Use these links to rapidly review the documentNEW WORLD RESTAURANT GROUP, INC. FORM 10-K TABLE OF CONTENTS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

|(Mark One):                                                   |                                                                                     
|------------------------------------------------------------- | ------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended December 28, 2004                  
|OR                                                           
|o                                                             | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
|For the transition period
from                             to

Commission File Number 0-27148

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NEW WORLD RESTAURANT GROUP, INC.(Exact Name of Registrant as Specified in its Charter)

|Delaware(State or Other Jurisdiction
of Incorporation or Organization)                     |  | 13-3690261(I.R.S. Employer
Identification No.)                                           
|------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------
|1687 Cole Blvd., Golden, Colorado 80401(Address of Principal Executive Offices) (Zip Code) |  | (303) 568-8000(Registrant's telephone number, including area code)                       
|Securities registered pursuant to
Section 12(b) of the Act: None                           |  | Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $.001 par value

---

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments
of this Form 10-K.    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934). Yes o    No ý

The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the closing sale price as reported on
the "pink sheets" as of June 29, 2004 was $877,366.

As
of March 7, 2005, 9,848,713 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III is incorporated herein by reference from the registrant's definitive proxy statement for the 2005 annual meeting of
stockholders, which will be filed with the SEC within 120 days after the close of the 2004 fiscal year.



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NEW WORLD RESTAURANT GROUP, INC.        FORM 10-K        TABLE OF CONTENTS



|         |  | PART I                                                                               
|-------- |  | -------------------------------------------------------------------------------------
|ITEM 1.  |  | BUSINESS                                                                             
|ITEM 2.  |  | PROPERTIES                                                                           
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                    
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|         |  | PART II                                                                              
|ITEM 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|ITEM 6.  |  | SELECTED FINANCIAL DATA                                                              
|ITEM 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|ITEM 9A. |  | CONTROLS AND PROCEDURES                                                              
|ITEM 9B. |  | OTHER INFORMATION                                                                    
|         |  | PART III                                                                             
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   
|ITEM 11. |  | EXECUTIVE COMPENSATION                                                               
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                               
|         |  | PART IV                                                                              
|ITEM 15. |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                           

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PART I

ITEM 1. BUSINESS

Business Overview

We are a leader in the quick casual segment of the restaurant industry. With 690 locations in 34 states and in the District of Columbia as of December 28,
2004, we operate and license locations primarily under the Einstein Bros. and Noah's brand names, and franchise locations primarily under the Manhattan and Chesapeake brand names. We also operate a
dough production facility. We view our business as a single segment with a focus on our company-operated restaurants. Our manufacturing and franchise operations are either supportive or ancillary to
our main business focus.

We
are a Delaware corporation organized in November 1992, and our principal executive offices are located at 1687 Cole Boulevard, Golden, CO 80401. The telephone number of our
principal executive offices is (303) 568-8000. Our Internet address is www.nwrgi.com. The information on our website is not incorporated by reference into this
Form 10-K.

We
have a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2004, 2003 and 2002 each contained 52 weeks and ended on December 28,
2004, December 30, 2003, and December 31, 2002, respectively.

The
restaurant industry, in which we compete, is intensely competitive. The industry is often affected by changes in demographics, consumers' eating habits and preferences, local and
national economic
conditions affecting consumer spending habits, population trends and local traffic patterns. Key elements of competition in the industry are price, quality and value of products offered, quality and
speed of service, advertising effectiveness, brand name identification, restaurant locations and attractiveness of facilities.

Our
financial focus is on long term, sustainable growth in free cash flow. Free cash flow represents net cash provided by operations less the investment in our facilities and fixed
assets. By achieving free cash flow, we will be more capable of paying down debt, saving cash for future use and building shareholder equity. We also believe free cash flow may give us the ability to
pursue new opportunities and/or acquire other businesses. Increasing our operating profit and efficiently managing working capital and capital expenditures primarily drive free cash flow.

In
measuring our overall growth and progress, we focus on various key performance indicators. Such key performance indicators include:



Our
progress toward some of these key performance indicators is discussed throughout Item 7, Management's Discussion and Analysis.

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History

In our early years, we operated and franchised specialty coffee cafés in the northeastern United States under the brand names of New World Coffee
(New World) and Willoughby's Coffee and Tea (Willoughby's). In addition to coffee, we also served fresh, high quality gourmet foods and pastries. Our business strategy in those years was to be a
franchisor and grow through acquisitions. With the acquisition of Manhattan Bagel Company, Inc. (Manhattan) in 1998 and Chesapeake Bagel Bakery (Chesapeake) in 1999, we became a significant
franchisor of bagel restaurants and, to a lesser extent, of coffee cafés. In 2001, our strategy evolved to include company-operated restaurants as well as franchised and licensed
locations as we completed the acquisition of substantially all of the assets (the Einstein Acquisition) of Einstein/Noah Bagel Corp. (ENBC) and its majority-owned subsidiary, Einstein/Noah Bagel
Partners, L.P., which operated 2 brands: Einstein Bros. Bagels (Einstein Bros.) and Noah's New York Bagels (Noah's).

The
Einstein Acquisition in 2001 was accomplished by issuing a substantial amount of short-term debt and mandatorily redeemable preferred equity, which have since been
refinanced and restructured.

Financing Transactions

Debt FinancingOn July 8, 2003, we issued $160 million in aggregate principal amount of 13% senior secured notes due in 2008 ($160
Million Notes) to replace our $140 million in aggregate principal amount of senior secured increasing rate notes due in 2003. On that same date, we also entered into a three-year,
$15 million senior secured revolving credit facility with AmSouth Bank (AmSouth Revolver).

Equity
RecapitalizationIn September 2003, we completed an equity recapitalization with our preferred stockholders, who held a substantial portion of our common stock.
Among other things, our Mandatorily Redeemable Series F Preferred Stock was eliminated. In exchange, we issued 57,000 shares of our Mandatorily Redeemable Series Z Preferred Stock to
Halpern Denny Fund III, L.P. (Halpern Denny) and we issued 9,380,843 shares of our common stock to Greenlight Capital and affiliates (Greenlight).

Current Developments

Effective October 6, 2004, we completed the sale of the Willoughby's Coffee & Tea business in Connecticut. The business was sold to the original
founders for a total sale price of approximately $400,000, which was received in cash. In connection with the transaction, we also executed a two-year supply agreement to purchase coffee
for our New World Coffee cafés from the buyers of Willoughby's. The transaction allowed us to place a non-core asset in the hands of experienced operators and, concurrently,
assure a quality source of supply for our New World Coffee cafés.

On
October 13, 2004, we announced that E. Nelson Heumann was named Chairman of the Board of Directors. Paul Murphy, Chief Executive Officer, who had been serving as Acting
Chairman since October 2003, continues on the Board as a Director. Additionally, Michael W. Arthur was elected as a Director expanding the board to seven members. Mr. Arthur also serves
on the Audit Committee and has been designated as the audit committee "financial expert." Other members of the Audit Committee are Directors Leonard Tannenbaum and Frank Meyer.

Also
on October 13, 2004, we announced that Susan Daggett, who had been Chief Operating Officer since October 2003, was named to the new position of Chief Strategy Officer.
Mike Mrlik, formerly the Executive Vice President of Operations, was promoted to Chief Operating Officer.

On
October 14, 2004, we announced the introduction of our new test concept, Einstein Bros. Café (EB Café). In addition to our core bagel offerings
and expanded breakfast menu, the new concept offers an extensive lunch menu with a culinary focus on innovative items using fresh and high quality

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ingredients.
The first unit of this new concept, located within Denver's Stapleton neighborhood, opened on October 18, 2004. By the end of fiscal year 2004, we retrofitted four additional
Einstein Bros. Bagels restaurants in the Denver and Colorado Springs, Colorado markets to EB Cafés. We currently intend to convert the remaining Einstein Bros. Bagels locations over
approximately a three-year time frame on a market-by-market basis.

Business Strategy

Our long-term objective is to grow our business by expanding our lunch day-part to take advantage of the largest segment of the restaurant
industry. We intend to concentrate on the development of certain markets to improve our competitive position, realize operational and marketing efficiencies, leverage existing brand awareness, enhance
customer convenience and increase overall profitability. Our efforts are also focused on the development of new menu offerings that are systematically introduced in order to keep our menu innovative,
delicious and relevant to our consumers' lifestyles.

We
are currently re-branding our Einstein Bros. Bagels with the introduction of EB Café. We believe the transformation process will move the brand beyond the
bagel by expanding upon our artisan-baking heritage. EB Café will offer a more extensive lunch menu, which we believe will further grow our lunch day-part business. At this
time, we are still analyzing our ability to compete in the dinner day-part segment, a day-part in which we have never competed.

We
believe we have a strong platform for growth through store licensing of our Einstein Bros. and Noah's brands. The licensing program is available to qualified foodservice operators and
typically requires an upfront license fee that is fully earned at the time the licensee commences operations. Stores are developed on college campuses, hospitals, airports, military installations and
other locations. The licensed stores are generally opened during the third and fourth calendar quarters consistent with the timing of many government and higher education projects and federal funding.
We typically receive continuing royalties on sales from each licensed store location. Our licensees are not required to buy all of their non-proprietary products directly from us, but
rather their product sources must be approved by us.

We
have a franchise base primarily in our Manhattan and Chesapeake brands that generates a recurring revenue stream through fee and royalty payments. Our franchise base provides us with
the ability to grow our brands with minimal commitment of capital by us, and creates a built-in customer base for our manufacturing operations. We continue to look for franchisee
candidates with appropriate operational experience and financial stability, including specific net worth and liquidity requirements. During 2004, we worked diligently to improve our relationship and
communication with performing franchisees. In an effort to strengthen the brands, we terminated certain relationships with many of our poorly performing franchisees. We believe that active involvement
in and management of restaurant operations will result in a successful franchise strategy.

We
have begun a financial and operational assessment of the Manhattan, Chesapeake and New World brands. As the Manhattan and Chesapeake brands represent the majority of our franchise
operations, revitalizing and strengthening these brands remains a challenge for our management team. We recognize that our historic franchise model is not consistent with future operating plans for
certain brands due to geographic separation from core markets. As a result, we are currently executing a
regionalization strategy that would include exiting certain markets. We believe regionalization will build stronger brand awareness and customer loyalty.

We
consider our site selection process and our advertising and media strategy critical to our long-term success. Our site selection process focuses on identifying markets,
trade areas and specific sites based on several factors, including visibility, ready accessibility (particularly for morning and lunch time traffic), parking, signage and adaptability of any current
structures. We then determine the availability of the site and the related costs. Our site selection strategy emphasizes co-tenant out parcel,

5

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end-cap
and in-line locations in neighborhood shopping centers, life-style centers and power centers with easy access from high-traffic roads. Our
advertising and media strategy focuses on multi-dimensional media tactics integrating print, traffic radio, broadcast, outdoor and direct mail to support our high revenue markets. Company operated and
franchised locations are generally required to contribute to the respective brand's marketing fund, which provides the locations with marketing support, including in-store
point-of-purchase and promotional materials. Print and other mass media advertising is utilized to increase consumer interest and build sales.

We
also believe we have opportunities to develop multiple sales channels outside of our traditional retail locations. These alternatives can generate incremental revenues, enhance our
brands' visibility and improve customer convenience. In particular, in-store bakeries in the grocery and warehouse club channels are increasingly seeking strong consumer brands to help
drive their sales of bread and bagels. We have established a supplier relationship with Costco Wholesale Corporation which allows us to sell Einstein Bros. and Noah's products, dual branded with the
Kirkland signature brand, through more than 300 Costco stores. We also entered into a similar relationship with Target Corporation and sell Einstein Bros. products through more than 100 SuperTarget
stores. We expect to attract additional alternative retail customers based on Einstein Bros.' substantial brand equity and superior food quality and freshness.

Restaurant Concepts

We operate and license locations primarily under the Einstein Bros. and Noah's brand names, and franchise locations primarily under the Manhattan and Chesapeake
brand names. The following table details the total restaurants open at the end of the respective fiscal year:

Company
owned

Licensed

Franchised

TotalEinstein Bros.:2004

371

54



4252003

373

38



411Noah's:2004

78

3



812003

83

3



86Manhattan:2004





145

1452003





178

178Chesapeake:2004





27

272003





42

42New World Coffee/Willoughby's*:2004

4



8

122003

8



11

19Total Restaurants:2004

453

57

180

6902003

464

41

231

736


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Einstein Bros. Bagels (Einstein Bros.)

Einstein Bros. is a national, quick casual restaurant chain. Einstein Bros. offers a menu that specializes in high-quality foods for breakfast and
lunch, including hot breakfast bagels/sandwiches,

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fresh
baked goods and five fresh-brewed premium coffees daily and other café beverages. The average Einstein Bros. location is approximately 2,200 square feet in size with approximately
40 seats and is generally located in a neighborhood or regional shopping center. We use sophisticated fixtures and materials in the brand's design to create a store environment that is consumer
friendly, inviting and reflective of the brand's personality and strong neighborhood identity, and which visually reinforces the distinctive difference between the brand's quick casual positioning and
that of quick service restaurants. During the fiscal years ended 2004, 2003 and 2002, Einstein Bros. company-owned restaurants generated approximately 82%, 81% and 81% of our retail sales,
respectively.

Einstein Bros. Café (EB Café)

Our EB Café is a new concept designed to move our Einstein Bros. brand beyond the bagel by expanding on the well-known Einstein Bros.
artisan-baking heritage. In addition to our core bagel offerings and expanded breakfast menu, the new concept offers a more extensive lunch menu with a culinary focus on innovative items using fresh
and high quality ingredients. Menu offerings include hand crafted gourmet sandwiches, hearty soups, innovative salads, fresh baked goods, premium coffees and other café beverages. The
restaurant's new look is conducive to meetings, family meals, and groups dining out together. The first unit of this quick casual restaurant concept, located within Denver's Stapleton neighborhood,
opened on October 18, 2004. By the end of fiscal year 2004, we retrofitted four additional Einstein Bros. Bagel restaurants in the Denver and Colorado Springs, Colorado markets to EB
Cafés. We currently intend to convert the remaining Einstein Bros. Bagel locations over approximately a three-year time frame on a market-by-market
basis.

Noah's

Noah's is a quick casual restaurant principally located on the West Coast. Noah's offers a menu that specializes in high-quality foods for breakfast
and lunch, including fresh baked goods, made-to-order deli style sandwiches, including such favorites as pastrami, corned beef and roast beef on fresh breads and bagels baked
on location daily, hearty soups, innovative
salads, desserts, five fresh-brewed premium coffees daily and other café beverages. The average Noah's location is approximately 1,800 square feet in size with approximately 12 seats
and is located in urban neighborhoods or regional shopping centers. We use elaborate tile work and wood accents in the brand's design to create an environment reminiscent of a Lower East Side New York
deli, which reinforces the brand's urban focus with an emphasis on the authenticity of a New York deli experience. During the fiscal years ended 2004, 2003 and 2002, Noah's company-owned restaurants
generated approximately 17%, 18% and 17% of our retail sales, respectively.

Manhattan

Our Manhattan brand represents the majority of our franchise operations and is predominately operated in the Northeast. The locations offer over 20 varieties of
fresh baked bagels, as well as bagel sticks and bialys and up to 15 flavors of cream cheese, a variety of breakfast and lunch sandwiches, salads, soups, coffees and café beverages, soft
drinks and desserts. The average Manhattan location is approximately 1,400 to 2,400 square feet with 24 to 50 seats and is primarily located in urban neighborhoods or regional shopping centers.
Manhattan stores are designed to combine the authentic atmosphere of a bagel bakery with the comfortable setting of a neighborhood meeting place.

Chesapeake

Our Chesapeake brand is operated on the Mid-Atlantic Coast. Chesapeake locations offer a menu that specializes in bagels and an extensive array of
cream cheese flavors. The locations also offer breakfast and lunch sandwiches, soups, salads, coffees and café beverages, soft drinks and desserts.

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New World Coffee

Our New World Coffee brand is principally operated in the northeastern United States. The locations offer up to 30 varieties and blends of fresh roasted coffee,
in brewed and whole bean format, a broad range of Italian-style beverages, along with a variety of menu items to complement the beverage offerings.

Sourcing, Manufacturing & Distribution

We believe that controlling the manufacture and distribution of our key products is an important element in ensuring both quality and profitability. To support
this strategy, we have developed proprietary formulations, invested in processing technology and manufacturing capacity, and aligned ourselves with strategic suppliers.

Bagel Dough

We have significant know-how and technical expertise for manufacturing and freezing mass quantities of raw dough to produce a high-quality
product more commonly associated with smaller bakeries. We believe this system enables locations to provide consumers with a variety of consistent, superior products. We currently operate a bagel
dough manufacturing facility in Whittier, CA and have a supply contract with Harlan Bakeries, Inc. in Avon, IN that produces bagel dough to our specifications.

Cream Cheese

In the past, our cream cheese was purchased through two third party providers and sold at our Einstein Bros., Noah's and Manhattan locations. Effective
December 28, 2004, we signed an exclusive three-year supply agreement to purchase cream cheese and other cheese products from a single source. We believe this agreement will realize
cost savings and result in other supply chain efficiencies.

Coffee

The majority of our coffee is purchased through a third party provider and is sold at our Einstein Bros. and Noah's locations.

Distribution

We currently utilize a network of independent distributors to distribute frozen dough and other materials to our locations. By contracting with distributors, we
are able to eliminate investment in distribution systems and to focus our managerial and financial resources on our retail operations. We contract for virtually all food products and supplies for our
company-owned store operations, including frozen dough, cream cheese, coffee, meats and paper goods and our vendors deliver the products to our distributors for delivery to each location. The
individual locations order directly from the distributors one to three times per week.

Commissaries

We believe that our commissary system that processes bulk raw ingredients used at our company-operated stores and licensed locations provides a competitive
advantage. Our commissaries assure consistent quality, supply fresh products and improve efficiencies by reducing labor and inventory requirements. We focus our growth in areas that allow us to
continue to gain efficiencies through leveraging the fixed cost of our current commissary structure. We distribute commissary products primarily through our regional distribution partners and locally
in certain markets through a fleet of temperature-controlled trucks operated by our personnel.

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Trademarks and Service Marks

Our rights in our trademarks and service marks (marks) are a significant part of our business. We are the owners of the federal registration of the "Einstein
Bros.," "Noah's New York Bagels," "Manhattan Bagel," "Chesapeake Bagel Bakery" and "New World Coffee" marks. Some of our marks are also registered in several foreign countries. We are aware of a
number of companies that use various combinations of words in our marks, some of which may have senior rights to ours for such use, but we do not consider any of these uses, either individually or in
the aggregate, to materially impair the use of our marks. It is our policy to defend our marks and the associated value from encroachment by others. The marks listed above represent the brands of the
retail outlets that we own, license or franchise. We also own numerous other marks related to our business.

General Economic Trends and Seasonality

We anticipate that our business will be affected by general economic trends that affect retailers in general. While we have not operated during a period of high
inflation, we believe based on industry experience that we would generally be able to pass on increased costs resulting from inflation to our consumers. Our business may be affected by other factors,
including increases in the commodity prices of flour, butter, cheese, coffee, dairy and/or fresh produce, energy costs, existing and additional competition, marketing programs, weather and variations
in the number of company-owned or licensed location openings and closings.

Although
few, if any, employees are paid at the minimum wage, an increase in the minimum wage may create pressure to increase the pay scale for our employees, which would increase our
labor costs and those of our franchisees and licensees.

Our
business is subject to seasonal trends. Generally, our revenues in the first fiscal quarter are somewhat lower than in the other three fiscal quarters.

Competition

We experience competition from numerous sources in our trade areas. Our restaurants compete based on customers' needs for breakfast, lunch and afternoon
"chill-out" (the period after lunch and before dinner). Our competitors are different for each day-part in which we offer our products. The competitive factors include brand
awareness, location, environment, customer service, price and quality of products. We compete for leased space in desirable locations. Certain of our competitors may have capital resources exceeding
those available to us. Our primary competitors include specialty food and casual dining restaurant retailers including national, regional and locally owned restaurants.

