 109  requires  the  recognition  of  deferred  tax assets and
liabilities  for the expected  future tax  consequences of events that have been
recognized in the Company's financial statements or tax returns.

Stock-Based Compensation

     SFAS No. 123 establishes  financial  accounting and reporting standards for
stock-based  employee  compensation  plans. SFAS No. 123 encourages  entities to
adopt a  fair-value-based  method of accounting  for stock  compensation  plans.
However,  SFAS No. 123 also permits entities to continue to measure compensation
costs under pre-existing accounting pronouncements with the requirement that pro
forma  disclosures of net income and earnings per share be included in the notes
to financial  statements.  In 1997, the Company  elected to adopt the disclosure
requirements of SFAS No. 123 and show pro forma results of net loss and earnings
per share data.


                                      F-9

<PAGE>

Use of Estimates

     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 at the
date of the  financial  statements  and the  reported  amounts of  revenues  and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

Reclassifications

     Certain  reclassifications  have been made to the  prior  year's  financial
statements to conform to the current year presentation.

2.   Acquisition Of Manahattan Bagel Company, Inc.

     On November 24, 1998, the Company  acquired  Manhattan Bagel Company,  Inc.
("MBC") under a plan of reorganization. The purchase price totaled approximately
$21,853,000,  consisting of $7,300,000 of cash paid to MBC creditors; $5,500,000
in notes  payable to MBC  creditors;  $4,150,000 of equity issued in the form of
shares of the Company's common stock and the accrual of certain post acquisition
expenses  of  $4,903,000,   including  indemnifications  of  up  to  $1,500,000,
guarantees of certain  liabilities  of up to $1,500,000 and certain post closing
reorganization costs of up to $1,903,000.

     The purchase  price was  allocated to the assets  acquired and  liabilities
assumed based on management's estimate of their fair market value at the date of
acquisition and the difference  between the cost of acquiring the assets and the
underlying fair market value of the net assets  acquired,  including  identified
intangibles,  was treated as goodwill,  which is being  amortized over 25 years.
The allocation of purchase price was done based on the information  available to
management at that time. Should additional  information come to the attention of
management,  such amounts may be revised  accordingly.  In  connection  with the
acquisition,  two former principals of MBC signed employment  agreements and one
former principal signed a consulting  agreement with the Company which terminate
November 23, 2000.

     The  consolidated  statements  of  operations  of the  Company  include the
results of MBC and its wholly owned subsidiary,  I&Joy,  Inc., since the date of
acquisition.

     Following is the unaudited pro forma presentation as if the purchase of the
had occurred on December 30, 1996 (Unaudited):

                                    Year Ended              Year Ended
                                December 27, 1998        December 28, 1997
     Revenue                        $46,003,000            $55,438,000
     Operating loss                ($10,645,000)          ($31,637,000)
     Net loss                      ($13,575,000)          ($32,598,000)
     Net loss per share               ($0.99)                ($2.79)

     The pro forma information presented above does not purport to be indicative
of the results that actually would have been obtained if the combined operations
had been  conducted  during  the  periods  presented,  nor does it purport to be
indicative of future periods of the combined operations.

                                      F-10

<PAGE>

3.   Other Acquisitions

     On October 25, 1996,  the Company  purchased  five  Willoughby's  locations
(plus one under  construction) and its roasting facility by acquiring the common
stock of  Willoughby's  for total  consideration  of $3,100,000 (net of acquired
debt of $700,000 paid at closing).  This amount  consisted of $600,000 cash paid
at the closing with an additional  $600,000 due on July 1, 1997,  $200,000 worth
of restricted  shares of the Company's  common stock,  and two promissory  notes
totaling  $1,700,000  (Note 8). The purchase  price was  allocated to the assets
acquired and liabilities assumed based on their fair market value at the date of
acquisition and the difference  between the cost of acquiring the assets and the
underlying fair market value of the net assets acquired was treated as goodwill,
which is being amortized over 20 years. In connection with the acquisition,  the
former  shareholders  of  Willoughby's  signed  employment  agreements  with the
Company,  which were  initially  scheduled to terminate in January 1999 but have
since been extended through January 2000.