Government Regulation

Each of our locations is subject to licensing and regulation by a number of governmental authorities, which include health, safety, labor, sanitation, building
and fire agencies in the state or municipality in which the store is located. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of
locations for an indeterminate period of time or third-party litigation. Our manufacturing, commissary and distribution facilities are licensed and subject to regulation by either federal, state or
local health and fire codes, and the operation of our trucks are
subject to Department of Transportation regulations. We are also subject to federal and state environmental regulations.

Our
franchise operations are 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 us to furnish to prospective franchisees a franchise offering circular containing prescribed information. Some
states in which we

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might
consider franchising also regulate the sale of franchises and require registration of the franchise-offering circular with state authorities.

Employees

As of December 28, 2004, we had 7,546 employees, of whom 7,260 were store personnel, 79 were plant and support services personnel, and 207 were corporate
personnel. Most store personnel work part-time and are paid on an hourly basis. We have never experienced a work stoppage and our employees are not represented by a labor organization. We
believe that our employee relations are good.

Executive Officers

Set forth below is information with respect to our executive officers:

Name

Age

PositionPaul J.B. Murphy III

50

Chief Executive Officer and DirectorMichael J. Mrlik II

47

Chief Operating OfficerRichard P. Dutkiewicz

49

Chief Financial OfficerJill B.W. Sisson

57

General Counsel and SecretarySusan E. Daggett

44

Chief Strategy Officer


Paul
J.B. Murphy III. Mr. Murphy was appointed Chief Executive Officer and Acting Chairman in October 2003. He served as Acting Chairman until October 2004.
Mr. Murphy joined us in December 1997 as Senior Vice PresidentOperations and had served as Executive Vice PresidentOperations since March 1998.
Mr. Murphy was appointed our Chief Operating Officer in June 2002. From July 1996 until December 1997, Mr. Murphy was Chief Operating Officer of one of our former
area developers. From August 1992 until July 1996, Mr. Murphy was Director of Operations of R&A Foods, L.L.C., an area developer of Boston Chicken. Mr. Murphy has a B.A.
degree from Washington and Lee University.

Michael
J. Mrlik II. Mr. Mrlik was promoted to Chief Operating Officer in October 2004. Mr. Mrlik joined us in October 1997 and has served in several
capacities since then. He was our Executive Vice PresidentOperations since October 2003, and previously served as our Senior Vice PresidentOperations
(May 2002October 2003), Vice PresidentOperations (January 2000May 2002), Vice PresidentFranchise
(July 1999January 2000), and Vice PresidentOperations (October 1997July 1999). Mr. Mrlik has a B.A. degree from Washington and
Lee University.

Richard
P. Dutkiewicz. Mr. Dutkiewicz joined us in October 2003 as Chief Financial Officer. From May 2003 to October 2003, Mr. Dutkiewicz was Vice
PresidentInformation Technology of Sirenza Microdevices, Inc., a publicly traded telecommunications component manufacturer located in Broomfield, Colorado. In May 2003,
Sirenza Microdevices, Inc. had acquired Vari-L Company, Inc., a publicly traded telecommunications component manufacturer. From January 2001 to May 2003,
Mr. Dutkiewicz was Vice PresidentFinance, Chief Financial Officer of Vari-L Company, Inc. From April 1995 to January 2001, Mr. Dutkiewicz
was Vice PresidentFinance, Chief Financial Officer, Secretary and Treasurer of Coleman Natural Products, Inc., located in Denver, Colorado, a leading supplier of branded natural
beef in the United States. Mr. Dutkiewicz's previous experience includes senior financial management positions at Tetrad Corporation, MicroLithics Corporation and various divisions of United
Technologies Corporation. Mr. Dutkiewicz was an Audit Manager at KPMG LLP. Mr. Dutkiewicz received a BBA degree from Loyola University of Chicago and is a member of the American
Institute of Certified Public Accountants, Financial Executives International and the Association for Corporate Growth.

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Jill
B. W. Sisson. Ms. Sisson, who joined us as a consultant in December 2003, most recently served as General Counsel and Secretary of Graphic Packaging International
Corporation, a NYSE-listed packaging company, from September 1992 until its merger with Riverwood Holding, Inc. in August 2003. From 1974 to September 1992, she
engaged in private law practice in Denver, Colorado. She received her J.D. degree from the University of Colorado Law School in 1974.

Susan
E. Daggett. Ms. Daggett was appointed Chief Strategy Officer in October 2004. Ms. Daggett served as our Chief Operating Officer from October 2003 until
October 2004. Ms. Daggett joined us in 1995 as Director, Operations Finance, and was subsequently promoted to V.P., Operations Finance, then to V.P. and Controller. In May 1998,
she moved into our purchasing and distribution areas, serving as V.P., Purchasing and later as V.P., Supply Chain, before becoming our Chief Supply Officer in May 2002 and Chief Operating
Officer in October 2003. Prior to joining us, Ms. Daggett served as Director, Financial Planning and Reporting at Arby's Inc., and as Director, Financial Planning and Analysis
with Burger King. Ms. Daggett began her career at Ernst & Whinney. She has a B.A. degree in Business Administration from the University of Northern Iowa.

Available Information

We are subject to the informational requirements of the Exchange Act. We therefore file periodic reports, proxy statements and other information with the SEC.
Such reports may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, or by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information
regarding issuers that file electronically.

Additionally,
copies of our reports on Forms 10-K, 10-Q and 8-K and any amendments to such reports are available for viewing and copying at our
internet site (www.nwrgi.com), free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to the SEC.

We
also make available on our website, and in print to any shareholder who requests it, the Charters for our Audit and Compensation Committees, as well as the Code of Conduct that
applies to all directors, officers, and employees of our company. Amendments to these documents or waivers related to the Code of Conduct will be made available on our website as soon as reasonably
practicable after their execution.

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ITEM 2. PROPERTIES

As of December 28, 2004, our company-owned facilities, franchisees and licensees operated 690 locations in various states and the District of Columbia as
follows:

Location

Company-
Operated

Franchised/
Licensed

TotalAlabama



2

2Arizona

22

2

24California

86

15

101Colorado

31

3

34Connecticut

1

1

2Delaware

2

3

5District of Columbia

1

5

6Florida

50

25

75Georgia

13

7

20Illinois

34

4

38Indiana

11

1

12Kansas

10



10Lousiana



1

1Maryland

11

6

17Massachusetts

3

2

5Michigan

18

3

21Minnesota

9

2

11Mississippi



1

1Missouri

15

1

16Nevada

9



9New Hampshire

1



1New Jersey

5

41

46New Mexico

5



5New York

4

15

19North Carolina

2

10

12Ohio

13

5

18Oregon

6

1

7Pennsylvania

15

43

58South Carolina



5

5Tennessee



1

1Texas

26

7

33Utah

20



20Virginia

14

23

37Washington

4



4Wisconsin

12

2

14Total

453

237

690


12

---





Information with respect to our headquarters, training and production facilities is presented below:

Location

Facility

SizeGolden, CO(1)

Headquarters, Support Center, Test Kitchen

46,802 sq. ft.Hamilton, NJ (2)

Franchise Support Center, Training Facility

6,637 sq. ft.Whittier, CA(3)

Production Facility

54,640 sq. ft.Walnut Creek, CA(4)

Administration Office-Noah's

2,190 sq. ft.


---

ITEM 3. LEGAL PROCEEDINGS

We are subject to claims and legal actions in the ordinary course of our business, including claims by our franchisees, licensees and employees or former
employees. We do not believe that an adverse outcome in any currently pending or threatened matter would have a material adverse effect on our business, results of operations or financial condition.

Employment Related

On July 31, 2002, Tristan Goldstein, a former store manager, and Valerie Bankhordar, a current store manager, filed a putative class action against
Einstein and Noah Corp. ("ENC") in the Superior Court for the State of California, County of San Francisco. The plaintiffs alleged that ENC failed to pay overtime wages to managers and assistant
managers of its California stores who were improperly designated as exempt employees. In April 2004, we reached an agreement in principle to settle the litigation, subject to court approval.
Amounts representing our estimate to settle this litigation were previously recorded during fiscal 2003.

On
March 31, 2003, Jerold E. Novack, our former Chief Financial Officer and Secretary, filed a complaint in the United States District Court for the District of New Jersey against
us, Anthony D. Wedo, our former Chairman and Chief Executive Officer, and William J. Nimmo, a former member of our board of directors. On January 13, 2005, the parties resolved the litigation.
The resolution of this issue did not have a material adverse effect on our consolidated financial condition or results of operations.

On
June 4, 2003, R. Ramin Kamfar, our former Chairman of the Board and Chief Executive Officer, filed an action in the United States District Court for the Southern District of
New York against us and Anthony D. Wedo, our former Chairman and Chief Executive Officer, alleging breach of contract, defamation, declaratory relief and punitive damages. On February 10, 2005,
the case was dismissed with
prejudice and the parties have resolved this litigation. The resolution of this issue did not have a material adverse effect on our consolidated financial condition or results of operations.

On
September 14, 2004, Atlantic Mutual Insurance Company brought an action in the Superior Court of New Jersey Law Division: Morris County, Docket No.
MRS-L-2463-04 against the Company, Wedo, Nimmo, Novack, Kamfar, Lexington Insurance Company, and XL Specialty Insurance Company seeking declaratory judgment on
insurance coverage issues in the Novack litigation and the Kamfar litigation described above. The parties have filed answers and cross-claims, and Mr. Kamfar has filed a

13

---



motion
for partial summary judgment claiming advancement for expenses for which he claims the Company is required to indemnify him. At this time, we can not predict the outcome of this matter and
there can be no assurance that we will prevail in this matter, that a determination will be made that we have insurance coverage for expenses that we have already incurred, or that damages or other
relief will not be awarded against us.

Investigations

On April 3, 2002, the Securities and Exchange Commission notified us that the Commission was conducting an investigation into the resignation of our former
Chairman, R. Ramin Kamfar, and the termination for cause of our former Chief Financial Officer, Jerold Novack, and the delay in filing our Form 10-K for 2001. We have cooperated
fully with the investigation as well as with a Department of Justice inquiry relating to these issues. Further, several of the former and present officers and directors have requested that, under
applicable law and our by-laws, we advance reasonable legal expenses on their respective behalves to the extent any of them is or has been requested to provide information to the
Commission in connection with its investigation. We have advanced certain expenses in connection with these claims. At this time, it is not possible to reasonably estimate the loss or range of loss,
if any.

Other Litigation

On February 23, 2000, New World Coffee of Forest Hills, Inc., a franchisee, filed a demand for arbitration with the American Arbitration Association
against us alleging fraudulent inducement and violations of New York General Business Law Article 33. In August 2004, this matter was resolved. The resolution of this issue did not have
a material adverse effect on our consolidated financial condition or results of operations.

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

No items were submitted to a vote of security holders in the fourth quarter of the fiscal year ended December 28, 2004.

14

---



PART II

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

Our common stock is quoted on the Pink Sheets OTC market under the symbol "NWRG.PK". The following table sets forth the high and low bid information for our
common stock for each fiscal quarter during the periods indicated. Bid information quoted reflects inter-dealer prices without retail mark-up, markdown or commission and may not
necessarily represent actual transactions. All share prices have been adjusted for the stock split which occurred in the third quarter of 2003.

Year ended December 28, 2004:

High

LowFirst Quarter (From December 31, 2003 to March 30, 2004)

$
8.00

$
3.00Second Quarter (From March 31, 2004 to June 29, 2004)

$
4.99

$
2.50Third Quarter (From June 30, 2004 to September 28, 2004)

$
2.98

$
1.75Fourth Quarter (From September 29, 2004 to December 28, 2004)

$
3.10

$
1.60


Year ended December 30, 2003:

High

LowFirst Quarter (From January 1, 2003 to April 1, 2003)

$
7.16

$
4.21Second Quarter (From April 2, 2003 to July 1, 2003)

$
18.66

$
3.19Third Quarter (From July 2, 2003 to September 30, 2003)

$
14.39

$
8.37Fourth Quarter (From October 1, 2003 to December 30, 2003)

$
10.00

$
3.25


As
of March 7, 2005, there were 397 holders of record of our common stock. This number does not include individual stockholders who own common stock registered in the name of a
nominee under nominee security listings.

We
have not declared or paid any cash dividends on our common stock since our inception. We do not intend to pay any cash dividends in the foreseeable future, and we are precluded from
paying cash dividends on our common stock under our financing agreements.

Sales of Unregistered Securities

During the fourth quarter of 2004, we received consideration of $6,464 and issued 6,328 shares of our common stock upon the exercise of certain warrants granted
by us subject to registration rights agreements. We issued these warrants to the warrant holder in a private financing transaction related to our issuance of increasing rate notes that were repaid in
July 2003. Securities issued were offered and sold in reliance upon the exemption from registration under Section 4(2) of the Securities Act, relating to sales by an issuer not involving
a public offering. The sales of securities were made without the use of an underwriter. The recipients of the securities represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and restrictive legends were affixed to the share certificates issued.

15

---



ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for each fiscal year was extracted or derived from financial statements which have been audited by Grant Thornton LLP, our
independent registered public accounting firm.

|                                                                                                                           |  | Fiscal years ended (1)(3): |         
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | --------
|
|
|
|Income Statement Data:                                                                                                     |  |                            |         
|Revenues                                                                                                                   |  | $                          | 373,860 
|Cost of sales                                                                                                              |  |                            | 306,661 
|                                                                                                                           |  |                            |         
|Gross margin                                                                                                               |  |                            | 67,199  
|Gross margin as percent of sales                                                                                           |  |                            | 18.0    
|General and administrative expenses                                                                                        |  |                            | 32,755  
|Depreciation and amortization                                                                                              |  |                            | 27,848  
|Charges for integration and reorganization costs                                                                           |  |                            | (869    
|Impairment charge                                                                                                          |  |                            | 450     
|                                                                                                                           |  |                            |         
|Income (loss) from operations                                                                                              |  |                            | 7,015   
|Interest expense, net(2)                                                                                                   |  |                            | 23,196  
|Cumulative change in the fair value of derivatives                                                                         |  |                            |        
|Loss (gain) on sale, disposal or abandonment of assets, net                                                                |  |                            | 1,557   
|Gain on sale of debt securities                                                                                            |  |                            |        
|Loss on exchange of Series F due to Equity Recap                                                                           |  |                            |        
|Loss on extinguishment of Greenlight obligation                                                                            |  |                            |         
|Permanent impairment in the value of investment in debt securities                                                         |  |                            |        
|Other expense (income)                                                                                                     |  |                            | (284    
|                                                                                                                           |  |                            |         
|Loss before income taxes                                                                                                   |  |                            | (17,454 
|Provision (benefit) for state income taxes                                                                                 |  |                            | (49     
|                                                                                                                           |  |                            |         
|Net loss                                                                                                                   |  |                            | (17,405 
|Dividends and accretion on Preferred Stock                                                                                 |  |                            |        
|                                                                                                                           |  |                            |         
|Net loss available to common stockholders                                                                                  |  | $                          | (17,405 
|                                                                                                                           |  |                            |         
|Net loss per sharebasic and diluted                                                                                       |  | $                          | (1.77   
|                                                                                                                           |  |                            |         
|Other Financial Data:                                                                                                      |  |                            |         
|Depreciation and amortization                                                                                              |  | $                          | 27,848  
|Capital expenditures                                                                                                       |  |                            | 9,393   
|Balance Sheet Data (at end of period):                                                                                     |  |                            |         
|Cash and cash equivalents                                                                                                  |  | $                          | 9,752   
|Property, plant and equipment, net                                                                                         |  |                            | 41,855  
|Total assets                                                                                                               |  |                            | 158,456 
|Short-term debt and current portion of long-term debt                                                                      |  |                            | 295     
|Mandatorily redeemable Series Z preferred stock, $.001 par value, $1,000 per share liquidation value                       |  |                            | 57,000  
|Long-term debt                                                                                                             |  |                            | 160,840 
|Mandatorily redeemable Series F preferred stock, $.001 par value, $1,000 per share liquidation value (temporary equity)(4) |  |                            |        
|Total stockholders' equity (deficit)                                                                                       |  |                            | (112,483

---

16

---



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

Restatement of Prior Financial Information

Over the past few months, several restaurant companies and other multi-location retailers have been reviewing their treatment of lease accounting and leasehold
amortization. During this time, many companies including but not limited to Brinker International, CKE Restaurants, Darden Restaurants, Jack in the Box, Starbucks and Wild Oats have either restated
their historic financial statements or have announced their intention to restate. In late January 2005, we commenced a review of our accounting policies and practices with respect to leasehold
amortization and deferred rent. On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission expressed its views regarding lease accounting issues and their
application under Generally Accepted Accounting Principles (GAAP). Based upon the results of our internal review and after discussions with our independent auditors, Grant Thornton LLP, we determined
on March 1, 2005 that it was appropriate to adjust certain prior financial statements for leasehold amortization. The resulting adjustments were all non-cash and had no impact on
our cash flows, cash position, revenues, same store sales, loss from operations plus depreciation and amortization, or our compliance with the covenants under our $160 Million Notes or AmSouth
Revolver. The adjustments were not attributable to any intentional non-compliance with any financial reporting requirements under securities laws, and we believe there will not be any
further adjustments as a result of our internal review of this matter.

The
issue requiring restatement related to our historical accounting practice of amortizing our leasehold improvements over a period that included both the noncancelable term of the
lease and its option periods (or the useful life of the asset, if shorter). Concurrently, we used the noncancelable lease term in determining whether each of our leases was an operating lease or a
capital lease and in calculating our straight-line rent expense. We believed that these longstanding accounting treatments were appropriate under generally accepted accounting principles.
Furthermore, we believed that these accounting treatments were comparable to the practices of other public companies. However, after noting recent Form 8-K filings of various
restaurant companies and other multi-location entities and following discussions with Grant Thornton LLP, we have now interpreted the authoritative accounting literature to require that we use the
same lease term in amortizing leasehold improvements as we use in determining capital versus operating leases and in calculating straight-line rent expense. Accordingly, we have adopted
the following policy: We will generally limit the depreciable lives for our leasehold improvements, which are subject to a lease, to the lesser of the useful life or the noncancelable lease term.
However, in circumstances where we would incur an economic penalty by not exercising one or more option periods, as contemplated by Statement of Financial Accounting Standard (SFAS) No. 13,
"Accounting for Leases," we may include one or more option periods when determining the amortization period. In either circumstance, our policy requires consistency when calculating the amortization
period, in classifying the lease, and in computing straight-line rent expense.

17

---



As
a result of the adjustments to leasehold amortization, our financial results have been restated as follows (dollars in thousands, except per share data):

|            |  |   |         | 2001 |   |         |  
|----------- |  | - | ------- | ---- | - | ------- | -
|
|As reported |  | $ | (30,043 | )    | $ | (18,700 | )
|Adjustments |  |   |        |      |   | (3,053  | )
|            |  |   |         |      |   |         |  
|As restated |  | $ | (30,043 | )    | $ | (21,753 | )
|            |  |   |         |      |   |         |  

|            |  |   |          | 2002 |   |         |  
|----------- |  | - | -------- | ---- | - | ------- | -
|
|As reported |  | $ | (107,263 | )    | $ | (40,473 | )
|Adjustments |  |   | (3,053   | )    |   | (4,421  | )
|            |  |   |          |      |   |         |  
|As restated |  | $ | (110,316 | )    | $ | (44,894 | )
|            |  |   |          |      |   |         |  

|            |  |   |          | 2003 |   |         |  
|----------- |  | - | -------- | ---- | - | ------- | -
|
|As reported |  | $ | (175,330 | )    | $ | (67,708 | )
|Adjustments |  |   | (7,474   | )    |   | (5,813  | )
|            |  |   |          |      |   |         |  
|As restated |  | $ | (182,804 | )    | $ | (73,521 | )
|            |  |   |          |      |   |         |  

We
expect that in future years, depreciation and amortization will increase by approximately $1.0 million per year assuming stable levels of capital expenditures going forward.
The following management's discussion and analysis takes into account the effects of these adjustments.

Company Overview

We are a leader in the quick casual segment of the restaurant industry. We specialize in high-quality foods for breakfast and lunch in a
café atmosphere with a neighborhood emphasis. Our product offerings include fresh baked goods, made-to-order sandwiches, bagels, soups, salads, desserts, premium
coffees and other café beverages. With 690 locations in 34 states and in the District of Columbia as of December 28, 2004, we operate and license locations primarily under the
Einstein Bros. and Noah's brand names, and franchise locations primarily under the Manhattan and Chesapeake brand names. We also operate a dough production facility. We view our business as a single
segment with a focus on our company-operated restaurants. Our manufacturing and franchise operations are either supportive or ancillary to our main business focus.

Industry Overview

Demographic shifts and evolving lifestyles have affected the U.S. restaurant industry over the past 30 years. The growth of women in the workforce, the
resulting rise of dual income households, and a large decrease in blue collar jobs and corresponding increase in white collar employment means consumers find themselves pressed for time, but not for
money. Less time, more money, different jobs and fewer stay-at-home cooks all continue to drive changes in food consumption habits in America.

18

---



According
to Technomic, Inc., a food service consulting company, the U.S. foodservice industry (i.e., food consumed outside the home) accounted for approximately 49% of total food sales in
2004, up from 37% in 1975. These demographic shifts and evolving lifestyles have more recently given rise to the "quick casual" segment of the restaurant industry. This is the segment in which our
brands compete. As defined by Technomic, quick casual restaurants are "attractive and comfortable establishments that serve freshly prepared, wholesome, quality, authentic foods in reasonably fast
service formats."

Trends and/or Uncertainties

The following factors represent currently known trends or uncertainties that may impact the comparability of operating performance or could cause reported
financial information not to be necessarily indicative of future operating results or future financial condition.

Revenue Trends and/or Uncertainties

We believe that a combination of events, including the popularity of lower carbohydrate diets and the constant competitive pressure of the restaurant industry,
resulted in negative comparable store sales for the first three quarters of the fiscal year ended 2004. We believe that changes in the products sold at our restaurants, including new menu items that
are lower in fat and carbohydrate content, coupled with operational changes at several of our restaurants, contributed to positive comparable store sales in the fourth fiscal quarter of 2004. We are
also utilizing our marketing programs to continue building awareness of our lunch offerings and to increase consumer visits to our restaurants.

As
previously discussed, we opened our first EB Café on October 18, 2004 in the Denver, Colorado market. By the end of fiscal year 2004, we retrofitted four
additional Einstein Bros. Bagel restaurants in the Denver and Colorado Springs, Colorado markets to EB Cafés. We plan to gather financial and
other data following the conversion of these restaurants to EB Cafés and analyze this information to determine the nature and extent of modifications to the menu offerings, physical
layout, operating elements and design elements for future conversions. Once we have completed our design and operating modification plan, we intend to commence a staggered rollout over approximately a
three-year time frame to other markets beginning in 2005. We believe that by converting our Einstein Bros. restaurants to EB Cafés on a
market-by-market basis, we can develop a consistent marketing and advertising message to our customers. Additionally, we believe we can minimize the adverse impact that
supporting multiple brands within the same market would have on our distribution partners.

Expense Trends and/or Uncertainties

Our expense trends for fiscal 2004 were broadly affected by five major categories:



In
fiscal 2004, prices for agricultural commodities such as dairy, cheese and butter increased substantially. In fiscal 2004, our cost of goods sold increased approximately
$2.4 million as compared with fiscal 2003 as a result of increases in commodity costs. We believe that dairy prices will decrease slightly in fiscal 2005, but that decrease may be offset by
increased commodity costs for coffee, flour and packaging. Furthermore, the hurricanes in the Southeastern United States in September and October 2004 created a shortage of certain produce
items such as tomatoes. As a result, the produce

19

---



that
was available during the latter part of 2004 was both more expensive and of a lower quality than prior to these hurricanes.

Rising
energy costs and the increasing costs of other natural resources affected not only the cost of distribution to our restaurants, but also utility bills and the cost of packaging
that is derived from petroleum products. Our distribution partners and common freight carriers passed on fuel surcharges to us during fiscal 2004. We believe energy costs will continue to rise during
fiscal 2005. Additionally because the cost of packaging materials is generally established on an annual basis, we believe these costs will be greater during 2005 than the costs in 2004.

In
addition to increased prices for produce, the adverse weather experienced in the Southeastern United States also resulted in increased costs due to restaurant closures, spoilage of
food products, and damage at our restaurants due to winds and flooding. During fiscal 2004, we estimate a loss of approximately $0.5 million in revenue due to temporary store closures. The loss
of revenue resulted in a negative impact to our margins of approximately $0.3 million.

Due
to competition for personnel and limited availability in the labor pool, we experienced an increase in labor costs during 2004. We anticipate that we will continue to experience
increased competition for personnel and declining availability in the labor pool during 2005. As a result of these issues, we also anticipate that we will experience an increase in hourly and salaried
wages, as well as an increase in benefits expense as a result of rising costs of insurance. Additionally, federal overtime regulations of the Fair Labor Standards Act which went into effect on
August 23, 2004 may impact the classification of several of our positions. Changes in the reclassification of employees from management to hourly employees could also affect our labor costs.

Certain
states and local governments have increased both the rate and nature of taxes on businesses in their regions in an effort to offset budget shortfalls. These increased taxes
include real estate and property taxes, state and local income taxes, and various employment taxes.

We
rely on our network of independent distributors to distribute frozen dough and other materials to our restaurants. We are continually evaluating our distribution network to ensure it
meets our internal criteria with respect to quality and service. In the event that certain distributors fail to meet our
internal criteria or our internal criterion is improved upon, we could incur an increase in distribution costs.

Impact of Inflation

We have not experienced a significant overall impact from inflation. As operating expenses increase, we recover increased costs through pricing increases, to the
extent permitted by competition. We also review and implement alternative products or processes.

20

---



Results of Operations for Fiscal Years 2004, 2003 and 2002

|                                                             |                                                             |       |      |       |      |       |      | % Increase (Decrease) |      
|------------------------------------------------------------ | ----------------------------------------------------------- | ----- | ---- | ----- | ---- | ----- | ---- | --------------------- | -----
|
|
|
|
|Revenues:                                                    |                                                             |       |      |       |      |       |      |                       |      
|                                                             | Retail sales                                                |       | 93.0 | %     | 92.9 | %     | 92.7 | %                     | (2.4 
|                                                             | Manufacturing revenues                                      |       | 5.4  | %     | 5.6  | %     | 6.0  | %                     | (6.2 
|                                                             | Franchise and license related revenues                      |       | 1.6  | %     | 1.5  | %     | 1.4  | %                     | 5.8  
|                                                             |                                                             |       |      |       |      |       |      |                       |      
|Total revenues                                               |                                                             | 100.0 | %    | 100.0 | %    | 100.0 | %    | (2.5                  | )%   
|Cost of sales:                                               |                                                             |       |      |       |      |       |      |                       |      
|                                                             | Retail costs                                                |       | 77.2 | %     | 77.7 | %     | 75.3 | %                     | (3.1 
|                                                             | Manufacturing costs                                         |       | 4.8  | %     | 5.2  | %     | 5.4  | %                     | (9.3 
|                                                             |                                                             |       |      |       |      |       |      |                       |      
|Total cost of sales                                          |                                                             | 82.0  | %    | 82.9  | %    | 80.6  | %    | (3.5                  | )%   
|Gross profit:                                                |                                                             |       |      |       |      |       |      |                       |      
|                                                             | Retail                                                      |       | 15.8 | %     | 15.2 | %     | 17.4 | %                     | 1.3  
|                                                             | Manufacturing                                               |       | 0.6  | %     | 0.4  | %     | 0.6  | %                     | 29.2 
|                                                             | Franchise and license                                       |       | 1.6  | %     | 1.5  | %     | 1.4  | %                     | 5.8  
|                                                             |                                                             |       |      |       |      |       |      |                       |      
|Total gross profit                                           |                                                             | 18.0  | %    | 17.1  | %    | 19.4  | %    | 2.4                   | %    
|General and administrative expenses                          |                                                             | 8.8   | %    | 10.9  | %    | 10.7  | %    | (21.6                 | )%   
|Depreciation and amortization                                |                                                             | 7.4   | %    | 8.9   | %    | 8.8   | %    | (18.1                 | )%   
|Charges (adjustments) of integration and reorganization cost |                                                             | (0.2  | )%   | 0.6   | %    | 1.1   | %    | *                     |      
|Impairment charges and other related costs                   |                                                             | 0.1   | %    | 1.4   | %    | 0.0   | %    | *                     |      
|                                                             |                                                             |       |      |       |      |       |      |                       |      
|Income (loss) from operations                                |                                                             | 1.9   | %    | (4.6  | )%   | (1.2  | )%   | (139.8                | )%   
|Other expense (income):                                      |                                                             |       |      |       |      |       |      |                       |      
|                                                             | Interest expense, net                                       |       | 6.2  | %     | 8.9  | %     | 10.8 | %                     | (32.1
|                                                             | Cumulative change in the fair value of derivatives          |       | 0.0  | %     | (0.3 | )%    | (0.1 | )%                    | *    
|                                                             | Loss (gain) on sale, disposal or abandonment of assets, net |       | 0.4  | %     | (0.1 | )%    | 0.0  | %                     | *    
|                                                             | Gain on investment in debt securities                       |       | 0.0  | %     | (0.1 | )%    | (0.6 | )%                    | *    
|                                                             | Loss on exchange of Series F Preferred Stock                |       | 0.0  | %     | 6.0  | %     | 0.0  | %                     | *    
|                                                             | Other                                                       |       | (0.1 | )%    | (0.0 | )%    | (0.1 | )%                    | 65.1 
|                                                             |                                                             |       |      |       |      |       |      |                       |      
|Loss before income taxes                                     |                                                             | (4.7  | )%   | (19.0 | )%   | (11.2 | )%   | (76.0                 | )%   
|                                                             |                                                             |       |      |       |      |       |      |                       |      

---

Revenues

Total revenues for fiscal 2004 were consistent with our expectations. Total revenues decreased 2.5% for fiscal 2004 compared to fiscal 2003 and 3.8% for fiscal
2003 compared to fiscal 2002. The decreases in total revenue primarily resulted from the decline in retail sales (e.g. company-operated store sales which represent the most significant component of
revenue). Our retail comparable store sales decreased 1.9% for fiscal 2004 and 3.3% for fiscal 2003. The decrease in comparable store sales was due to a reduction in transactions of 5.4% and 4.6% for
fiscal 2004 and 2003, respectively. The effect of these decreased transactions was partially offset by an increase in check average of 3.8% and 2.0% for fiscal 2004 and 2003, respectively. The
increases experienced in average check were primarily related to a price increase coupled with a shift in product mix to higher priced items. Comparable store

21

---



sales
represent sales at stores that were open for one full year and have not been relocated or closed during the current year. Comparable store sales are also referred to as "same-store"
sales and as "comp sales" within the restaurant industry.

Throughout
fiscal 2004, the adverse trend of lower comparable store sales began to level out. The following table summarizes the elements of comparable store sales for each quarter in
fiscal 2004:

Period

Transactions

Average
Check

Comparable
Store Sales12/31/03 to 3/30/04

-5.5
%
0.7
%
-4.8
%3/31/04 to 6/29/04

-7.3
%
3.9
%
-3.7
%6/30/04 to 9/28/04

-6.3
%
5.0
%
-1.6
%9/29/04 to 12/28/04

-2.5
%
5.2
%
2.6
%


We
believe the trend in comparable store sales throughout fiscal 2004 was the result of improvements in the operation of our restaurants, the introduction of new menu items, improved
catering programs in certain markets, and the marketing and advertising campaigns that were initiated in the fourth fiscal quarter.

Gross Profit

Our total gross profit improved 2.4% for fiscal 2004 compared to fiscal 2003. The improvement was primarily due to improvements in our retail costs of sales. Our
retail margins improved by 1.3% in fiscal 2004 as compared to fiscal 2003. All store-level operating expenses other than depreciation, amortization and taxes impact our retail margins. For fiscal
2004, approximately $8.2 million of the improvement we experienced was attributable to our decision to temporarily reduce marketing expenditures as we focused on modifications to our customer
service system, menu offerings and the "look and feel" of our company-operated restaurants. Additionally we experienced an improvement in labor utilization and reductions in group insurance and
workers' compensation claims of approximately $1.1 million, offset by increases of approximately $2.4 million in commodity costs. We will continue to implement solutions that improve our
margins but expect this trend to level out during the next year, as many of our store-level cost reduction initiatives will have been in place for approximately one year.

Hurricanes
in Florida caused many of our restaurants in that state to be closed for a short period of time due to evacuations and power shortages. During fiscal 2004, we estimate a loss
of approximately $0.5 million in revenue due to the temporary closures. The loss of revenue resulted in a negative impact to our margins of approximately $0.3 million. We have filed a
claim under our business interruption insurance coverage for these losses but due to the deductibles, we have not recorded any reimbursement for the losses incurred. We believe that the amount of
reimbursement for these losses, if any, would be minimal.

Our
total gross profit decreased 14.9% in fiscal 2003 compared to fiscal 2002. The decline was primarily due to a 15.9% decrease in retail margins in fiscal 2003 when compared to fiscal
2002. Cost of retail sales increased in 2003 as a result of an increase in restaurant operating expenses. This increase was in part driven by additional food and labor costs associated with a
transition in menu item mix in response to changes in customers' menu preferences. The new items introduced had a lower contribution margin and required more labor for preparation than the items they
replaced. Consumer preferences determine the menu items selected by our customers, which in turn affects our overall cost of sales. Furthermore, certain elements of cost of sales are fixed in nature
such as rent, utilities, property taxes and manager salaries. Accordingly, when 2003 sales volumes decreased as compared to 2002 sales volumes, costs of sales did not decrease in the same proportion.
Therefore, cost of sales as a percentage of sales is adversely affected by reduced sales volume.

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Other Expenses

General and administrative expenses decreased 21.6% and 2.0% during fiscal 2004 and 2003, respectively, when compared to the preceding fiscal year. The decline in
fiscal 2004 general and administrative expenses is primarily due to reduced spending of $3.9 million for non-capitalizable legal and consulting expenses that were related to our
2003 debt refinancing and equity recapitalization, and the re-audit of our 2000 and 2001 financial results that occurred during 2003, which did not recur in 2004. Additionally, in 2004,
bad debt expense decreased $1.8 million due to improved collection efforts and management of franchisee receivables. Fiscal year 2003 general and administrative expenses declined as a result of
reduced spending as compared to fiscal 2002. General and administrative expenses in the 2002 period included approximately $2.6 million (inclusive of related payroll tax expenses) of
unauthorized bonus payments and legal expenses of approximately $1.7 million incurred in connection with our voluntary internal investigation of the unauthorized bonus payments.

Depreciation
and amortization expenses decreased 18.1% and 3.0% during fiscal 2004 and 2003, respectively, when compared to the preceding fiscal year. The fiscal 2004 decrease in
depreciation and amortization expense is primarily due to a portion of our asset base becoming fully depreciated. During the latter part of fiscal 2004, we spent additional capital on existing stores,
which will result in a corresponding increase in our depreciable asset base, and thus depreciation expense. Over the past several years, former management did not invest significant capital in our
store equipment due to limited availability of resources and covenant restrictions under our former credit facilities. Depreciation and amortization expense for fiscal 2003 declined slightly compared
to fiscal 2002.

Charges
(adjustments) of integration and reorganization cost for fiscal 2004 primarily represents adjustments to previously recorded liabilities associated with the closing and
consolidation of our Eatontown facilities during 2002. During April 2004, we reached an agreement with the landlord of our Eatontown facility to settle outstanding litigation. Previously
recorded integration and reorganization
estimates associated with closing this facility were adjusted to reflect a reduction of the prior year's accrued cost of $700,000. The charge in fiscal 2003 reflects an increase in the estimated
liability associated with closing certain facilities as part of our reorganization partially offset by an adjustment from an estimated reorganization liability recorded in 2002. Additional information
regarding charges (adjustments) of integration and reorganization costs is included in footnote 18 of Item 8 of this report.

During
fiscal 2004, we recorded $450,000 in impairment charges for long-lived asset impairments and exit costs from the decision to close two restaurants and to write down
the assets of five under-performing restaurants. During fiscal 2003, we recorded a charge of approximately $5.3 million due to the reduced value of certain trademarks associated with our
Manhattan and Chesapeake brands and the value of franchisee territory rights for our Manhattan brand. There was no impairment of intangible assets in fiscal 2004.

Interest
expense, net decreased 32.1% and 20.3% during fiscal 2004 and 2003, respectively, when compared to the preceding fiscal year. In July 2003, we refinanced our debt which
resulted in a decline in interest expense for fiscal 2004. As a result of the debt refinancing, the stated interest rate on our primary debt facility declined from 18% to 13% per year. The primary
cause of the fiscal 2003 decline in interest expense is due to a $7.0 million decline in interest associated with a $35 million asset-backed secured loan through a wholly-owned
subsidiary, which was retired in 2003. Fiscal 2002 reflected a full year of interest in addition to the effective interest amortization of the initial discount and the estimated future warrants. In
contrast, fiscal 2003 reflected a partial year of interest and no effective interest amortization.

As
a result of the equity recapitalization in September 2003, we no longer have contingently issuable warrants and all issued warrants are classified as permanent equity. The
cumulative change in fair value of derivatives during fiscal 2003 is due to the change in the fair value of warrants classified as a derivative liability based on the underlying fair value of common
stock to which they are indexed and,

23

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for
contingently-issuable warrants classified as a derivative liability, the estimated probability of issuance and other pertinent factors.

During
fiscal 2004, we recorded a loss on disposal or abandonment of assets of approximately $2.3 million, primarily due to the disposal of menu boards as a result of our new menu
offerings and due to the abandonment of leasehold improvements related to closed restaurants and our administrative facilities located in New Jersey. Additional information regarding the loss (gain)
on sale, disposal or abandonment of assets is included in footnote 19 of Item 8 of this report.

In
fiscal 2003, we recognized a gain on the investment in debt securities of $0.4 million from our investment in the Einstein/Noah Bagel Corp. 7.25% Convertible Debentures due
2004. The proceeds from the bankruptcy court were in excess of our original estimates.

In
September 2003, we completed an equity recapitalization with our preferred stockholders, who held a substantial portion of our common stock. Among other things, our Mandatorily
Redeemable Series F Preferred Stock was eliminated. In exchange, we issued 57,000 shares of Series Z Mandatorily Redeemable Preferred Stock to Halpern Denny Fund III, L.P. and we issued
9,380,843 shares of our common stock to Greenlight Capital and affiliates. The exchange of the Halpern Denny interest resulted in a reduction of our effective dividend rate and as a result of this and
other factors, we accounted for this transaction as troubled debt restructuring. This exchange did not result in a gain from troubled debt restructuring. The exchange of the Greenlight interest into
common shares was recorded at fair value, which resulted in a loss upon exchange of approximately $23.0 million reflected in fiscal 2003.

Financial Condition and Liquidity

We have historically relied upon our major preferred and common stockholders to provide us with supplemental financing at times when our cash flows from
operations have been insufficient to cover our capital requirements or the requirements of other debt. The restaurant industry is predominantly a cash business where cash is received at the time of
the transaction. We have a minimal amount of accounts receivable, which are predominantly from our franchisees, licensees and distributors. Additionally, our investment in inventory is minimal since
our products are perishable. Our accounts payable are on terms that we believe are consistent with those of other companies within the industry.

The
primary driver of our operating cash flow is our restaurant operations, specifically the gross margin from our company-operated restaurants. Therefore, we focus on the elements of
those operations including comparable store sales to ensure a steady stream of operating profits that enable us to meet our cash obligations. On a weekly basis, we review our company-operated store
performance compared with the same period in the prior year and our operating plan. We are continuously identifying and implementing cost reduction initiatives, not only at the store operations level,
but also within other disciplines such as supply chain, manufacturing operations and overhead. Examples of our 2004 cost reduction initiatives included:



During
2005, we will continue to identify cost reduction initiatives, including but not limited to: menu optimization, reductions in cost of goods sold through purchasing efficiencies
and further refinement of programs that monitor theoretical food cost.

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During
fiscal 2004, the majority of our capital expenditures were focused on the following: (1) requirements of our existing company-operated stores, primarily equipment
replacement and new computer hardware, (2) upgrades and remodeling costs associated with the openings of EB Café, (3) capital spent on our manufacturing operations and
upgrades to our bagel manufacturing equipment located at our contract manufacturer's site and (4) additional capital for our support center in Golden, Colorado, primarily related to spending on
information technology upgrades and maintenance. We anticipate that the majority of our capital expenditures for fiscal 2005 will be focused on remodeling costs of current restaurants and new openings
of EB Café.