     On  June  13,  1996,  the  Company   purchased  three  Coopers  Coffee  Bar
("Coopers")  locations  for $242,500  cash and a $770,000 note payable (Note 5).
The  purchase  price was  allocated to the assets  acquired  based on their fair
value  at the  date  of  acquisition  and the  difference  between  the  cost of
acquiring  the  locations,  and the fair  value of the net assets  acquired  was
allocated to goodwill and is being amortized over 10 years.

4.   Impairment Of Long Lived Assets

     During  1997,  the  Company  recorded  a  noncash  charge  to  earnings  of
approximately  $3.5 million  based on their  evaluation  of long lived assets in
accordance  with SFAS 121 and in line with the Company's  strategy to expand the
franchising  program  through the opening of additional new locations as well as
franchising  Company-owned  stores.  This  charge  includes  approximately  $2.6
million in  writedowns  of the book value of the fixed assets of certain  stores
and $121,000  writedown of net goodwill related to an acquisition.  The carrying
values of the stores were  written  down to  estimated  future  discounted  cash
flows.  An additional  $750,000 of expense was recorded to reflect,  among other
things,  prepaid  rent and other  store  costs  estimated  by  management  to be
incurred in connection with underperforming locations.

     In the fourth  quarter  of 1998 the  Company  recorded a noncash  charge to
earnings  of  approximately   $4.2  million  based  on  its  evaluation  of  the
realizability of certain long-lived assets.  This charge includes  approximately
$3.0 million in writedowns of the book value of certain  stores and $1.2 million
in writedowns of goodwill related to the Willoughby's and Coopers  acquisitions.
For  assets  to be held  and  used,  realizability  was  evaluated  based on the
estimated undiscounted future cash flows attributable to such assets as compared
to the book values of such assets. When an impairment existed,  such assets were
written down to their estimated discounted cash flows. For assets to be disposed
of,  realizability  was  evaluated  based on the fair  value of the assets to be
disposed of, which was  determined  based upon  estimated  selling prices of the
locations.

5.  Property and Equipment

     Property and equipment consist of the following as of December 27, 1998:

        Leasehold improvements                                      $6,399,676
        Store/factory equipment                                      2,742,201
        Furniture and fixtures                                       1,188,401
        Office equipment                                             1,924,800
                                                                    ----------
                                                                    12,255,078
        Less-
            Accumulated depreciation and amortization               (1,349,936)
            Allowance for impairment of fixed assets                (4,015,266)
                                                                    ----------
                                                                    $6,889,876
                                                                    ==========

     Depreciation  expense totaled  approximately  $1,212,300 and $2,067,000 for
the years ended December 27,1998 and December 28, 1997, respectively.


                                      F-11

<PAGE>

6.  Notes Receivable

     During  1998,  the  Company  issued  promissory  notes  to  franchisees  to
facilitate their construction of stores and provide other initial operating cash
flows,  including franchise fees. The notes are payable with interest thereon at
rates  ranging  from  6-10%  per  annum  and  are  generally  to be paid in full
simultaneously upon the closing of a subsequent financing by the franchisee. The
notes have terms expiring from November 1999 to November 2004. Substantially all
of the assets of the franchisee's store are pledged as collateral for the notes.

     Included in notes receivable is approximately  $1,190,000 due from officers
of the Company related to the purchase of Company-owned stores.

7.  Other Assets

     Other assets consist of the following as of December 27, 1998:

          Security deposits                             $562,515
          Other                                          652,609
                                                       ---------
                                                      $1,215,124    
                                                       =========

8.  Long-term Debt

<TABLE>
<CAPTION>

     Long-term debt consists of the following at December 27, 1998:

<S>                                                                                  <C>   

          Notes payable to the Manhattan Bagel unsecured creditors' trust (a)       $ 5,500,000
          Note payable to financing company (b)                                       5,000,000
          Note payable to New Jersey Economic Development Authority (c)               2,800,000
          Promissory notes payable in connection with Willoughby's and          
          Cooper's acquisitions (d)                                                   1,485,000
          Mortgage payable (e)                                                          277,468
          Other                                                                         101,905
                                                                                     ----------
                                                                                     15,164,373

          Less- Current portion                                                       1,633,624
                                                                                     ----------
                                                                                    $13,530,749
                                                                                     ==========
</TABLE>

     (a) In connection  with the  acquisition of MBC, the Company entered into a
note payable of $5,500,000 with the Manhattan Bagel Unsecured  Creditor Trust at
an  interest  rate of 9% per  annum.  Principal  is payable  quarterly  in equal
installments  commencing February 2000. Interest is payable quarterly in arrears
commencing February 1999. The note has a 3-year maturity.