Based
upon our projections for fiscal 2005 and beyond, we believe that the cash flow from operations coupled with the continued availability of our AmSouth Revolver will be adequate to
fund our operations, capital expenditures and required debt and interest repayments for the foreseeable future.

Our
AmSouth Revolver is a $15 million senior secured revolving credit facility, which matures on July 8, 2006. On December 28, 2004, our unused credit facility
totaled approximately $10.0 million, net of outstanding letters of credit of $5.0 million. Our credit facility contains financial covenants relating to the maintenance of leverage and
coverage ratios. The credit facility also contains affirmative and negative covenants including, among other things, limitations on certain additional indebtedness, capital expenditures and minimum
EBITDA as defined in the AmSouth agreement. We were in compliance with all covenants at December 28, 2004 and do not anticipate that the covenants will impact our ability to borrow under our
credit facility for its remaining term. On February 11, 2005, the AmSouth Revolver was amended to increase our letter of credit sub-facility from $5 million to
$7.5 million.

We
are currently in discussions with Bear Stearns regarding the refinancing of our $160 Million Notes and the AmSouth Revolver. We believe refinancing may reduce interest expense.

If
at some point in the future we require additional financing, we can not assure you that any additional financing would be available on acceptable terms, or at all. If we are unable to
obtain additional financing, we may be required to further reduce costs associated with our current infrastructure, decrease spending on marketing and advertising campaigns, curtail research and
development programs and/or halt all other discretionary spending programs, any of which could reduce sales and adversely affect liquidity and operations.

On
December 28, 2004, we had unrestricted cash of $9.8 million and restricted cash of $3.8 million. On December 30, 2003, we had unrestricted cash of
$9.6 million and restricted cash of $4.9 million. We reduced our working capital deficit to $18.7 million in fiscal 2004 compared with a working capital deficit of
$23.6 million in fiscal 2003.

Operating Activities

During fiscal 2004, operations generated $11.1 million of cash. We believe we will continue to see improvements in our cash flow from operations during
2005 and that such cash flow will be adequate to fund operating costs. Due to the timing of interest payments under our $160 Million Notes, which are due January 1 and July 1, we
generally consume cash from operations during the first and third fiscal quarters of each year. During the second and fourth fiscal quarters of each year, we generally generate cash from operations.
Historically, our fourth quarter is our strongest quarter for generating cash due to seasonality and gift card promotions.

Investing Activities

During fiscal 2004, we used $9.4 million of cash to purchase additional property and equipment which included $1.2 million for new stores,
$5.8 million for replacement and new equipment at our existing company-operated stores, $0.8 million for our manufacturing operations and $1.6 million for general corporate
purposes.

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Financing Activities

During fiscal 2004, we used $1.0 million of cash to reduce our debt outstanding on the AmSouth Revolver, approximately $0.8 million to repay our
obligations under the Chesapeake Bagel Bakery Note Payable and approximately $0.3 million to repay our obligations under the New Jersey Economic Development Authority Note Payable. This is
further described in Note 10 of our consolidated financial statements set forth in Item 8 of this report.

Contractual Obligations

The following table summarizes the amounts of payments due under specified contractual obligations as of December 28, 2004 (in thousands):

|                                              |  | Payments Due by Period
|--------------------------------------------- |  | ----------------------
|
|Accounts payable and accrued expenses         |  | $                     
|Debt                                          |  |                       
|Interest expense on $160 Million Notes        |  |                       
|Manditorily Redeemable Series Z               |  |                       
|Minimum lease payments under capital leases   |  |                       
|Minimum lease payments under operating leases |  |                       
|Purchase obligations(a)                       |  |                       
|Other long-term obligations(b)                |  |                       
|                                              |  |                       
|Total                                         |  | $                     
|                                              |  |                       

---

We
also have $5 million in letters of credit outstanding. The letters of credit expire on various dates during 2005, are automatically renewable for one additional year and are
payable upon demand in the event that we fail to pay certain workers compensation claims.

Off-Balance Sheet Guarantees

As of December 28, 2004, we had outstanding guarantees of indebtedness under certain leases of approximately $1.6 million. Additionally we had other
outstanding guarantees of indebtedness of approximately $125,000.

Non-GAAP Financial Measures

Free cash flow and EBITDA (which we define as earnings before: (1) interest, (2) taxes, (3) depreciation and amortization,
(4) integration and reorganization charges, (5) cumulative change in fair value of derivatives, (6) gain/loss on the investment, sale, disposal or exchange of assets,
(7) impairment and other related charges and (8) other income) are a basis upon which we measure our financial performance, as well as our ability to pay down debt, save cash for future
use and build shareholder equity. We also use these measures for budget and planning purposes. If a prior estimated charge subsequently has a non-cash adjustment, that amount is not included in our
reconciliation to EBITDA. We provide data regarding free cash flow and EBITDA as additional information for

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investors.
We believe that the presentation of these calculations provides meaningful non-GAAP financial measures to help investors understand and compare business trends among different
reporting periods on a consistent basis. These measures are not in accordance with, or an alternative to, generally accepted accounting principles (GAAP). Rather, these measures are intended to
supplement GAAP financial information, and may be different from the measures used by other companies.

A
reconciliation of GAAP numbers adjusted for free cash flow and EBITDA is as follows (in thousands of dollars):

|                                                                           |                                                     | 2004 |   | 2003   |   | 2002 |       
|-------------------------------------------------------------------------- | --------------------------------------------------- | ---- | - | ------ | - | ---- | ------
|Reconciliation of Net Cash Used in Operating Activities to Free Cash Flow: |                                                     |      |   |        |   |      |       
|                                                                           | Net cash provided by (used in) operating activities |      | $ | 11,110 |   | $    | 2,015 
|                                                                           | Less: purchases of fixed assets                     |      |   | (9,393 | ) |      | (6,921
|                                                                           |                                                     |      |   |        |   |      |       
|                                                                           | Free Cash Flow                                      |      | $ | 1,717  |   | $    | (4,906
|                                                                           |                                                     |      |   |        |   |      |       

|                                     |              | 2004                                                        |   | 2003    |        | 2002 |        
|------------------------------------ | ------------ | ----------------------------------------------------------- | - | ------- | ------ | ---- | -------
|
|Reconciliation of Net Loss to EBITDA |              |                                                             |   |         |        |      |        
|                                     | Net Loss     |                                                             |   | (17,405 | )      |      | (73,521
|                                     | Adjustments: |                                                             |   |         |        |      |        
|                                     |              | Interest expense, net                                       |   |         | 23,196 |      |        
|                                     |              | Cumulative change in the fair value of derivatives          |   |         |       |      |        
|                                     |              | Gain on investment in debt securities                       |   |         |       |      |        
|                                     |              | Loss (gain) on sale, disposal or abandonment of assets, net |   |         | 1,557  |      |        
|                                     |              | Loss on exchange of Series F Preferred Stock                |   |         |       |      |        
|                                     |              | Other income                                                |   |         | (284   | )    |        
|                                     |              | Provision (benefit) for income taxes                        |   |         | (49    | )    |        
|                                     |              | Depreciation and amortization                               |   |         | 27,848 |      |        
|                                     |              | Charges for integration and reorganization costs            |   |         |       |      |        
|                                     |              | Impairment charges and other related costs                  |   |         | 450    |      |        
|                                     |              |                                                             |   |         |        |      |        
|                                     | EBITDA       |                                                             | $ | 35,313  |        | $    | 23,822 
|                                     |              |                                                             |   |         |        |      |        

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costsan amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) and amends Paragraph 5 of ARB 43, Chapter 4, by requiring that those items be recognized as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that allocation of fixed-production overhead be based on the normal capacity of the production facilities. This Statement is effective during fiscal
years beginning after June 15, 2005. We do not believe the adoption of this Statement will have a material impact on our financial position and results of operations.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004) entitled "Share-Based Payment" that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for a) equity instruments of the enterprise or b) liabilities that are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and generally

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would
require instead that such transactions be accounted for using a fair-value-based method. This Statement is effective as of the first interim or annual reporting period that begins
after June 15, 2005. We have not fully completed our evaluation of the impact this Statement will have on our financial position and results of operations. Based on options granted and various
assumptions used to calculate stock based compensation expense as of December 28, 2004, we anticipate that the impact of adoption would result in an increase to expenses of approximately
$471,000 for fiscal 2005. If actual events differ from our assumptions used to calculate the expense, our financial results could be impacted. Pro forma results of the impact on net loss for fiscal
years ended 2004, 2003 and 2002 are presented in Note 2 "Stock Based Compensation" of our consolidated financial statements set forth in Item 8 of this report.

We
have considered all other recently issued accounting pronouncements and do not believe that the adoption of such pronouncements will have a material impact on our financial
statements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates based on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We
believe the following critical accounting policies impact our more significant judgments and estimates used in the preparation of our financial statements. Our significant accounting
policies are discussed in Note 2 to our consolidated financial statements set forth in Item 8 of this report.

Property and Equipment and the Related Depreciation and Amortization Expense

Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. The useful lives
of the assets are based upon our expectations of the period of time that the asset will be used to generate revenue. We periodically review the assets for changes in circumstances, which may impact
their useful lives.

In
late January 2005, we commenced a review of our accounting policies and practices with respect to leasehold amortization and deferred rent. Historically, we amortized our
leasehold improvements over a period that included both the noncancelable term of the lease and its option periods (or the useful life of the asset, if shorter). Concurrently, we used the
noncancelable lease term in determining whether each of our leases was an operating lease or a capital lease and in calculating our straight-line rent expense. We believed that these
longstanding accounting treatments were appropriate under generally accepted accounting principles. Furthermore, we believed that these accounting treatments were comparable to the practices of other
public companies. However, after noting recent Form 8-K filings by various restaurant companies and other multi-location entities and following discussions with Grant Thornton LLP,
we have now interpreted the authoritative accounting literature to require that we use the same lease term in amortizing leasehold improvements as we use in determining capital versus operating leases
and in calculating straight-line rent expense. Accordingly, we have adopted the following policy: we generally limit the depreciable lives for our leasehold improvements, which are subject
to a lease, to the lesser of the useful life or the noncancelable lease term. However, in circumstances where we would incur an economic penalty by not exercising one or more option periods, as
contemplated by SFAS No. 13, we may include one or more option periods when determining the depreciation period. In either circumstance, our policy requires consistency when

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calculating
the depreciation period, in classifying the lease, and in computing straight-line rent expense. As a result of this change, our financial results have been restated. We expect
that in future years, depreciation and amortization will increase by approximately $1.0 million per year assuming stable levels of capital expenditures going forward.

Impairment of Long-Lived Assets

We review property and equipment for impairment when events or circumstances indicate that the carrying amount of a restaurant's assets may not be recoverable. We
test for impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimate of future cash flows. Relevant facts and circumstances may include, but
are not limited to, local competition in the area, the ability of existing store management, the necessity of tiered pricing structures and the impact that conversion to the EB Café
concept may have on our estimates. This process requires the use of estimates and assumptions, which are subject to high degree of judgment. In the event that these estimates and assumptions change in
the future, we may be required to record impairment charges for these assets.

At
least annually, we utilize independent valuation experts to assist us in assessing the recoverability of goodwill and other intangible assets related to our restaurant concepts. These
impairment tests require us to estimate the fair values of our restaurant concepts by making assumptions regarding future profits and cash flows, expected growth rates, terminal values, discount rates
and other factors. In the event that these assumptions change in the future, we may be required to record impairment charges for these assets.

Self-Insurance

We are self-insured for certain losses related to health, general liability and workers' compensation. We maintain stop loss coverage with third party
insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated
liability is established and discounted at 10% based upon analysis of historical data and actuarial estimates and is reviewed on a quarterly basis to ensure that the liability is appropriate. If
actual trends, including the severity or frequency of claims differ from our estimates, our financial results could be impacted.

Guarantees

In the past, we would sometimes guarantee leases for the benefit of certain of our franchisees. We record a liability for our exposure under the guarantees when
such exposure is probable and estimable. Current franchisees are the primary lessees under the vast majority of these leases. Under the lease guarantees, we may be required by the lessor to make all
of the remaining monthly rental payments or property tax and common area maintenance payments if the franchisee does not make the required payments in a timely manner. However, we believe that most,
if not all, of the franchised locations
could be subleased to third parties minimizing our potential exposure. Additionally, we have indemnification agreements with our franchisees under which the franchisees would be obligated to reimburse
us for any amounts paid under such guarantees. Historically, we have not been required to make such payments in significant amounts. In the event that trends change in the future, our financial
results could be impacted.

We
are also liable for certain debt guarantees we made in connection with our franchisees' initial equipment purchases. This program has since been discontinued and most of our debt
guarantees mature during 2006 and 2007. When we have been required to make significant payments related to the debt guarantees, we have recorded a liability where we believe our exposure is probable
and estimable.

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Forward Looking Statements

We wish to caution our readers that the following important factors, among others, could cause the actual results to differ materially from those indicated by
forward-looking statements made in this report and from time to time in news releases, reports, proxy statements, registration statements and other written communications, as well as verbal
forward-looking statements made from time to time by representatives of the company. Such forward-looking statements involve risks and uncertainties that may cause our actual results, performance or
achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to
differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, restaurant openings or closings, operating margins, the availability
of acceptable real estate locations, the sufficiency of our cash balances and cash generated from operating and financing activities for our future liquidity and capital resource needs, and other
matters, and are generally accompanied by words such as: believes, anticipates, estimates, predicts, expects, and similar expressions that convey the uncertainty of future events or outcomes. An
expanded discussion of some of these risks factors follows.

We may not be successful in implementing any or all of the initiatives of our business strategy.

Our success depends in part on our ability to understand our customers' needs. We believe successful deployment of our current business strategy will address
customers' needs and contribute to overall company growth. While we believe our new EB Café concept will revitalize the Einstein Bros. brand, its success is dependent upon various
factors, including customer acceptance of new menu offerings and pricings, the look and feel of the restaurant, and the new service system. In addition, the availability of capital and opportunities
to make modifications to existing stores will be significant factors in the
success of our business strategy. If we improperly perceive customers' needs and/or are not successful in implementing any or all of the initiatives of our business strategy, it could have a material
adverse effect on our business, results of operations, and financial condition.

We have and expect to continue to have a substantial amount of debt.

We have a high level of debt and are highly leveraged. In addition, we may, subject to certain restrictions, incur substantial additional indebtedness in the
future. Our high level of debt, among other factors, could:



We may not be able to generate sufficient cash flow to make payments on our indebtedness.

Economic, financial, competitive, legislative and other factors beyond our control may affect our ability to generate cash flow from operations to make payments
on our indebtedness, including the $160 Million Notes, and to fund necessary working capital. A significant reduction in operating cash flow would likely increase the need for alternative sources of
liquidity. If we are unable to generate

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sufficient
cash flow to make payments on our debt, we will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing our debt on terms that are not
favorable to us, selling assets or raising equity. We may not be able to accomplish any of these alternatives on satisfactory terms, if at all, and even if accomplished, they may not yield sufficient
funds to service our debt.

We are vulnerable to changes in consumer preferences and economic conditions that could harm our financial results.

Food service businesses are often affected by changes in consumer tastes, dietary trends, national, regional and local economic conditions and demographic trends.
Factors such as traffic patterns, local demographics and the type, number and location of competing restaurants may adversely affect the performance of individual locations. Shifts in consumer
preferences away from our type of cuisine and/or the quick casual style could have a material adverse affect on our results of operations. We believe that the trend toward consumption of food low in
carbohydrate content may have had and may continue to have a negative impact on our sales and revenues. In addition, increased food and energy costs have affected our results and may, in the future,
together with inflation, harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on
pricing, which could harm our business prospects, financial condition, operating results and cash flow. Our continued success will depend in part on our ability to anticipate, identify and respond to
changing consumer preferences and economic conditions.

There is intense competition in the restaurant industry for personnel, real estate, advertising space, and customers, among other things.

Our industry is intensely competitive and there are many well-established competitors with substantially greater financial and other resources than we
have. In addition to current competitors, one or more new major competitors with substantially greater financial, marketing and operating resources could enter the market at any time and compete
directly against us. In addition, in
virtually every major metropolitan area in which we operate or expect to enter, local or regional competitors already exist. This may make it more difficult to obtain real estate, advertising space,
and retain customers and personnel.

We are vulnerable to fluctuations in the cost, availability and quality of our raw ingredients.

The
cost, availability and quality of the ingredients we use to prepare our food are subject to a range of factors, many of which are beyond our control. Fluctuations in economic and
political conditions, weather and demand could adversely affect the cost of our ingredients. During 2004, weather has been a factor in the increase in commodity prices. We have limited control over
fluctuations in the price and quality of commodities, and we may not be able to pass through any cost increases to our customers. We are dependent on frequent deliveries of fresh ingredients, thereby
subjecting us to the risk of shortages or interruptions in supply. All of these factors could adversely affect our business and financial results.

We heavily depend on our suppliers and distributors.

We currently purchase our raw materials from various suppliers. We purchase a majority of our frozen bagel dough from one supplier (who utilizes our proprietary
processes) and on which we are dependent upon in the short-term. Additionally, we purchase all of our cream cheese from a single source. Though to date we have not experienced significant
difficulties with our suppliers, our reliance on our suppliers subjects us to a number of risks, including possible delays or interruption in supplies, diminished control over quality and a potential
lack of adequate raw material capacity. Any disruption

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in
the supply or degradation in the quality of the materials provided by our suppliers could have a material adverse effect on our business, operating results and financial condition. In addition,
such disruptions in supply or degradations in quality could have a long-term detrimental impact on our efforts to develop a strong brand identity and a loyal consumer base.

We
depend on our network of six regional custom distributors to distribute frozen bagel dough and other materials to our locations. If any one or more of these distributors fails to
perform as anticipated, or if there is any disruption in any of our distribution relationships for any reason, it could have a material adverse effect on our business, financial condition and results
of operations.

Increasing labor costs could adversely affect our continued profitability.

We are dependent upon an available labor pool of employees, many of whom are hourly employees whose wages may be affected by an increase in the federal or state
minimum wage. Numerous proposals have been made on federal, state and local levels to increase minimum wage levels. Although few, if any, of our employees are paid at the minimum wage level, an
increase in the minimum wage may create pressure to increase the pay scale for our employees, which would increase our labor costs and those of our franchisees and licensees. A shortage in the labor
pool or other general inflationary pressures or changes could also increase labor costs. In addition, changes in labor laws or reclassifications of employees from management to hourly employees could
affect our labor cost. For example, federal overtime regulations under the Fair Labor Standards Act, which went into effect on August 23, 2004, may impact the classification of several of our
positions. We are continuing to evaluate the specific impact of these changes. An increase in labor costs could have a material adverse effect on our income from operations and decrease our
profitability and cash available to service our debt obligations if we are unable to recover these increases by raising the prices we charge our customers.

We face the risk of adverse publicity and litigation in connection with our operations.

We are from time to time the subject of complaints or litigation from our consumers alleging illness, injury or other food quality, health or operational
concerns. Adverse publicity resulting from these allegations may materially adversely affect us, regardless of whether the allegations are valid or whether we are liable. In addition, employee claims
against us based on, among other things, discrimination, harassment or wrongful termination may divert financial and management resources that would otherwise be used to benefit our future
performance. We have been subject to claims from time to time, and although these claims have not historically had a material impact on our operations, a significant increase in the number of these
claims or the number that are successful could materially adversely affect our business, prospects, financial condition, operating results or cash flows.

We rely in part on our franchisees.

We rely in part on our franchisees and the manner in which they operate their locations to develop and promote our business. Although we have developed criteria
to evaluate and screen prospective franchisees, franchisees may not have the business acumen or financial resources necessary to operate successful franchises in their franchise areas. The failure of
franchisees to operate franchises successfully could have a material adverse effect on us, our ability to collect royalties, our reputation, our brands and our ability to attract prospective
franchisees.

We face risks associated with government regulation.

Each of our locations is subject to licensing and regulation by the health, sanitation, safety, labor, building and fire agencies of the respective states and
municipalities in which it is located. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing

32

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of
facilities for an indeterminate period of time, or third-party litigation, any of which could have a material adverse effect on us and our results of operations.

In
addition, our franchising operations are subject to regulation by the Federal Trade Commission. Our franchisees and we must also comply with state franchising laws and a wide range of
other state and local rules and regulations applicable to our business. The failure to comply with federal, state and local rules and regulations would have an adverse effect on our franchisees and
us.

Under
various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on or in
such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although we are not
aware of any environmental conditions that require remediation by us under federal, state or local law at our properties, we have not conducted a comprehensive environmental review of our properties
or operations. We may not have identified all of the potential environmental liabilities at our properties, and any such liabilities that are identified in the future may have a material adverse
effect on our financial condition.

We may not be able to protect our trademarks, service marks and other proprietary rights.

We believe that our trademarks, service marks and other proprietary rights are important to our success and our competitive position. Accordingly, we devote
substantial resources to the establishment and protection of our trademarks, service marks and proprietary rights. However, the actions we take may be inadequate to prevent imitation of our products
and concepts by others or to prevent others from claiming violations of their trademarks and proprietary rights by us. In addition, others may assert rights in our trademarks, service marks and other
proprietary rights.

We have a majority stockholder.

Greenlight Capital, L.L.C. and its affiliates beneficially own approximately 97 percent of our common stock. As a result, Greenlight has sufficient voting
power, without the vote of any other stockholders, to determine what matters will be submitted for approval by our stockholders, to approve actions by written consent without the approval of any other
stockholders, to elect all of our board of directors, and to determine whether a change in control of our company occurs. Greenlight's interests on matters submitted to stockholders may be different
from those of other stockholders. Greenlight is not involved in our day-to-day operations, but Greenlight has voted its shares to elect our current board of directors. The
chairman of our board of directors is a current employee of Greenlight.

Our
common stock is not currently listed on any stock exchange or Nasdaq. As a result, we are not subject to corporate governance rules adopted by the New York Stock Exchange, American
Stock Exchange and Nasdaq requiring a majority of directors to be independent and requiring compensation and nominating committees that are composed solely of independent directors. However, we are
subject to rules requiring that the audit committee consist entirely of independent directors. Under the rules of these stock exchanges and Nasdaq, if a single stockholder holds more that 50% of the
voting power of a listed company, that company is considered a controlled company, and except for the rules relating to independence of the audit committee, is exempt from the above-mentioned
independence rules. Since Greenlight beneficially owns approximately 97 percent of our common stock, we may take advantage of the controlled company exemption if our common stock becomes listed
on an exchange or Nasdaq in the future. As a result, our stockholders currently do not have, and may never have, the protections that these rules are intended to provide.

33

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Future sales of shares of our common stock by our stockholders could cause our stock price to fall.

If a substantial number of shares of our common stock are sold in the public market, the market price of our common stock could fall. The perception among
investors that these sales will occur could also produce this effect. Our majority stockholder Greenlight beneficially owns approximately 97 percent of our common stock and sales by Greenlight
or a perception that Greenlight will sell could cause a decrease in the market price of our common stock. Additionally, holders of outstanding warrants may convert and sell the underlying shares in
the public market. Pursuant to our obligations under registration rights agreements, we have registered 957,872 shares of common stock underlying certain warrants, of which Greenlight owns warrants to
purchase approximately 493,683 shares of our common stock. Sales of shares or a perception that there will be sales of the underlying shares could also cause a decrease in the market price of our
common stock.

Holders may find it difficult to effect transactions in our common stock.

Our common stock is currently quoted on the "pink sheets" under the symbol "NWRG.PK." Before changing our symbol on October 20, 2003, our common stock was
quoted on the "pink sheets" under the symbol "NWCI.PK." Since our common stock is not listed on Nasdaq, the American Stock Exchange or the New York Stock Exchange, holders of our common stock may find
that the liquidity of our common stock is impairednot only in the number of securities that can be bought and sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of us, and lower prices for our securities than might otherwise be attained.

Securities
that are not listed on a stock exchange, the Nasdaq National Market or the Nasdaq SmallCap Market are subject to an SEC rule that imposes special requirements on
broker-dealers who sell those securities to persons other than their established customers and accredited investors. The broker-dealer must determine that the security is suitable for the purchaser
and must obtain the purchaser's written consent prior to the sale. These requirements may make it more difficult for stockholders to sell our stock than the stock of some other companies. It may also
affect our ability to raise more capital if and when necessary.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For the fiscal years ended 2004 and 2003, our results of operations, financial position and cash flows have not been materially affected by changes in the
relative values of non-U.S. currencies to the U.S. dollar. We do not use derivative financial instruments to limit our foreign currency risk exposure since virtually all of our business is
conducted in the United States.

Our
debt as of December 28, 2004 and December 30, 2003 is principally comprised of the $160 Million Notes due July 1, 2008 and the AmSouth Revolver. A 100 basis
point increase in market interest rates would have an immaterial effect on our borrowing costs, since the interest rate on the $160 Million Notes is fixed. The interest rate on the AmSouth Revolver
fluctuates with changes in the prime rate, but is immaterial in relation to interest expense under the $160 Million Notes and in our results of operations and financial condition.

We
purchase certain commodities such as butter, cheese, coffee and flour. These commodities are generally purchased based upon market prices established with vendors. These purchase
arrangements may contain contractual features that limit the price paid by establishing certain price floors or caps. We do not use financial instruments to hedge commodity prices because these
purchase arrangements help control the ultimate cost paid and any commodity price aberrations are generally short-term in nature.

This
market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic
and global financial markets.

34

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



|                                   
|-----------------------------------
|Audited Annual Financial Statements
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   

35

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors
New World Restaurant Group, Inc.

We
have audited the accompanying consolidated balance sheets of New World Restaurant Group, Inc. and Subsidiaries as of December 28, 2004 and December 30, 2003, and
the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 28, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above, present fairly, in all material respects, the financial position of New World Restaurant Group, Inc. and
Subsidiaries as of December 28, 2004 and December 30, 2003, and the results of their operations, and their cash flows for each of the three years in the period ended December 28,
2004, in conformity with accounting principles generally accepted in the United States of America.

Our
audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of additional analysis and
is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and in our opinion, is
fairly stated in all material respects in relation to the basic financial statements taken as a whole.

As
discussed in Note 2, the Company has restated their consolidated financial statements for the years ended December 30, 2003 and December 31, 2002, to record
amortization expense on leasehold improvements in conformity with accounting principles generally accepted in the United States of America.

|/s/GRANT THORNTON LLP |  | 
|--------------------- |  | 

Denver,
Colorado
February 21, 2005

36

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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        AS OF DECEMBER 28, 2004 AND DECEMBER 30, 2003        (in thousands, except share
information)

|                                      |                                                                                                                                                                          | December 28,
2004                                                      |                             | December 30,
2003                           |       
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | --------------------------- | ------------------------------------------- | ------
|
|ASSETS                                |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      | Current assets:                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          | Cash and cash equivalents                                              |                             | $                                           | 9,752 
|                                      |                                                                                                                                                                          | Restricted cash                                                        |                             |                                             | 1,269 
|                                      |                                                                                                                                                                          | Franchise and other receivables, net of allowance of $2,475 and $3,310 |                             |                                             | 7,123 
|                                      |                                                                                                                                                                          | Inventories                                                            |                             |                                             | 4,941 
|                                      |                                                                                                                                                                          | Prepaid expenses and other current assets                              |                             |                                             | 1,643 
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        | Total current assets        |                                             |       
|                                      | Restricted cash long-term                                                                                                                                                |                                                                        |                             | 2,526                                       |       
|                                      | Property and equipment, net                                                                                                                                              |                                                                        |                             | 41,855                                      |       
|                                      | Trademarks and other intangibles, net                                                                                                                                    |                                                                        |                             | 77,219                                      |       
|                                      | Goodwill                                                                                                                                                                 |                                                                        |                             | 4,875                                       |       
|                                      | Debt issuance costs and other assets                                                                                                                                     |                                                                        |                             | 7,253                                       |       
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        | Total assets                |                                             | $     
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      | Current liabilities:                                                                                                                                                     |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          | Accounts payable                                                       |                             | $                                           | 8,243 
|                                      |                                                                                                                                                                          | Accrued expenses                                                       |                             |                                             | 34,836
|                                      |                                                                                                                                                                          | Short term debt and current portion of long-term debt                  |                             |                                             | 295   
|                                      |                                                                                                                                                                          | Current portion of obligations under capital leases                    |                             |                                             | 16    
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        | Total current liabilities   |                                             |       
|                                      | Senior notes and other long-term debt                                                                                                                                    |                                                                        |                             | 160,840                                     |       
|                                      | Obligations under capital leases                                                                                                                                         |                                                                        |                             | 31                                          |       
|                                      | Other liabilities                                                                                                                                                        |                                                                        |                             | 9,678                                       |       
|                                      | Mandatorily redeemable, Series Z Preferred Stock, $.001 par value, $1,000 per share liquidation value; 2,000,000 shares authorized; 57,000 shares issued and outstanding |                                                                        |                             | 57,000                                      |       
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        | Total liabilities           |                                             |       
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      | Stockholders' deficit:                                                                                                                                                   |                                                                        |                             |                                             |       
|                                      | Common stock, $.001 par value; 15,000,000 shares authorized; 9,848,713 and 9,841,828 shares issued and outstanding                                                       |                                                                        |                             | 10                                          |       
|                                      | Additional paid-in capital                                                                                                                                               |                                                                        |                             | 175,797                                     |       
|                                      | Unamortized stock compensation                                                                                                                                           |                                                                        |                             | (137                                        | )     
|                                      | Accumulated deficit                                                                                                                                                      |                                                                        |                             | (288,153                                    | )     
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        | Total stockholders' deficit |                                             |       
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       
|                                      |                                                                                                                                                                          |                                                                        |                             | Total liabilities and stockholders' deficit |       
|                                      |                                                                                                                                                                          |                                                                        |                             |                                             |       

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

37

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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        FOR THE YEARS ENDED DECEMBER 28, 2004, DECEMBER 30, 2003 AND DECEMBER 31, 2002        (in thousands, except earnings per share and related share information)

|                                                      |                                                                  | December 28,
2004 |         | December 30,
2003 |   | December 31,
2002 |          
|----------------------------------------------------- | ---------------------------------------------------------------- | ----------------- | ------- | ----------------- | - | ----------------- | ---------
|
|Revenues:                                             |                                                                  |                   |         |                   |   |                   |          
|                                                      | Retail sales                                                     |                   | $       | 347,786           |   | $                 | 356,225  
|                                                      | Manufacturing revenues                                           |                   |         | 20,122            |   |                   | 21,457   
|                                                      | Franchise and license related revenues                           |                   |         | 5,952             |   |                   | 5,624    
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Total revenues                                        |                                                                  |                   | 373,860 |                   |   | 383,306           |          
|Cost of sales:                                        |                                                                  |                   |         |                   |   |                   |          
|                                                      | Retail costs                                                     |                   |         | 288,736           |   |                   | 297,934  
|                                                      | Manufacturing costs                                              |                   |         | 17,925            |   |                   | 19,756   
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Total cost of sales                                   |                                                                  |                   | 306,661 |                   |   | 317,690           |          
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Gross profit                                          |                                                                  |                   | 67,199  |                   |   | 65,616            |          
|Operating expenses:                                   |                                                                  |                   |         |                   |   |                   |          
|                                                      | General and administrative expenses                              |                   |         | 32,755            |   |                   | 41,794   
|                                                      | Depreciation and amortization                                    |                   |         | 27,848            |   |                   | 34,013   
|                                                      | Charges (adjustments) of integration and reorganization cost     |                   |         | (869              | ) |                   | 2,132    
|                                                      | Impairment charges and other related costs                       |                   |         | 450               |   |                   | 5,292    
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Income (loss) from operations                         |                                                                  |                   | 7,015   |                   |   | (17,615           | )        
|Other expense (income):                               |                                                                  |                   |         |                   |   |                   |          
|                                                      | Interest expense, net                                            |                   |         | 23,196            |   |                   | 34,184   
|                                                      | Cumulative change in the fair value of derivatives               |                   |         |                  |   |                   | (993     
|                                                      | Loss (gain) on sale, disposal or abandonment of assets, net      |                   |         | 1,557             |   |                   | (558     
|                                                      | Gain on investment in debt securities                            |                   |         |                  |   |                   | (374     
|                                                      | Loss on exchange of Series F Preferred Stock due to Equity Recap |                   |         |                  |   |                   | 23,007   
|                                                      | Other                                                            |                   |         | (284              | ) |                   | (172     
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Loss before income taxes                              |                                                                  |                   | (17,454 | )                 |   | (72,709           | )        
|Provision (benefit) for state income taxes            |                                                                  |                   | (49     | )                 |   | 812               |          
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Net loss                                              |                                                                  |                   | (17,405 | )                 |   | (73,521           | )        
|Dividends and accretion on Preferred Stock            |                                                                  |                   |        |                   |   | (14,423           | )        
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Net loss available to common stockholders             |                                                                  | $                 | (17,405 | )                 | $ | (87,944           | )        
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Net loss per common shareBasic and Diluted           |                                                                  | $                 | (1.77   | )                 | $ | (22.71            | )        
|                                                      |                                                                  |                   |         |                   |   |                   |          
|Weighted average number of common shares outstanding: |                                                                  |                   |         |                   |   |                   |          
|                                                      | Basic and Diluted                                                |                   |         | 9,842,414         |   |                   | 3,873,284
|                                                      |                                                                  |                   |         |                   |   |                   |          

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

38

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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)        FOR THE YEARS ENDED DECEMBER 28, 2004, DECEMBER 30, 2003 AND
DECEMBER 31, 2002        (in thousands, except share information)

|                                         |                                                     | Common Stock |           |   |    |   |   |         |        |   |     
|---------------------------------------- | --------------------------------------------------- | ------------ | --------- | - | -- | - | - | ------- | ------ | - | ----
|
|
|Balance, January 1, 2002 (as restated)   |                                                     | 290,376      |           | $ |   |   | $ | 80,220  |        | $ |    
|                                         | Net loss (as restated)                              |              |          |   |    |  |   |         |       |   |     
|                                         | Issuance of common stock                            |              | 557,037   |   |    | 1 |   |         | 116    |   |     
|                                         | Issuance of warrants in financing transactions      |              |          |   |    |  |   |         | 6,321  |   |     
|                                         | Dividends and accretion on preferred stock          |              |          |   |    |  |   |         |       |   |     
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     
|Balance, December 31, 2002 (as restated) |                                                     | 847,413      |           | $ | 1  |   | $ | 86,657  |        | $ |    
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     
|                                         | Net loss (as restated)                              |              |          |   |    |  |   |         |       |   |     
|                                         | Conversion of Series F to common stock              |              | 9,380,843 |   |    | 9 |   |         | 84,704 |   |     
|                                         | Conversion of common stock and warrants to Series Z |              | (386,428  | ) |    |  |   |         | (762   | ) |     
|                                         | Issuance of warrants in financing transactions      |              |          |   |    |  |   |         | 4,986  |   |     
|                                         | Dividends and accretion on preferred stock          |              |          |   |    |  |   |         |       |   |     
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     
|Balance, December 30, 2003 (as restated) |                                                     | 9,841,828    |           | $ | 10 |   | $ | 175,585 |        | $ |    
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     
|                                         | Net loss                                            |              |          |   |    |  |   |         |       |   |     
|                                         | Stock compensation expense of options granted       |              |          |   |    |  |   |         | 205    |   |     
|                                         | Amortization of stock compensation expense          |              |          |   |    |  |   |         |       |   |     
|                                         | Common stock issued upon warrant exercise           |              | 6,885     |   |    |  |   |         | 7      |   |     
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     
|Balance, December 28, 2004               |                                                     | 9,848,713    |           | $ | 10 |   | $ | 175,797 |        | $ | (137
|                                         |                                                     |              |           |   |    |   |   |         |        |   |     

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

39

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NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED DECEMBER 28, 2004, DECEMBER 30, 2003 AND DECEMBER 31, 2002        (in thousands)

|                                                                                          |                                                                  | December 28,
2004                     |                                                     | December 30,
2003 |        | December 31,
2002 |       
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ----------------- | ------ | ----------------- | ------
|
|OPERATING ACTIVITIES:                                                                     |                                                                  |                                       |                                                     |                   |        |                   |       
|Net loss                                                                                  |                                                                  | $                                     | (17,405                                             | )                 | $      | (73,521           | )     
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                  |                                       |                                                     |                   |        |                   |       
|                                                                                          | Depreciation and amortization                                    |                                       |                                                     | 27,848            |        |                   | 34,013
|                                                                                          | Stock based compensation expense                                 |                                       |                                                     | 68                |        |                   |      
|                                                                                          | Loss, net of gains, on disposal of assets and impairment charges |                                       |                                                     | 1,872             |        |                   | 4,734 
|                                                                                          | Gain on investment in debt securities                            |                                       |                                                     |                  |        |                   | (374  
|                                                                                          | Charges (adjustments) of integration and reorganization costs    |                                       |                                                     | (869              | )      |                   | 2,132 
|                                                                                          | Provision for (recovery of) losses on accounts receivable        |                                       |                                                     | 177               |        |                   | 1,815 
|                                                                                          | Cumulative change in fair value of derivatives                   |                                       |                                                     |                  |        |                   | (993  
|                                                                                          | Amortization of debt issuance and debt discount costs            |                                       |                                                     | 1,849             |        |                   | 3,138 
|                                                                                          | Notes issued as paid in kind for interest on Bridge Loan         |                                       |                                                     |                  |        |                   | 395   
|                                                                                          | Issuance of standstill and step-up warrants                      |                                       |                                                     |                  |        |                   | 3,132 
|                                                                                          | Greenlight interest                                              |                                       |                                                     |                  |        |                   | 1,025 
|                                                                                          | Loss on exchange of Series F Preferred Stock due to Equity Recap |                                       |                                                     |                  |        |                   | 23,007
|                                                                                          | Reduction in Bridge Loan due to Equity Recap                     |                                       |                                                     |                  |        |                   | (500  
|                                                                                          | Changes in operating assets and liabilities:                     |                                       |                                                     |                   |        |                   |       
|                                                                                          |                                                                  | Franchise and other receivables       |                                                     |                   | (1,458 | )                 |       
|                                                                                          |                                                                  | Accounts payable and accrued expenses |                                                     |                   | (2,112 | )                 |       
|                                                                                          |                                                                  | Other assets and liabilities          |                                                     |                   | 1,140  |                   |       
|                                                                                          |                                                                  |                                       |                                                     |                   |        |                   |       
|                                                                                          |                                                                  |                                       | Net cash provided by (used in) operating activities |                   |        | 11,110            |       
|INVESTING ACTIVITIES:                                                                     |                                                                  |                                       |                                                     |                   |        |                   |       
|Purchase of property and equipment                                                        |                                                                  |                                       | (9,393                                              | )                 |        | (6,921            | )     
|Proceeds from the sale of equipment                                                       |                                                                  |                                       | 543                                                 |                   |        | 558               |       
|Proceeds from the sale of assets held for sale                                            |                                                                  |                                       |                                                    |                   |        |                  |       
|Proceeds from investment in debt securities                                               |                                                                  |                                       |                                                    |                   |        | 374               |       
|                                                                                          |                                                                  |                                       |                                                     |                   |        |                   |       
|                                                                                          |                                                                  |                                       | Net cash provided by (used in) investing activities |                   |        | (8,850            | )     
|FINANCING ACTIVITIES:                                                                     |                                                                  |                                       |                                                     |                   |        |                   |       
|Proceeds (repayments) of line of credit, net                                              |                                                                  |                                       | (985                                                | )                 |        | (5,000            | )     
|Repayment of notes payable                                                                |                                                                  |                                       | (1,105                                              | )                 |        | (1,131            | )     
|Proceeds from issuance of $160 Million Indenture                                          |                                                                  |                                       |                                                    |                   |        | 160,000           |       
|Repayment of $140 Million Facility                                                        |                                                                  |                                       |                                                    |                   |        | (140,000          | )     
|Advance funding of NJEDA (restricted cash)                                                |                                                                  |                                       |                                                    |                   |        | (1,684            | )     
|Debt issuance costs                                                                       |                                                                  |                                       |                                                    |                   |        | (8,571            | )     
|Common stock issued upon warrant exercise                                                 |                                                                  |                                       | 7                                                   |                   |        |                  |       
|                                                                                          |                                                                  |                                       |                                                     |                   |        |                   |       
|                                                                                          |                                                                  |                                       | Net cash provided by (used in) financing activities |                   |        | (2,083            | )     
|Net increase (decrease) in cash                                                           |                                                                  |                                       | 177                                                 |                   |        | (360              | )     
|Cash and cash equivalents, beginning of period                                            |                                                                  |                                       | 9,575                                               |                   |        | 9,935             |       
|                                                                                          |                                                                  |                                       |                                                     |                   |        |                   |       
|Cash and cash equivalents, end of period                                                  |                                                                  | $                                     | 9,752                                               |                   | $      | 9,575             |       
|                                                                                          |                                                                  |                                       |                                                     |                   |        |                   |       

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

40

---





NEW WORLD RESTAURANT GROUP, INC. AND SUBSIDIARIES        Notes to Consolidated Financial Statements        (dollars in thousands, except share and per share amounts)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

The consolidated financial statements of New World Restaurant Group, Inc. and its wholly-owned subsidiaries (collectively, the Company) have been prepared
in conformity with accounting principles generally accepted in the United States of America. All inter-company accounts and transactions have been eliminated in consolidation. The Company owns,
franchises or licenses various restaurant concepts under the brand names of Einstein Bros. Bagels and Einstein Bros. Café (collectively known as Einstein Bros.), Noah's New York Bagels
(Noah's), Manhattan Bagel Company (Manhattan), Chesapeake Bagel Bakery (Chesapeake) and New World Coffee (New World).