     (b) In connection  with the  acquisition of MBC, the Company entered into a
note payable of $5,000,000 with a financing company,  at an interest rate of 12%
per  annum,  to  provide  a portion  of the  funds  necessary  to  complete  the
acquisition.  The note has a 3-year  maturity.  Principal  is  payable  in equal
quarterly installments of $250,000 commencing February 2000. Interest is payable
quarterly  commencing  February 1999.  Additionally,  for as long as the debt is
outstanding,  the Company is obligated to issue to the finance  company  250,000
shares of common  stock each  quarter.  The first  issuance of such common stock
took place in December of 1998.

     (c) In December 1998, the Company entered into a note payable of $2,800,000
with the New Jersey Economic Development Authority at an interest rate of 9% per
annum. The note has a 10-year  maturity.  Principal is paid annually  commencing
November 1999 and interest is paid quarterly beginning March, 1999.


                                      F-12
<PAGE>

     (d) In connection  with the  acquisition  of  Willoughby's  in October 1996
(Note 3), a total of $1,100,000 remained due by the Company, bearing interest at
8.5%, of which  $400,000 is payable on April 5, 1999, and $700,000 is payable on
October 5, 1999. The notes were discounted using a 10% interest rate.

     In June 1997,  a  promissory  note of $770,000 was issued by the Company in
connection with the Coopers  acquisition (Note 3). The note is payable over four
years in equal  installments  and bears  interest at 6%. The note was discounted
using an interest rate of 10%.

     (e) The Company is obligated under a mortgage payable on its plant in South
Carolina.  The mortgage  bears interest at prime plus 1.25% and matures in March
2010. The mortgage is secured by the associated real estate.

     Scheduled  maturities  of the notes  payable as of December 27, 1998 are as
follows:


                 1999                                    $1,633,624
                 2000                                     4,283,624
                 2001                                     4,091,125
                 2002                                     3,307,000
                 2003 and thereafter                      1,849,000
                                                          ---------
                                                       $ 15,164,373
                                                          =========

     Interest  expense on  long-term  debt  totaled  approximately  $224,000 and
$315,000  for  the  years  ended  December  27,  1998  and  December  27,  1997,
respectively.

9.  Accrued Expenses

     Accrued expenses consist of the following at December 27, 1998:

        Estimated future liabilities resulting from MBC
            acquisition                                              $4,321,451
        Accrued payroll and related (including bonuses and
            severance payments)                                         779,000
        Accrued professional fees                                       375,000
        Accrued store closing costs                                     350,000
        Other                                                        $1,454,195
                                                                      ---------
                                                                     $7,279,646
                                                                      =========

10.   Provision For Store Closings and Reorganization Costs

     During 1997, the Company  provided a $300,000  provision  relating to store
closings originally provided for in 1996. All stores provided for were closed as
of December 28, 1997, and no additional reserve was provided by the Company.  As
of December 27, 1998, the Company has recorded a provision,  and a corresponding
accrual,  of $350,000  relating to five stores that the company expects to close
during  1999.  Additionally,  during 1998 the  Company  closed what had been the
corporate  offices of New World prior to the  acquisition  of MBC, at which time
all operations and corporate offices were  centralized.  In connection with this
move,  the Company  has  recorded a charge of  $1,874,212  to the  statement  of
operations during the year ended December 27, 1998,  primarily  comprised of the
abandonment  of assets at the previous  location with a remaining  book value of
approximately  $1,000,000  and the accrual for certain  bonuses,  severance  and
relocation costs relating to the move.






                                      F-13

<PAGE>

11.   Stockholders' Equity

Stock Subscription Note Receivable

     In October  1994,  an officer of the  Company  purchased  29,213  shares of
Redeemable  Convertible  Series A stock for cash and a promissory  note totaling
$80,000.  Such shares were  converted  to 17,035  shares of common  stock by the
officer. The promissory note, which bears interest at 4.5% per annum, originally
matured March 15, 1998, but was extended to March 15, 2000. The shares of common
stock issued have been pledged as collateral.

Series A and Series B Convertible Preferred Stock

     In  1996,  the  Company  completed  the  sale of 375  shares  of  Series  A
Convertible Preferred Stock, generating approximately $3,320,000 in net proceeds
after  commissions and costs of  approximately  $430,000.  During 1996,  certain
individuals  exercised  their  rights  and  converted  55  shares  of  Series  A
Convertible Preferred Stock into 221,022 shares of Common Stock.

     In 1997,  the Company  repurchased  175 shares of the Series A  Convertible
Preferred  Stock from  certain  holders and in exchange  issued  137.5 shares of
Series B Convertible Preferred Stock, $.001 par value, and issued 194,440 shares
of unregistered  shares of common stock, par value $.001 per share. The Series B
Convertible  Preferred  Stock bears no dividend  and has limited  voting  rights
except as provided under the General  Corporation  Law of the State of Delaware.
The stock is  convertible  into shares of common  stock in  accordance  with the
Certificate   of   Designation   of  Series  B  Convertible   Preferred   Stock.
Additionally,  the remaining  145 shares of the Series A  Convertible  Preferred
Stock were converted into 1,411,654  shares of Common Stock, and 27.75 shares of
the Series B Convertible  Preferred  Stock were converted into 213,425 shares of
Common Stock.

     In 1998,  51.25  shares of the Series B  Convertible  Preferred  Stock were
converted into 481,111 shares of Common Stock.

Common Stock

     Subsequent to year end, the Company  approved for increase in common shares
authorized for issuance to 50,000,000 shares.

     On February 27, 1997 and August 29,  1997,  the Company  completed  private
placements  of 1,142,857  and  1,142,851  unregistered  shares of common  stock,
respectively, realizing approximately $1,153,000 and $845,000.

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

     On or about May 24,  1998,  July 2,1998 and  November  20, 1998 the Company
completed private placements of, 1,454,120, 862,068 and 555,000 shares of Common
Stock, respectively, realizing approximately $1,576,000, $1,000,000 and $500,000
in net proceeds after commissions and costs. Additionally, 1,000,000 warrants to
purchase the Company's common stock at an exercise price of $1.00 per share were
issued to an  entity  for  certain  services  provided  in  connection  with the
acquisition.  The value of such  warrants  is  approximately  $675,000  has been
included as a component of the total purchase price of the acquisition.

     In  connection  with the  acquisition  of MBC (Note 2), the Company  issued
2,973,913 shares of common stock to creditors and employees of MBC.

     During  1998,  1,137,068  and 49,333  shares of common stock were issued as
payment for notes payable and employee bonuses respectively. 

Warrants

     As of December 27, 1998,  the Company has 1,907,927  warrants  outstanding.
These warrants have exercise prices ranging from $.01 - $9.08 per share and have
terms ranging from 5 to 10 years.  Such warrants were issued in connection  with
financings and certain other services.

                                      F-14

<PAGE>

Stock Options

     The Company's  1994 Stock Plan (the "1994 Plan")  provides for the granting
to employees of incentive  stock  options and for the granting to employees  and
consultants  of  nonstatutory  stock options and stock purchase  rights.  Unless
terminated sooner, the 1994 Plan will berminate  automatically in August,  2004.
The Board of Directors has the authority to amend, suspend or terminate the 1994
Plan,  subject  to any  required  stockholder  approval  under  applicable  law,
provided  that no such  action may affect any share of common  stock  previously
issued and sold or any option previously granted under the 1994 Plan.

     Options  generally  become  exercisable  in  ratable  installments  over  a
four-year  period.  A total of  750,000  shares  of common  stock are  currently
reserved for issuance pursuant to the 1994 Plan and all have been issued.

     In  1998  the  Company  granted  80,000  board-approved  options  to  three
employees outside of the 1994 Plan and the Directors' Option Plan.