We
have a 52/53-week fiscal year ending on the Tuesday closest to December 31. Fiscal year 2004, 2003 and 2002 each contained 52 weeks and ended on December 28,
2004, December 30, 2003, and December 31, 2002, respectively.

Certain
reclassifications have been made to conform previously reported data to the current presentation. These reclassifications have no effect on net income or financial position as
previously reported.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Restatement of Prior Financial Information

It has been our longstanding historical accounting policy to amortize our leasehold improvements over a period that included both the noncancelable term of the
lease and its option periods (or the useful life of the asset, if shorter). Concurrently, we used the noncancelable lease term in determining whether each of our leases was an operating lease or a
capital lease and in calculating our straight-line rent expense. We believed that these accounting treatments were appropriate under generally accepted accounting principles. Furthermore,
we believed that these accounting treatments were comparable to the practices of other public companies. However, we have since concluded that we should use the same lease term in amortizing leasehold
improvements as we use in determining capital versus operating leases and in calculating straight-line rent expense. Accordingly, we have adopted the following policy: the depreciable
lives for our leasehold improvements, which are subject to a lease, will be limited to the lesser of the useful life or the noncancelable lease term. In circumstances where we would incur an economic
penalty by not exercising one or more option periods, as contemplated by Statement of Financial Accounting Standards (SFAS) No. 13 "Accounting for Leases," we may include one or more option
periods when determining the depreciation period. In either circumstance, our policy requires consistency when calculating the depreciation period, in classifying the lease, and in computing
straight-line rent expense.

41

---



As
a result of this change, our financial statements have been restated as follows:

|                         |                                              | 2003 |  
|------------------------ | -------------------------------------------- | ---- | -
|
|Balance Sheet:           |                                              |      |  
|                         | Property and equipment, net                  |      | $
|                         | Total assets                                 |      |  
|                         | Accumulated deficit                          |      |  
|                         | Total stockholders' deficit                  |      |  
|Statement of Operations: |                                              |      |  
|                         | Depreciation and amortization                |      |  
|                         | Loss from operations                         |      |  
|                         | Loss before income taxes                     |      |  
|                         | Net loss                                     |      |  
|                         | Net loss available to common stockholder     |      |  
|                         | Net loss per common share, basic and diluted |      | $

|                         |                                              | 2002 |  
|------------------------ | -------------------------------------------- | ---- | -
|
|Balance Sheet:           |                                              |      |  
|                         | Property and equipment, net                  |      | $
|                         | Total assets                                 |      |  
|                         | Accumulated deficit                          |      |  
|                         | Total stockholders' deficit                  |      |  
|Statement of Operations: |                                              |      |  
|                         | Depreciation and amortization                |      |  
|                         | Loss from operations                         |      |  
|                         | Loss before income taxes                     |      |  
|                         | Net loss                                     |      |  
|                         | Net loss available to common stockholder     |      |  
|                         | Net loss per common share, basic and diluted |      | $

Accumulated
deficit at January 1, 2002 as reported was $107,263. The impact of the restatement for fiscal year 2001 was $3,053, which was recorded as an adjustment to opening
stockholders' deficit at

42

---



January 1,
2002. The adjustments had no effect on net cash flows from operating, investing and financing activities, cash position and revenues.

|            |  |   |          | 2002 |   |         |  
|----------- |  | - | -------- | ---- | - | ------- | -
|
|As reported |  | $ | (107,263 | )    | $ | (40,473 | )
|Adjustments |  |   | (3,053   | )    |   | (4,421  | )
|            |  |   |          |      |   |         |  
|As restated |  | $ | (110,316 | )    | $ | (44,894 | )
|            |  |   |          |      |   |         |  

|            |  |   |          | 2003 |   |         |  
|----------- |  | - | -------- | ---- | - | ------- | -
|
|As reported |  | $ | (175,330 | )    | $ | (67,708 | )
|Adjustments |  |   | (7,474   | )    |   | (5,813  | )
|            |  |   |          |      |   |         |  
|As restated |  | $ | (182,804 | )    | $ | (73,521 | )
|            |  |   |          |      |   |         |  

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us
to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues, costs and expenses during the reporting period. Actual results could differ from the estimates.

Revenue Recognition

We record revenue from the sale of food and beverage as products are sold. Our manufacturing revenues are recorded at the time of shipment to customers. Initial
fees received from a franchisee or licensee to establish a new location are recognized as income when we have performed our obligations required to assist the franchisee or licensee in opening a new
location, which is generally at the time the franchisee or licensee commences operations. Continuing royalties, which are a percentage of the net sales of franchised and licensed locations, are
accrued as income each month. Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as income when redeemed by the holder.

Property and Equipment

Property and equipment is recorded at cost. Furniture and equipment are depreciated using the straight-line method over the estimated useful life of
the asset, which ranges from 3 to 8 years. Leasehold improvements are amortized using the straight-line method. The depreciable lives for our

43

---



leasehold
improvements, which are subject to a lease, are limited to the lesser of the useful life or the noncancelable lease term. In circumstances where we would incur an economic penalty by not
exercising one or more option periods, we include one or more option periods when determining the depreciation period. In either circumstance, our policy requires consistency when calculating the
depreciation period, in classifying the lease, and in computing straight-line rent expense.

In
accordance with Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," impairment losses are recorded on
long-lived assets on a restaurant-by-restaurant basis whenever impairment indicators are determined to be present. We consider a history of cash flow losses to be
the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted future cash flows, considering
location, local competition, current store management performance, existing pricing structure and alternatives available for the site. If impairment exists, the amount of impairment is measured as the
excess of the carrying amount of the asset over its fair value as determined utilizing the estimated discounted future cash flows or the expected proceeds, net of costs to sell, upon sale of the
asset.

For
the year ended December 28, 2004, we recorded $450 in impairment charges for long-lived asset impairments and exit costs from the decision to close two restaurants
and to write down the assets of five under-performing restaurants.

Goodwill, Trademarks and Other Intangibles

Intangible assets include both goodwill and identifiable intangibles arising from the allocation of the purchase prices of assets acquired. Goodwill represents
the excess of cost over fair value of net assets acquired in the acquisition of Manhattan. Other intangibles consist mainly of trademarks, trade secrets and patents.

Goodwill
and other intangible assets with indefinite lives are not subject to amortization but are tested for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" requires a two-step approach for
testing impairment. First, the estimated fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then
the second step of the impairment test is performed; the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of its
carrying amount over its fair value. Intangible assets not subject to amortization consist primarily of the Einstein Bros. and Manhattan trademarks.

Intangible
assets with lives restricted by contractual, legal or other means are amortized over their useful lives and consist primarily of patents used in our manufacturing process.
Amortization expense is calculated using the straight-line method over the estimated useful lives of approximately 5 years. Intangible assets subject to amortization are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets."

44

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During fiscal 2004, we began an evaluation of whether each of our brands should be a part of our overall strategic business plan. As a result of this evaluation,
we determined that certain brands may no longer fit strategically. Accordingly, we performed an interim impairment analysis and determined that no impairment of these brands existed. We also performed
a longevity analysis of certain brands and determined that certain trademarks had an estimated remaining useful life of 4 years. These trademarks were previously treated as a
non-amortizing intangible and accordingly, were reclassified as an amortizing intangible at June 29, 2004.

For
the fiscal years ended 2004 and 2003, we engaged an independent valuation expert to assist us in performing our impairment analyses. At December 28, 2004, there was no
indication of impairment in our indefinite and definite lived intangible assets. At December 30, 2003, there was an indication that the carrying amounts of our indefinite lived assets exceeded
their fair values and accordingly we recorded an impairment charge of $4,878 related to our Manhattan and Chesapeake trademarks. The impairments for both Manhattan and Chesapeake were related to
declining cash flows for those brands and our expectation that the trend of lower sales will continue in future years. In addition to the trademark impairment, we also wrote-off the value
of previously reacquired Manhattan franchise territory rights of $414.

Self-Insurance

We are self-insured for certain losses related to health, general liability and workers' compensation. We maintain stop loss coverage with third party
insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated
liability is established based upon analysis of historical data and actuarial estimates, is discounted at 10% and is reviewed on a quarterly basis to ensure that the liability is appropriate. The
estimated liability is included in accrued expenses in our consolidated balance sheets.

Guarantees

We are liable for certain lease assignments and guarantees and we record a liability for our exposure under these lease assignments and guarantees when such
exposure is probable and estimable. Current franchisees are the primary lessees under the vast majority of these leases. Under the lease guarantees, we may be required by the lessor to make all of the
remaining monthly rental payments or property tax and common area maintenance payments if the franchisee does not make the required payments in a timely manner. However, we believe that most, if not
all, of the franchised locations could be subleased to third parties minimizing our potential exposure. Additionally, we have indemnification agreements with our franchisees under which the
franchisees would be obligated to reimburse us for any amounts paid under such guarantees. Historically, we have not been required to make such payments in significant amounts. We have recorded a
liability where we believe our exposure is probable and estimable. As of December 28, 2004, our total exposure under these contingent liabilities was approximately $2,300. Approximately $425
has been recorded and is included in accrued expenses in our consolidated balance sheets.

We
are also liable for certain debt guarantees we made in connection with our franchisees initial equipment purchases. When we have been required to make significant payments related to
the debt guarantees, we have recorded a liability where we believe our exposure is probable and estimable. As

45

---



of
December 28, 2004, our total exposure under these contingent liabilities was approximately $536. Approximately $411 has been recorded and is included in accrued expenses in our consolidated
balance sheets.

Fair Value of Financial Instruments

As of December 28, 2004 and December 28, 2003, our financial instruments consist of cash equivalents, accounts receivable, accounts payable and
debt. The fair value of accounts receivable and accounts payable approximate their carrying value, due to their short-term maturities. The fair value of debt and notes payable is estimated
to approximate their carrying value by comparing the terms of existing instruments to the terms offered by lenders for similar borrowings with similar credit ratings. The fair value of the $160
Million Notes approximates its carrying value at December 28, 2004 as the notes are traded at par in the market.

The
Mandatorily Redeemable Series Z Preferred Stock (Series Z) is recorded in the accompanying balance sheet at its full face value of $57,000, which represents the total
required future cash payment. The current fair value of the Series Z, which was determined by using the useful life of the Series Z and
the effective dividend rate from the Certificate of Designation, is estimated to be $28,500 and $24,400 at December 28, 2004 and December 30, 2003, respectively.

Concentrations of Risk

We purchase a majority of our frozen bagel dough from one supplier who utilizes our proprietary processes, which we are dependent upon in the
short-term. Additionally, we purchase all of our cream cheese from a single source. Though to date we have not experienced significant difficulties with our suppliers, our reliance on our
suppliers subjects us to a number of risks, including possible delays or interruption in supplies, diminished control over quality and a potential lack of adequate raw material capacity. Any
disruption in the supply or degradation in the quality of the materials provided by our suppliers could have a material adverse effect on our business, operating results and financial condition. In
addition, such disruptions in supply or degradations in quality could have a long-term detrimental impact on our efforts to develop a strong brand identity and a loyal consumer base.

Advertising Costs

We expense advertising costs as incurred. Advertising costs were $4,500, $12,900 and $14,000 for the fiscal years ended 2004, 2003 and 2002, respectively, and are
included in retail costs of sales in the consolidated statements of operations.

Income Taxes

We record deferred tax assets and liabilities based on the difference between the financial statement and income tax basis of assets and liabilities using the
enacted statutory tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. The recorded deferred tax assets are reviewed for
impairment on a quarterly basis by reviewing our internal estimates for future net income. If we determine it to be more likely than not that the recovery of the asset is in question in the immediate,
foreseeable future, we record a valuation allowance. On

46

---



December 28,
2004 and December 30, 2003, we recorded a full valuation allowance against our net deferred tax asset. We will continue to record valuation allowances against additional
deferred tax assets until such time that recoverability of such assets is demonstrated.

The
provision (benefit) for income taxes reflected in our consolidated statements of operations represents minimum state taxes payable.

Net Loss per Common Share

We compute basic net loss per common share by dividing the net loss for the period by the weighted average number of shares of common stock outstanding (which
includes shares contingently issuable for little or no consideration) during the period.

Diluted
net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potential common stock equivalents outstanding
during the period, if dilutive. Potential common stock equivalents include incremental shares of common stock issuable upon the exercise of stock options and warrants. The effects of potential common
stock equivalents have not been included in the computation of diluted net loss per share as their effect is anti-dilutive.

The
following table summarizes the weighted average number of common shares outstanding, as well as sets forth the computation of basic and diluted net loss per common share for the
periods indicated:

|                                                                                                                               |  | For the years ended: |          
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | ---------
|
|
|Weighted average shares outstanding                                                                                            |  |                      | 9,842,414
|                                                                                                                               |  |                      |          
|Net loss available to common stockholders (in thousands of dollars)                                                            |  | $                    | (17,405  
|                                                                                                                               |  |                      |          
|Basic and diluted net loss per share                                                                                           |  | $                    | (1.77    
|                                                                                                                               |  |                      |          
|Shares contingently issuable included in the weighted average number of shares of common stock                                 |  |                      |         
|                                                                                                                               |  |                      |          
|Outstanding options and warrants that were not included in the diluted calculation because their effect would be anti-dilutive |  |                      | 1,764,372
|                                                                                                                               |  |                      |          

Stock-Based Compensation

We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting
for Stock Issued to Employees, and related interpretations, in accounting for our fixed award stock options to our employees. As such, compensation expense is recorded only if
the current market price of the underlying common stock exceeded the exercise price

47

---



of
the option on the date of grant. We apply the fair value-basis of accounting as prescribed by Statements of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" in accounting for our fixed award stock options to our consultants. Under SFAS No. 123, compensation expense is recognized based on the fair value of stock options granted.
Had compensation cost for stock options granted to employees been determined on the basis of fair value as computed using the assumptions herein, net loss and loss per share would have been increased
to the following pro forma amounts:

For the years ended:December 28,
2004

December 30,
2003

December 31,
2002(restated)

(restated)Net loss available to common stockholders, as reported

$
(17,405
)
$
(87,944
)
$
(72,488
)Deduct: stock based compensation determined under the fair value method, net of related tax effects


(544
)

(10
)

(196
)Pro forma net loss available to common stockholders

$
(17,949
)
$
(87,954
)
$
(72,684
)Basic and diluted loss per common share:As reported

$
(1.77
)
$
(22.71
)
$
(55.18
)Pro forma

$
(1.82
)
$
(22.71
)
$
(55.33
)


Compensation
cost of options granted for the SFAS No. 123 pro forma amounts disclosed above was estimated using the Black-Scholes option-pricing model with the following
assumptions:

For the years ended:December 28,
2004

December 30,
2003

December 31,
2002Expected life of options from date of grant (in years)


4.00


4.00


4.00Risk-free interest rate


2.7 - 3.4
%

3.0
%

3.0
%Volatility


100.0
%

100.0
%

100.0
%Assumed dividend yield


0.0
%

0.0
%

0.0
%Weighted average fair value of options granted

$
2.21

$
2.84

$
6.47


Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costsan amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) and amends Paragraph 5 of ARB 43, Chapter 4, by requiring that those items be recognized as current-period charges regardless of whether they meet

48

---



the
criterion of "so abnormal." In addition, this Statement requires that allocation of fixed-production overhead be based on the normal capacity of the production facilities. This Statement is
effective during fiscal years beginning after June 15, 2005. We do not believe the adoption of this Statement will have a material impact on our financial position and results of operations.

In
December 2004, the FASB issued SFAS No. 123 (revised 2004) entitled "Share-Based Payment" that addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for a) equity instruments of the enterprise or b) liabilities that are based on the fair value of the enterprise's equity instruments or
that may be settled by the issuance of such equity instruments. The Statement eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and generally would require instead that such transactions be accounted for using a fair-value-based method. This Statement is effective as of the first
interim or annual reporting period that begins after June 15, 2005. We have not fully completed our evaluation of the impact this Statement will have on our financial position and results of
operations. Based on options granted and various assumptions used to calculate stock based compensation expense as of December 28, 2004, we anticipate that the impact of adoption would result
in an increase in expenses of approximately $471,000 for fiscal 2005. If actual events differ from our assumptions used to calculate the expense, our financial results could be impacted.

We
have considered all other recently issued accounting pronouncements and do not believe that the adoption of such pronouncements will have a material impact on our financial
statements.

3. RESTRICTED CASH AND CASH EQUIVALENTS

Restricted cash and cash equivalents consist of the following:

December 28,
2004

December 30,
2003Advertising Funds(a)

$
851

$
667New Jersey Economic Development Authority(b)


1,307


1,684Worker's Compensation Insurance Collateral(c)


1,600


2,500Other


37


3,795


4,851Less current portion of long-term restricted cash


1,269


1,815Long-term restricted cash and cash equivalents

$
2,526

$
3,036


---

49

---





4. FRANCHISE AND OTHER RECEIVABLES

The majority of our receivables are due from our franchisees and distributors. Credit is extended based on our evaluation of the customer's financial condition
and, generally, collateral is not required. Accounts receivable are due within 7-30 days and are stated at amounts due from customers net of an allowance for doubtful accounts.
Accounts outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts
receivable are past due, our previous loss and payment history, the customer's current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. We
write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Franchise
and other receivables consist of the following:

December 28,
2004

December 30,
2003Franchisee and licensee receivables

$
3,367

$
4,970Vendor rebates


3,196


2,126Other


3,035


2,0569,598


9,152Less allowance for doubtful accounts


2,475


3,310Total receivables

$
7,123

$
5,842


5. INVENTORIES

Inventories, which consist of food, beverage, paper supplies and bagel ingredients, are stated at the lower of cost or market, with cost being determined by the
first-in, first-out method. Inventories consist of the following:

December 28,
2004

December 30,
2003Finished goods

$
4,545

$
4,403Raw materials


396


428Total inventories

$
4,941

$
4,831


50

---



6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

December 28,
2004

December 30,
2003(restated)Leasehold improvements

$
49,186

$
49,712Store and manufacturing equipment


61,373


56,963Furniture and fixtures


1,095


1,588Office and computer equipment


10,445


9,574122,099


117,837Less accumulated depreciation


80,244


63,324Property and equipment, net

$
41,855

$
54,513


As
of December 28, 2004 and December 30, 2003, manufacturing equipment with a net book value of approximately $5,100 and $10,100, respectively, was located at a major
supplier's plant.

7. TRADEMARKS AND OTHER INTANGIBLES

Trademarks and other intangibles consist of the following as of:

December 28,
2004

December 30,
2003Amortizing intangibles:Trade secrets

$
5,385

$
5,385Trademarks


2,062


Patents-manufacturing process


33,741


33,74141,188


39,126Less accumulated amortization:Trade secrets


3,770


2,693Trademarks


387


Patents-manufacturing process


23,618


16,87027,775


19,563Total amortizing intangibles, net

$
13,413

$
19,563Non-amortizing intangibles:Trademarks


63,806


65,868Total trademarks and other intangibles, net

$
77,219

$
85,431


Certain
trademarks were previously treated as a non-amortizing intangible and were reclassified as an amortizing intangible at June 29, 2004. See note 2 for
additional information.