     The Company's 1995  Directors'  Stock Option Plan (the  "Directors'  Option
Plan") was  adopted by the Board of  Directors  and  approved  by the  Company's
shareholders in August 1995.  Unless  terminated  sooner,  the Director's Option
Plan will  terminate  automatically  in August 2005.  The Board of Directors may
amend or terminate the Directors'  Option Plan at any time;  provided,  however,
that no such action may  adversely  affect any  outstanding  option  without the
optionee's  consent and the provisions  affecting the grant and terms of options
may not be  amended  more than once  during  any  six-month  period.  A total of
200,000  shares of  common  stock  have been  reserved  for  issuance  under the
Directors'  Option Plan. The  Directors'  Option Plan provides for the automatic
grant of  nonstatutory  stock options to  nonemployee  directors of the Company.
These  options  vest  immediately  upon  grant.  A total of 184,000  and 144,000
options were granted  under the  Directors'  Option Plan as of December 27, 1998
and December 28, 1997, respectively. A total of 16,000 shares were available for
grant under the Directors' Option Plan as of December 27, 1998.


     A summary of the status of the Company' two stock option plans at December
27, 1998 and  December  29,  1997,  and  changes  during the years then ended is
presented in the table and narrative below:

<TABLE>
<CAPTION>

                                                                     1998                          1997
                                                                     ----                          ----
                                                                               Weighted                     Weighted
                                                                                Average                     Average
                                                                               Exercise                     Exercise
                                                            Options             Price       Options         Price
                                                            -------            --------     -------        ---------
<S>                                                          <C>             <C>           <C>              <C> 

Outstanding, beginning of year                               1,094,614          $2.48        564,876          $3.09

    Grant                                                       40,000           1.00        619,738           1.78

    Exercised                                                        -                             -              -

    Forfeited                                                (343,457)           1.93       (90,000)           2.46

Outstanding, end of year                                       791,157           2.54      1,094,614           2.48

Exercisable, end of year                                       525,508           1.93        476,960

Weighted average, fair value of options granted                                  $.63                          $.99

</TABLE>

                                      F-15

<PAGE>
     The following table summarizes  information about stock options outstanding
at December 27, 1998.

<TABLE>
<CAPTION>

                     Number Outstanding   Weighted Average                             Number                           
                       at December 27,       Remaining       Weighted Average     Exercisable at     Weighted Average
  Exercise Prices           1998          Contractual Life     Exercise Price    December 27, 1998     Exercise Price
  ---------------     -----------------  -----------------    ----------------   -----------------    ---------------
<S>                      <C>              <C>                  <C>                 <C>                    <C>  

  $.77-$ .99               83,784               7.74               $ .96              83,734                $.96
 $1.00-$2.00              506,373               7.32               $ .88             300,440               $1.59
 $2.13-$5.50              201,000               7.69               $2.60             141,334               $2.72
                         --------                                                    -------               -----
                          791,157                                                    525,508
                         ========                                                    =======
</TABLE>

SFAS No. 123

     Had compensation cost for these plans been determined  consistent with SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the following pro forma amounts:

                                                      1998              1997
                                                      ----              ----
         Net loss:
            As reported                          ($7,491,610)      ($6,736,157)
            Pro forma                            ($8,010,540)       (7,118,522)
        
         Basic net loss per common share:
            As reported                                 (.55)             (.80)
            Pro forma                                   (.58)             (.84)

         Diluted net loss per common share:
            As reported                                 (.55)             (.80)
            Pro forma                                   (.58)             (.84)

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the  following  weighted-average
assumptions used for grants in 1998 and 1997,  respectively:  risk-free interest
rates of 6.2% and 6.1%;  expected  dividend  yields of 0%;  expected  lives of 5
years; expected stock price volatility of 57% and 51%.

12.  Income Taxes

     A summary of the  significant  components of deferred assets as of December
27, 1998 is as follows:

        Operating loss carryforwards                               ($4,640,000)
        Non cash charges not yet realized for tax reporting                   
            purposes                                                (3,576,000)
        Accrued liabilities                                         (1,033,000)
        Other                                                         (109,000)
            Net deferred tax assets                                 (9,358,000)

        Valuation allowance                                        ($9,358,000)
                                                                   -----------
                                                                           -
                                                                   ===========


                                      F-16


<PAGE>

     The Company has recorded a full  valuation  allowance  against its deferred
tax assets due to the uncertainty as to their future realization.  The change in
the valuation allowance during 1998 was an increase of approximately $2,422,000.
     