51

---



Intangible
amortization expense totaled approximately $8,200, $7,800 and $7,800 for the fiscal years ended 2004, 2003 and 2002, respectively. The estimated aggregate amortization expense
for the following five fiscal years is as follows:

Fiscal year:2005

$
8,3402006


4,4282007


5162008


1292009


Thereafter


$
13,413


8. DEBT ISSUANCE COSTS AND OTHER ASSETS

Debt issuance costs and other assets consist of the following:

December 28,
2004

December 30,
2003Security deposits

$
1,296

$
1,337Debt issuance costs, net of amortization


5,957


7,802Other





31Total debt issue costs and other assets

$
7,253

$
9,170


Direct
costs incurred for the issuance of debt are capitalized and amortized using the effective interest method over the term of the respective debt. In the event that the debt is
retired prior to the maturity date, debt issuance costs will be expensed in the period that the debt is retired. The amortization of debt issuance costs is included in interest expense in the
consolidated statements of operations. Amortization expense of approximately $1,800, $3,100 and $10,600 was recorded for the fiscal years ended 2004, 2003 and 2002, respectively.

9. ACCRUED EXPENSES

Accrued expenses consist of the following:

December 28,
2004

December 30,
2003Payroll and related bonuses

$
12,450

$
11,664Interest


10,249


10,039Integration and reorganization


21


4,073Gift cards


2,476


2,301Other


9,640


9,794Total accrued expenses

$
34,836

$
37,871


52

---



10. SENIOR NOTES AND OTHER LONG-TERM DEBT

Senior notes and other long-term debt consist of the following:

December 28,
2004

December 30,
2003$160 Million Notes

$
160,000

$
160,000AmSouth Revolver


15


1,000Chesapeake Bagel Bakery Note Payable





825New Jersey Economic Development Authority Note Payable


1,120


1,400161,135


163,225Less current portion of debt


295


2,105Long-term debt

$
160,840

$
161,120


$160 Million Notes

On July 8, 2003, we issued $160,000 of 13% senior secured notes maturing on July 1, 2008 ("$160 Million Notes") in a private placement.

The
$160 Million Notes are guaranteed, fully and unconditionally, jointly and severally, by us and all present and future subsidiaries of ours and is collateralized by substantially all
of our assets in which we have an interest. Pursuant to an Intercreditor Agreement, the $160 Million Notes are subordinate to the AmSouth Revolver as described below.

The
$160 Million Notes contain certain covenants, which, among others, include certain financial covenants such as limitations on capital expenditures and minimum EBITDA as defined in
the agreement. These covenants are measured on a rolling twelve-month period and fiscal quarter basis, respectively. This debt contains usual and customary default provisions. As of
December 28, 2004, we were in compliance with all our financial and operating covenants.

Interest
payments under the $160 Million Notes are payable in arrears at the rate of 13% per year on July 1 and January 1, commencing January 1, 2004. The notes are
redeemable, at our option, in whole or in part at any time after July 1, 2004 at the following redemption prices (as expressed in percentages of the principal amount):

Year

Percentage2004

104.0
%2005

103.0
%2006

102.0
%2007

101.0
%2008 and thereafter

100.0
%


AmSouth Revolver

On July 8, 2003, we entered into a three-year, $15 million senior secured revolving credit facility with AmSouth Bank ("AmSouth
Revolver"). The AmSouth Revolver was subsequently amended to

53

---



make
technical corrections, clarify ambiguous terms and provide for increased limits with respect to letters of credit. On February 11, 2005, the AmSouth Revolver was amended again to increase
our letter of credit sub-facility from $5 million to $7.5 million.

The
AmSouth Revolver is collateralized by substantially all of our assets in which we have an interest and is senior to the $160 Million Notes pursuant to an Intercreditor Agreement.

The
AmSouth Revolver contains certain covenants, which, among others, include certain financial covenants such as limitations on capital expenditures, operating lease obligations,
minimum EBITDA as defined in the agreement, operating cash flow coverage ratio and minimum net worth. These covenants are measured on a rolling twelve-month period at each fiscal quarter or annually
at year-end. Additional covenant restrictions exist if the total borrowings, including outstanding letters of credit exceed $10,000. This debt also contains usual and customary default
provisions. As of December 28, 2004, we are in compliance with all of our financial and operating covenants.

Interest
payments under the AmSouth Revolver are payable in arrears on the first of each month. The net borrowings under the AmSouth Revolver bear an interest rate equal to the base rate
plus an applicable margin with the base rate being the AmSouth Bank "prime rate" and the applicable margin based on our fixed charge coverage ratio with a minimum and maximum applicable margin of 0.5%
and 2.5%, respectively. As of December 28, 2004 and December 30, 2003, the interest rate on the borrowings outstanding under the AmSouth Revolver was 5.75% and 5.0%, respectively.

We
are required to pay an unused credit line fee of 0.50% per annum on the average daily unused amount. The unused line fee is payable monthly in arrears. Additionally, we are required
to pay a letter of credit fee, based on the average daily undrawn face amount for each letter of credit issued, of an applicable margin being based on our fixed charge coverage ratio with a minimum
and maximum applicable margin of 2.0% and 4.5% respectively. Letters of credit reduce our availability under the AmSouth Revolver. At December 28, 2004, we had $5,000 of letters of credit
outstanding. The letters of credit expire on various dates during 2005, are automatically renewable for one additional year and are payable upon demand in the event that we fail to pay certain workers
compensation claims. Our availability under the AmSouth Revolver was approximately $10,000 at December 28, 2004.

Chesapeake Bagel Bakery Note Payable

As a part of the acquisition of the assets of Chesapeake, we entered into a note payable to the seller. The note provided for quarterly payments of interest only
at 10%. The note was paid in full on August 31, 2004 according to its terms.

New Jersey Economic Development Authority Note Payable

In December 1998, Manhattan entered into a note payable in the principal amount of $2,800 with the New Jersey Economic Development Authority (NJEDA) at an
interest rate of 9% per annum. Principal is paid annually and interest is paid quarterly. The note matures on December 1, 2008 and is secured by the assets of Manhattan.

On
July 3, 2003, we placed an advanced funding of the note in escrow to enact a debt defeasance as allowed for in the agreement. This advanced funding is shown as restricted cash
and the note is

54

---



included
in both current portion and long-term portion of debt in the December 28, 2004 and December 30, 2003 consolidated balance sheets in accordance with the payment
terms. This classification will continue until the note is fully paid from the escrow amount proceeds.

Our
senior notes and other long-term debt obligations for the five years following December 28, 2004 are as follows (in thousands of dollars):

Fiscal year:2005

$
2952006


2802007


2802008


160,2802009


Thereafter


$
161,135


11. LEASES

Capital Leases

We lease certain equipment under capital leases. Included in property and equipment are the asset values of $51 and the related accumulated amortization of $5 at
December 28, 2004. Amortization of assets under capital leases is included in depreciation and amortization expense.

Operating Leases

We lease office space, restaurant space and certain equipment under operating leases having terms that expire at various dates through fiscal 2017. Our restaurant
leases have renewal clauses of 1 to 20 years
at our option and, in some cases, have provisions for contingent rent based upon a percentage of gross sales, as defined in the leases. Rent expense for fiscal 2004, 2003 and 2002 was approximately
$31,400, $31,200 and $30,500, respectively. Contingent rent included in rent expense for fiscal 2004, 2003 and 2002 was approximately $3,700, $3,500 and $2,900, respectively.

55

---





Future Minimum Lease Payments

As of December 28, 2004, future minimum lease payments under capital and operating leases were as follows (in thousands of dollars):

Fiscal year:

Capital
Leases

Operating
Leases2005

$
18

$
26,3582006


18


20,1582007


14


10,7342008





4,6442009





2,7052010 and thereafter





4,969Total minimum lease payments


50

$
69,568Less imputed interest (average rate of 4.75%)


3Present value of minimum lease payments


47Less current installments


16Future minimum rental payments, net

$
31


12. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following (in thousands of dollars):

December 28,
2004

December 30,
2003Vendor contractual agreements(a)

$
7,804

$
8,014Guaranteed franchisee debt(b)


394


874Deferred rent


1,480


1,509$
9,678

$
10,397


---

56

---



13. 2003 DEBT REFINANCING AND EQUITY RECAPITALIZATION

During 2000 and 2001, we engaged in several financing transactions to acquire the bonds of Einstein/Noah Bagel Corp. (ENBC), which declared Chapter 11 bankruptcy
on April 27, 2000. In 2001, we completed the acquisition of substantially all of the assets (the Einstein Acquisition) of ENBC and its majority-owned subsidiary, Einstein/Noah Bagel Partners,
L.P. which operated 2 brands: Einstein Bros. Bagels and Noah's New York Bagels. The Einstein Acquisition in 2001 was accomplished by issuing a substantial amount of short-term debt and
mandatorily redeemable preferred equity. The maturity date on the debt and the redemption date of certain preferred stock issuances ranged from one to three years. The debt and preferred stock
agreements required the issuance of additional warrants and payment of dividends in the event that they were not redeemed within a certain period. Such debt and preferred stock and warrant agreements
were referred to as the Increasing Rate Notes or $140 Million Facility, the Standstill Agreement, the Bond Purchase Agreement, the Bridge Loan, and the Mandatorily Redeemable Series F Preferred
Stock (Series F) and Warrant Agreements.

In
connection with the aforementioned debt and preferred stock issuances, we issued freestanding warrants and rights to receive additional warrants based either on the passage of time or
upon the occurrence (or non-occurrence) of certain contingent future events. The warrants were classified as a liability in the consolidated balance sheets, subject to the provisions of
SFAS No. 133,
"Accounting for Derivative and Hedging Activities," which required the warrants to be adjusted to fair value at each measurement date. Changes in the fair value of derivatives were recognized in
earnings. During the years 2003 and 2002, we recorded a cumulative change in the fair value of derivatives of $993 and $233, respectively. As a result of the equity recapitalization as described
below, we no longer have contingently issuable warrants and all warrants issued have been classified as permanent equity.

We
previously held an investment in debt securities which included ENBC 7.25% Convertible Debentures due 2004 (Einstein Bonds). The Einstein Bonds were classified as available for sale
and recorded at fair value with changes in fair value reported in stockholders' deficit. During the years ended 2003 and 2002, we received proceeds of $374 and $36,711, respectively, for the
debentures from the bankruptcy court that exceeded the carrying value of the asset. Accordingly, we recorded a gain on our investment in debt securities of $374 and $2,537 in 2003 and 2002,
respectively.

The
proceeds received of $36,711 relating to our investment in the Einstein Bonds were used repay a portion of the Bridge Loan, which bore interest at an initial rate of 14% per annum
and increased by 0.35% on the fifteenth day of each month beginning July 15, 2002. The Bridge Loan was secured by the Einstein Bonds. We issued Series F to pay the remaining balance of
the Bridge Loan. Additionally, we issued Series F to pay the Bond Purchase Agreement in full. The Bond Purchase Agreement provided for guaranteed accretion of 15% per year, increasing to 17% on
January 17, 2002 and an additional 2% each six months thereafter. The Series F was entitled to an annual cash dividend equal to 17% per annum increasing 100 basis points per month until
the Series F was redeemed. Warrants to purchase shares of our common stock were also issued in connection with this transaction and have since been reclassified as permanent equity as a result
of the equity recapitalization.

On
July 8, 2003, we issued $160 million of 13% senior secured notes due 2008 as further explained in Note 10. We used the net proceeds, among other things, to
refinance the Increasing Rate Notes. The Increasing Rate Notes bore interest at an initial rate of 13%, increasing 100 basis point each quarter commencing September 15, 2001 to a maximum
rate of 18%. On that same date, we also entered into a three-year, $15 million senior secured facility with AmSouth Bank.

57

---



In
September 2003, we completed an equity recapitalization with our preferred stockholders, who held a substantial portion of our common stock. Among other things, our Mandatorily
Redeemable Series F Preferred Stock (Series F) and its related dividends and accretion were eliminated. In exchange, we issued 57,000 shares of our Mandatorily Redeemable Series Z
Preferred Stock (Series Z) to Halpern Denny Fund III, L.P. ("Halpern Denny") and we issued 9,380,843 shares of our common stock to Greenlight Capital and affiliates ("Greenlight").

The
exchange of the Halpern Denny interest resulted in a reduction of our effective dividend rate and as a result of this and other factors, we accounted for this transaction as troubled
debt restructuring.
This exchange did not result in a gain from troubled debt restructuring. The exchange of the Greenlight interest into common shares was recorded at fair value, which resulted in a loss upon exchange
of approximately $23,000.

In
connection with the equity recapitalization and because certain debt agreements were not redeemed within a certain period, we issued step-up warrants to prevent further dilution and
entered into Standstill Agreements with holders of our Increasing Rate Notes. Under the terms of the Standstill Agreements, we agreed to issue additional warrants to purchase shares of our common
stock. The Standstill Agreements prevented the call of the debt until such time as we completed the equity recapitalization. For the year ended December 30, 2003, we recorded $3,132 in interest
expense related to the standstill and step-up warrants representing the fair value of our stock on the date of issuance.

14. MANDATORILY REDEEMABLE SERIES Z PREFERRED STOCK

The major provisions of our Mandatorily Redeemable Series Z Preferred Stock (Series Z) are as follows:



The
Series Z is recorded in the accompanying consolidated balance sheets at its full face value of $57,000 as a result of the accounting under troubled debt restructuring as
discussed in Note 13. The $57,000 represents the total cash payable upon liquidation.

58

---



15. STOCKHOLDERS' EQUITY

Common Stock

We are authorized to issue up to 15 million shares of common stock, par value $0.001 per share. As of December 28, 2004 and December 30,
2003, there were 9.849 million and 9.842 million shares outstanding, respectively.

Series A Junior Participating Preferred Stock

In June 1999, our board of directors authorized the issuance of a Series A junior participating preferred stock in the amount of 700,000 shares.
This authorization was made in accordance with the Stockholders' Rights Plan. There are currently no issued shares.

Stockholder Protection Rights Plan

We maintain a Stockholder Protection Rights Plan (the Plan). Upon implementation of the Plan in June 1999, our Board declared a dividend distribution of
one right on each outstanding share of common stock, as well as on each share later issued. Each right will allow stockholders to buy one one-hundredth of a share of Series A junior
participating preferred stock at an exercise price of $10.00. The rights become exercisable if an individual or group acquires 15% or more of common stock, or if an individual or group announces a
tender offer for 15% or more of common stock. The Board can redeem the rights at $0.001 per right at any time before any person acquires 15% or more of the outstanding common stock. In the event an
individual (the "Acquiring Person") acquires 15% or more of the outstanding common stock, each right will entitle its holder to purchase, at the right's exercise price, one one-hundredth
of a share of Series A junior participating preferred stock, which is convertible into common stock at one-half of the then value of the common stock, or to purchase such common
stock directly if there are a sufficient number of Shares of common stock authorized. Our Board has the ability to exclude any Acquiring Person from the provision of the stockholders rights plan,
resulting in such Acquiring Person's purchase of our common stock not triggering the plan. Rights held by the Acquiring Person are void and will not be exercisable to purchase shares at the bargain
purchase price. If we are acquired in a merger or other business combination transaction, each right will entitle its holder to purchase, at the right's then-current exercise price, a
number of the acquiring company's common shares having a market value at that time of twice the right's exercise price.

16. STOCK OPTION AND WARRANT PLANS

1994 and 1995 Plans

Our 1994 Stock Plan (1994 Plan) provided for the granting to employees of incentive stock options and for the granting to employees and consultants of
non-statutory stock options and stock purchase rights. On November 21, 2003, the board of directors terminated the authority to issue any additional options under the 1994 Plan. At
December 28, 2004, 17 options with an exercise price of $210.71 per share remained outstanding under this plan.

Our
1995 Directors' Stock Option Plan (Directors' Option Plan) provided for the automatic grant of non-statutory stock options to non-employee directors of the
Company. On December 19, 2003, our board of directors terminated the authority to issue any additional options under the Directors' Option

59

---



Plan.
At December 28, 2004, 2,324 options with a weighted average exercise price of $32.43 per share remained outstanding under this plan.

2003 Executive Employee Incentive Plan

On November 21, 2003, our board of directors adopted the Executive Employee Incentive Plan, amended on December 19, 2003 (2003 Plan). The 2003 Plan
provides for granting incentive stock options to employees and granting non-statutory stock options to employees and consultants. Unless terminated sooner, the 2003 Plan will terminate
automatically in December 2013. The board of directors has the authority to amend, modify or terminate the 2003 Plan, subject to any required approval by our stockholders under applicable law
or upon advice of counsel. No such action may affect any options previously granted under the 2003 Plan without the consent of the holders. The number of shares issuable pursuant to options granted
under the 2003 Plan is 900,000. Options typically vest in part based upon the passage of time and, in part, upon our financial performance. Options that do not vest due to the failure to achieve
specific financial performance criteria are forfeited. Options to purchase approximately 386,000 shares of our common stock, which are not yet exercisable, are subject to company performance. We
expect that approximately one-half of the non-vested awards at December 28, 2004, will eventually vest based on company performance. As of December 28, 2004,
there were 129,000 shares reserved for future issuance under the 2003 Plan.

2004 Stock Option Plan for Independent Directors

On December 19, 2003, our board of directors adopted the Stock Option Plan for Independent Directors, effective January 1, 2004, (2004 Directors'
Plan). Our board of directors may amend, suspend, or terminate the 2004 Directors' Plan at any time, provided, however, that no such action may adversely affect any outstanding option without the
option holders consent. A total of 200,000 shares of common stock have been reserved for issuance under the 2004 Directors' Plan. The 2004 Directors' Plan provides for the automatic grant of
non-statutory stock options to independent directors on January 1 of each year. Options become exercisable six months after the grant date and are exercisable for 5 years
from the date of grant unless earlier terminated. As of December 28, 2004, there were 170,000 shares reserved for future issuance under the 2004 Directors' Plan.

60

---



Option Activity

Transactions during fiscal 2004, 2003 and 2002 were as follows:

|                               |           | Number of Options |          | Weighted Average Exercise Price |        
|------------------------------ | --------- | ----------------- | -------- | ------------------------------- | -------
|
|Outstanding, beginning of year |           | 878,345           |          | 86,647                          |        
|                               | Granted   |                   | 45,000   |                                 | 877,495
|                               | Exercised |                   |         |                                 |       
|                               | Forfeited |                   | (120,004 | )                               | (85,797
|                               |           |                   |          |                                 |        
|Outstanding, end of year       |           | 803,341           |          | 878,345                         |        
|                               |           |                   |          |                                 |        
|Exercisable, end of year       |           | 32,341            |          | 2,345                           |        
|                               |           |                   |          |                                 |        

The
following table summarizes information about stock options outstanding at December 28, 2004:

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$2.25 - $4.00    |  | 801,000             |  | 9.00               
|$4.01 - $31.00   |  | 1,826               |  | 8.42               
|$31.01 - $241.00 |  | 515                 |  | 4.84               
|                 |  |                     |  |                    
|                 |  | 803,341             |  | 9.00               
|                 |  |                     |  |                    

Warrants

As of December 28, 2004, we have 961,391 warrants outstanding and exercisable to purchase shares of our common stock. The warrants have exercise prices
ranging from $0.60 to $663.00 per share, of which 950,933 are exercisable at $1.00 or less per share, and have terms ranging from three to ten years. Such warrants were issued in connection with
financings and certain other services. Transactions during fiscal 2004, 2003 and 2002 were as follows:

2004

2003

2002Outstanding at beginning of year

968,337

659,328

858,336Issued



541,027

459,363Exercised

(6,885
)


(658,371
)Converted



(227,747
)
Forfeited

(61
)
(4,271
)
Outstanding and exercisable at end of year

961,391

968,337

659,328


61

---



17. SAVINGS PLAN

We sponsor a qualified defined contribution retirement plan covering eligible employees of New World Restaurant Group. Employees, excluding officers, are eligible
to participate in the plan if they meet certain compensation and eligibility requirements. The 401(k) plan allows participating employees to defer the receipt of a portion of their compensation and
contribute such amount to one or more investment options. We have accrued a match of approximately 25% of the participants' elective contribution for 2004. Our contribution expense was $250, $203 and
$298 for 2004, 2003 and 2002, respectively. Our contributions vest at the rate of 100% after three years of service.