     At December 27, 1998, the Company had net operating loss  carryforwards  of
approximately  $11.6  million  available  to offset  future  taxable  income for
federal income tax purposes.  These net operating loss  carryforwards  expire on
various dates through 2018.  The Company's  ability to utilize its net operating
loss  carryforwards  may be  subject  to annual  limitations  in future  periods
pursuant to the "change in ownership  rules"  under  Section 382 of the Internal
Revenue Code, as amended. No value has been attributed to the net operating loss
carryforwards  acquired by the Company in the  acquisition  of MBC  management's
evaluation  of such value has not been  completed.  To the extent the Company is
able to utilize such acquired net operating loss carryforwards, the tax benefits
will first be offset against the goodwill recorded in the acquisition.

                                      F-17
<PAGE>

13.  Commitments and Contingencies

Operating Leases

     The Company  lease's  office and retail space under  various  noncancelable
operating  leases.  Property leases normally require payment of a minimum annual
rental plus a pro rate share of certain landlord operating expenses.

     As of December 27, 1998,  approximate  future minimum rental payments under
noncancelable operating leases for the next five years and the period thereafter
are as follows:

                 Year ending:

                    1999                                         $3,995,170
                    2000                                          4,028,320
                    2001                                          3,988,878
                    2002                                          3,882,671
                    2003                                          3,795,264
                    Thereafter                                   13,125,692
                                                                 ----------
                                                                $32,815,995
                                                                 ==========

     Rent  expense  under  operating  leases was  approximately  $2,617,000  and
$2,865,000  for the  years  ended  December  27,  1998 and  December  28,  1997,
respectively.

Capital Leases

     The Company has capital  leases for computer  equipment  used in its stores
and offices.  As of December 27, 1998, payments under such capital leases are as
follows:

                 Year ending:

                    1999                                             $188,610
                    2000                                               67,589
                    2001                                               15,989
                                                                     -------- 
                                                                      272,188
                    Less- Amount representing interest                158,022
                                                                     --------
                                                                     $114,166
                                                                     ========

Employment Agreements

     The Company has entered into employment agreements with six officers of the
Company expiring between July 1999 and December 2000.  Minimum base salaries and
bonuses  for  the  term  of  these  employment   agreement  total  approximately
$1,584,000,  of which the Company is committed to pay $1,330,294  after December
27, 1998.

Contingencies

     From time to time,  the  Company  is a party to  litigation  arising in the
normal  course of its  business  operations.  In the opinion of  management  and
counsel,  it is not  anticipated  that the  settlement or resolution of any such
matters  will  have  a  material  adverse  impact  in  the  Company's  financial
condition, liquidity or results of operations.

                                      F-18

<PAGE>

Related Party Transactions

     During  1998,  two  officers of the Company  signed and agreed to purchased
four stores from the Company for a total  purchase  price of  $1,250,000,  which
generated a gain to the Company of approximately  $545,000.  One of these stores
was sold to an unrelated party during 1998.

14.  Assets Held For Resale

     In 1998,  the  Company  determined  that it would  seek to sell the  assets
relating to stores it had  previously  acquired  in  accordance  with  Company's
strategy to sell its Company-owned stores to franchisees.  The Company evaluated
the  reliability  of the carrying  amount of such assets based on the  estimated
fair value of such assets  which was  determined  based on the stores  estimated
selling prices.  Based on this evaluation,  the Company wrote off  approximately
$1,439,000  of  goodwill  and  fixed  assets  relating  to six  locations.  This
write-off is part of the impairment of long-lived  assets  further  discussed in
Note 4. The remaining value of such assets is being  classified as held for sale
in the accompanying  consolidated balance sheet, based on the Company's plan and
intent to dispose of such stores by the end of 1999.

15. Other Liabilities

     Other liabilities  represent  certain costs,  which the Company has accrued
and  which  are not  expected  to come due  within  the next  fiscal  year.  The
liabilities consist of $2,700,000 of certain indemnifications and guarantees and
approximately  $1,400,000 of other expenses relating to the acquisition (such as
trustee and other fees) not expected to come due within the next year.



                                      F-19