18. INTEGRATION AND REORGANIZATION COSTS

2001 Restructuring

During the quarter ended July 3, 2001, we implemented a plan to consolidate our two dough manufacturing facilities on the West Coast, eliminate duplicative
labor lines of assembly, and terminate certain lease obligations inclusive of several restaurant and other locations. We initially recorded a restructuring accrual of approximately $4,400 associated
with this restructuring plan. Approximately $1,000 of this charge represented a write-off of equipment and leasehold improvements that were either abandoned or deemed unusable by us. As of
December 28, 2004, we anticipate the remaining lease liabilities to expire on or before October 2006.

The
following table presents the activity and balances related to the 2001 restructuring accrual:

|                                         |  | Facility
Consolidation
Costs |      | Severance Costs |   | Contract
Termination and
Other Costs |   | Store Lease
Termination |      | Total |  
|---------------------------------------- |  | ---------------------------- | ---- | --------------- | - | ------------------------------------ | - | ----------------------- | ---- | ----- | -
|Initial accrual                          |  | $                            | 379  |                 | $ | 151                                  |   | $                       | 233  |       | $
|Application of costs against the accrual |  |                              |     |                 |   |                                     |   |                         | (204 | )     |  
|Adjustments to the accrual               |  |                              |     |                 |   |                                     |   |                         | 29   |       |  
|                                         |  |                              |      |                 |   |                                      |   |                         |      |       |  
|Balance at January 1, 2002               |  | $                            | 379  |                 | $ | 151                                  |   | $                       | 58   |       | $
|Application of costs against the accrual |  |                              | (68  | )               |   | (229                                 | ) |                         | (94  | )     |  
|Adjustments to the accrual               |  |                              |     |                 |   | 85                                   |   |                         | 43   |       |  
|                                         |  |                              |      |                 |   |                                      |   |                         |      |       |  
|Balance at December 31, 2002             |  | $                            | 311  |                 | $ | 7                                    |   | $                       | 7    |       | $
|Application of costs against the accrual |  |                              | (266 | )               |   |                                     |   |                         | (14  | )     |  
|Adjustments to the accrual               |  |                              | (32  | )               |   | (7                                   | ) |                         | 7    |       |  
|                                         |  |                              |      |                 |   |                                      |   |                         |      |       |  
|Balance at December 30, 2003             |  | $                            | 13   |                 | $ |                                     |   | $                       |     |       | $
|Application of costs against the accrual |  |                              | (15  | )               |   |                                     |   |                         |     |       |  
|Adjustments to the accrual               |  |                              | 2    |                 |   |                                     |   |                         |     |       |  
|                                         |  |                              |      |                 |   |                                      |   |                         |      |       |  
|Balance at December 28, 2004             |  | $                            |     |                 | $ |                                     |   | $                       |     |       | $
|                                         |  |                              |      |                 |   |                                      |   |                         |      |       |  

62

---



2002 Restructuring

During the quarter ended October 1, 2002, we implemented a plan to shut down our dough manufacturing facilities on the East Coast. During the quarter ended
December 31, 2002, we implemented a plan to terminate the lease obligation for the Eatontown location. We vacated the Eatontown location in the last week of 2002. When initiated, the
restructuring plans were expected to take approximately one year to complete, subject to our ability to sublease the Eatontown facility. We ultimately recorded a $4,800 charge associated with the
restructuring plans in 2002. Approximately $2,200 of this charge represented a write-off of equipment and leasehold improvements that were either abandoned or deemed unusable by us. In the
fourth quarter of fiscal 2003, we became aware that the Eatontown facility was in the process of being sold and that the landlord had engaged a valuation expert to determine the total cost associated
with our vacating the facility. Based upon the results of this study, we adjusted our initial charge to our estimate of the ultimate liability on the Eatontown facility. During April 2004, we
reached an agreement with the landlord of the Eatontown facility to settle outstanding litigation. Previously recorded integration and reorganization estimates
associated with closing this facility were adjusted to reflect a reduction of the prior year's accrued cost of $700,000.

The
following table presents the activity and balances related to the 2002 restructuring accrual:

|                                         |  | Facility
Consolidation
Costs |        | Severance Costs |   | Contract
Termination and
Other Costs |   | Total |     
|---------------------------------------- |  | ---------------------------- | ------ | --------------- | - | ------------------------------------ | - | ----- | ----
|Initial accrual                          |  | $                            | 1,447  |                 | $ | 787                                  |   | $     | 300 
|Application of costs against the accrual |  |                              |       |                 |   | (662                                 | ) |       | (168
|                                         |  |                              |        |                 |   |                                      |   |       |     
|Balance at December 31, 2002             |  | $                            | 1,447  |                 | $ | 125                                  |   | $     | 132 
|Application of costs against the accrual |  |                              | (160   | )               |   | (90                                  | ) |       | (68 
|Adjustments to the accrual               |  |                              | 2,413  |                 |   | (35                                  | ) |       | (33 
|                                         |  |                              |        |                 |   |                                      |   |       |     
|Balance at December 30, 2003             |  | $                            | 3,700  |                 | $ |                                     |   | $     | 31  
|Application of costs against the accrual |  |                              | (3,000 | )               |   |                                     |   |       |    
|Adjustments to the accrual               |  |                              | (700   | )               |   |                                     |   |       | (31 
|                                         |  |                              |        |                 |   |                                      |   |       |     
|Balance at December 28, 2004             |  | $                            |       |                 | $ |                                     |   | $     |    
|                                         |  |                              |        |                 |   |                                      |   |       |     

19. LOSS (GAIN) ON SALE, DISPOSAL OR ABANDONMENT OF ASSETS

During fiscal 2004, we recorded a loss on disposal or abandonment of assets of approximately $120 due to the disposal of menu boards as a result of our new menu
offerings and approximately $1,500 due to the abandonment of leasehold improvements related to closed restaurants and our administrative facilities located in New Jersey. The loss on disposal or
abandonment of assets was offset by a gain of approximately $90 on the sale of the assets of Willoughby's as further described below.

63

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20. SALE OF WILLOUGHBY'S COFFEE AND TEA

Effective October 6, 2004, we executed an Asset Purchase Agreement and sold the assets of Willoughby's to the original founders. The Willoughby's business
consisted of a coffee roasting plant, three retail locations and an office space.

Components
of the asset sale included, but were not limited to:



Under
the terms of agreement, we sold the assets for a total sales price of approximately $400, which was received in cash. In connection with the sale of Willoughby's, we also executed
a two-year supply agreement to purchase coffee for our New World Coffee cafés from the buyer.

We
have considered Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We have determined that the
revenues, cost of sales, other operating expenses and the net book value of the assets related to the sale of the coffee roasting plant and three retail locations included in the Willoughby's business
were immaterial in relation to our Einstein Bros., Noah and Manhattan restaurants, as well as the financial statements taken as a whole. Accordingly, we have not presented discontinued operations in
the accompanying consolidated statements of operations, nor have we reflected assets as held for sale in the accompanying consolidated balance sheets. We recognized a gain from the sale of
approximately $90 during the year ended December 28, 2004.

21. INCOME TAXES

The provision for income taxes consists of the following:

2004

2003

2002(restated)

(restated)CurrentFederal

$


$


$
State


(49
)

812


366Total current income tax expense (benefit)


(49
)

812


366DeferredFederal


(6,529
)

(15,905
)

(17,354
)State


(611
)

(1,601
)

(1,577
)Total deferred income tax benefit


(7,140
)

(17,506
)

(18,931
)Increase in valuation allowance


7,140


17,506


18,931Total income tax benefit (expense)

$
(49
)
$
812

$
366


64

---



A
reconciliation between the reported provision for income taxes and the amount computed by applying the statutory federal income tax rate of 35% to loss before income taxes is as
follows:

2004

2003

2002(restated)

(restated)Expected tax expense (benefit) at 35%

$
(6,109
)
$
(25,448
)
$
(15,585
)State tax, net of federal benefit


(611
)

(1,601
)

(1,577
)Loss on extinguishment of debt





8,052


Other, net


(469
)

2,303


(1,403
)Change in valuation allowance


7,140


17,506


18,931Total provision (benefit) for taxes

$
(49
)
$
812

$
366


The
income tax effects of temporary differences that give rise to significant portions of deferred tax assets as of December 28, 2004 and December 30, 2003 are as follows:

2004

2003Deferred tax assetsOperating loss carryforwards

$
57,412

$
53,409Capital loss carryforwards


1,237


Accrued expenses


2,424


4,563Allowances for doubtful accounts


893


1,266Other assets


32


Property, plant and equipment


12,016


7,636Total gross deferred tax asset


74,014


66,874Less valuation allowance


(74,014
)

(66,874
)Total deferred tax asset

$


$



For
income tax purposes, at December 28, 2004, we had net operating loss carryforwards of approximately $150,000, expiring at various dates through 2024. The utilization of
approximately $69,000 of the aforementioned net operating loss carryforwards is subject to an annual limitation under the provisions of Section 382 of the Internal Revenue Code.

We
believe it is more likely than not that our net deferred tax asset will not be realized. Accordingly, a valuation allowance has been recorded against the deferred tax asset at
December 28, 2004 and December 30, 2003. Should we conclude that the deferred tax asset is, at least in part, realizable, the valuation allowance will be reversed to the extent of such
expected realizability.

65

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22. SUPPLEMENTAL CASH FLOW INFORMATION

|                                                            |                                                                                                        | 2004 |   | 2003   |  | 2002
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---- | - | ------ |  | ----
|Cash paid during the period for (in thousands):             |                                                                                                        |      |   |        |  |     
|                                                            | Interest                                                                                               |      | $ | 21,166 |  | $   
|                                                            | Income taxes                                                                                           |      | $ | 667    |  | $   
|Non-cash investing and financing activities (in thousands): |                                                                                                        |      |   |        |  |     
|                                                            | Non-cash dividends and accretion on preferred stock                                                    |      | $ |       |  | $   
|                                                            | Conversion of Bridge Loan and Greenlight obligation to Mandatorily Redeemable Series F preferred stock |      | $ |       |  | $   
|                                                            | Conversion of Mandatorily Redeemable Series F to Mandatorily Redeemable Series Z preferred stock       |      | $ |       |  | $   
|                                                            | Conversion of Mandatorily Redeemable Series F to common stock                                          |      | $ |       |  | $   
|                                                            | Non-cash warrant issuance                                                                              |      | $ |       |  | $   
|                                                            | Non-cash option issuance                                                                               |      | $ | 205    |  | $   

23. RELATED PARTY TRANSACTIONS

Several of our stockholders or former stockholders, including BET, Brookwood, Halpern Denny, Greenlight Capital, LLC and certain of their affiliates (Greenlight),
have been involved in our
financings, refinancings and have purchased our debt and equity securities. Below, we have summarized related party transactions involving these investors during 2004, 2003 and 2002 fiscal years.

E.
Nelson Heumann is the chairman of our board of directors and is a current employee of Greenlight. Leonard Tannenbaum, a director, was the Managing Director of MYFM Capital LLC until
July 2004. In July 2004, Mr. Tannenbaum founded Fifth Street Capital LLC and is the managing partner. He is also a limited partner and 10% owner in BET. His
father-in-law is Bruce Toll, an affiliate of BET. John S. Clark II, a director, was employed by Greenlight until March 2004. Greenlight beneficially owns approximately
97 percent of our common stock.

Eve
Trkla, a director of our company until August 16, 2003, is the Chief Financial Officer of Brookwood Financial Partners, L.P., a former affiliate of Brookwood. Brookwood
designated Ms. Trkla as a director to serve for the period specified in the Stockholders Agreement (which was terminated as a result of the equity recapitalization).

William
Nimmo, a director of our company until June 6, 2003, is a partner in Halpern, Denny and Co., an affiliate of Halpern Denny. Halpern Denny designated Mr. Nimmo as a
director of our company.

On
May 30, 2002, we entered into a Loan and Security Agreement (the facility) with BET, which provided for $75,000 revolving loan facility at 11% interest. The facility was
secured by substantially all of our assets. In connection with obtaining the facility, we paid MYFM Capital LLC a fee of $75. In February 2003, we executed an amendment to the facility to
extend the maturity of the facility from March 31, 2003 to June 1, 2003. From February 1, 2003 to June 1, 2003, the interest rate increased from 11% to 13% per annum. BET
and MYFM Capital LLC received an extension fee of $188 in connection with the amendment, payable at maturity, and an additional $113 because the facility was not paid in full by June 2, 2003.
After June 1, 2003, the interest rate for borrowings under the facility was 15% per annum, and MYFM Capital LLC received a $25 fee for entering into a standstill

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agreement
with us. The facility was repaid with the proceeds of issuance of the $160 Million Facility in July 2003, and BET received $3 for reimbursement of legal fees and expenses.

In
July 2003, Greenlight purchased all of the outstanding Einstein/Noah Bagel Corp. 7.25% Convertible Debentures due 2004 from Jefferies. Upon consummation of the equity
recapitalization, we issued 4,337.481 shares of Series F to Greenlight in full payment of the outstanding Bridge Loan. The shares of Series F were converted into common stock in the
equity recapitalization.

On
June 25, 2003, we entered into the equity recapitalization with Halpern Denny and Greenlight, pursuant to which the parties agreed to a recapitalization of our equity
structure. Pursuant to the
equity recapitalization, we reimbursed Greenlight and Halpern Denny for legal fees and disbursements incurred in connection with their investment in our company and the equity restructuring in the
respective amounts of $226 and $125.

Greenlight
purchased $35,000 and BET purchased $7,500 of our $160 Million Notes. Leonard Tannenbaum purchased an additional $500 of our $160 Million Notes in the market.

On
December 8, 2003, we entered into a consulting agreement with Ms. Jill B. W. Sisson to provide legal, consulting and advisory services to us and to serve as General
Counsel and Secretary. Pursuant to the Agreement, Ms. Sisson is paid $16 per month and, on December 19, 2003, was granted options to purchase 75,000 shares of common stock pursuant to
the 2003 Plan. The options vest in part, upon length of service and in part, upon the achievement of specified financial goals by us. In addition, Ms. Sisson is eligible to receive annual
additional premium compensation based upon our performance and personal performance. Ms. Sisson will also be reimbursed for reasonable and necessary out-of-pocket
expenses. The agreement provides for non-solicitation of our employees for a year after termination of the agreement, and can be terminated by either party upon 30 days notice.

During
2002, the holders involved in certain debt and preferred stock financings in 2000 and 2001 became entitled to receive additional warrants. See Note 13 for additional
information.

24. PURCHASE COMMITMENTS

We have obligations with certain of our major suppliers of raw materials (primarily frozen bagel dough and cream cheese) for minimum purchases both in terms of
quantity and pricing on an annual basis. Furthermore, from time to time, we will commit to the purchase price of certain commodities that are related to the ingredients used for the production of our
bagels. On a periodic basis, we review the relationship of these purchase commitments to our business plan, general market trends and our assumptions in our operating plans. If these commitments are
deemed to be in excess of the market, we will expense the excess purchase commitment to cost of sales, in the period in which the shortfall is determined. The total of our future purchase obligations
at December 28, 2004 was approximately $18,468.

25. LITIGATION

We are subject to claims and legal actions in the ordinary course of our business, including claims by our franchisees, licensees and employees or former
employees. We do not believe that an adverse

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outcome
in any currently pending or threatened matter would have a material adverse effect on our business, results of operations or financial condition.

Employment Related

On July 31, 2002, Tristan Goldstein, a former store manager, and Valerie Bankhordar, a current store manager, filed a putative class action against
Einstein and Noah Corp. ("ENC") in the Superior Court for the State of California, County of San Francisco. The plaintiffs alleged that ENC failed to pay overtime wages to managers and assistant
managers of its California stores who were improperly designated as exempt employees. In April 2004, we reached an agreement in principle to settle the litigation, subject to court approval.
Amounts representing our estimate to settle this litigation were previously recorded during fiscal 2003.

On
March 31, 2003, Jerold E. Novack, our former Chief Financial Officer and Secretary, filed a complaint in the United States District Court for the District of New Jersey against
us, Anthony D. Wedo, our former Chairman and Chief Executive Officer, and William J. Nimmo, a former member of our board of directors. On January 13, 2005, the parties resolved the litigation.
The resolution of this issue did not have a material adverse effect on our consolidated financial condition or results of operations.

On
June 4, 2003, R. Ramin Kamfar, our former Chairman of the Board and Chief Executive Officer, filed an action in the United States District Court for the Southern District of
New York against us and Anthony D. Wedo, our former Chairman and Chief Executive Officer, alleging breach of contract, defamation, declaratory relief and punitive damages. On February 10, 2005,
the case was dismissed with prejudice and the parties have resolved this litigation. The resolution of this issue did not have a material adverse effect on our consolidated financial condition or
results of operations.

On
September 14, 2004, Atlantic Mutual Insurance Company brought an action in the Superior Court of New Jersey Law Division: Morris County, Docket No.
MRS-L-2463-04 against the Company, Wedo, Nimmo,
Novack, Kamfar, Lexington Insurance Company, and XL Specialty Insurance Company seeking declaratory judgment on insurance coverage issues in the Novack litigation and the Kamfar litigation described
above. The parties have filed answers and cross-claims, and Mr. Kamfar has filed a motion for partial summary judgment claiming advancement for expenses for which he claims the Company is
required to indemnify him. At this time, we cannot predict the outcome of this matter and there can be no assurance that we will prevail in this matter, that a determination will be made that we have
insurance coverage for expenses that we have already incurred, or that damages or other relief will not be awarded against us.

Investigations

On April 3, 2002, the Securities and Exchange Commission notified us that the Commission was conducting an investigation into the resignation of our former
Chairman, R. Ramin Kamfar, and the termination for cause of our former Chief Financial Officer, Jerold Novack, and the delay in filing our Form 10-K for 2001. We have cooperated
fully with the investigation as well as with a Department of Justice inquiry relating to these issues. Further, several of the former and present officers and directors have requested that, under
applicable law and our by-laws, we advance reasonable legal expenses on

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their
respective behalves to the extent any of them is or has been requested to provide information to the Commission in connection with its investigation. We have advanced certain expenses in
connection with these claims. At this time, it is not possible to reasonably estimate the loss or range of loss, if any.

Other Litigation

On February 23, 2000, New World Coffee of Forest Hills, Inc., a franchisee, filed a demand for arbitration with the American Arbitration Association
against us alleging fraudulent inducement and violations of New York General Business Law Article 33. In August 2004, this matter was resolved. The resolution of this issue did not have
a material adverse effect on our consolidated financial condition or results of operations.

26. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes the unaudited consolidated results of operations for fiscal 2004 and 2003:

|                                             |  | Fiscal year 2004, for the quarters ended: |       
|-------------------------------------------- |  | ----------------------------------------- | ------
|
|Revenue                                      |  | $                                         | 91,196
|Income from operations(1)                    |  | $                                         | 1,654 
|Net loss(2)                                  |  | $                                         | (4,130
|Net loss available to common shareholders(3) |  | $                                         | (4,130
|Basic and diluted loss per share             |  | $                                         | (0.42 

|                                             |  | Fiscal year 2003, for the quarters ended (restated): |        
|-------------------------------------------- |  | ---------------------------------------------------- | -------
|
|Revenue                                      |  | $                                                    | 95,211 
|Income (loss) from operations(1)             |  | $                                                    | (1,655 
|Net loss(2)                                  |  | $                                                    | (9,154 
|Net loss available to common shareholders(3) |  | $                                                    | (13,756
|Basic and diluted loss per share             |  | $                                                    | (9.03  

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NEW WORLD RESTAURANT GROUP, INC.        Schedule IIValuation and Qualifying Accounts        (in thousands of dollars)

|                                             |                                        | Balance at
beginning
of period |   | Additions(a) |  | Deductions(b) |   | Balance at
end of period
|-------------------------------------------- | -------------------------------------- | ------------------------------ | - | ------------ |  | ------------- | - | ------------------------
|For the fiscal year ended December 31, 2002: |                                        |                                |   |              |  |               |   |                         
|                                             | Allowance for doubtful accounts        |                                | $ | 4,097        |  | 639           |   | (125                    
|                                             | Restructuring reserve                  |                                | $ | 2,936        |  | 3,107         |   | (3,275                  
|                                             | Valuation allowance for deferred taxes |                                | $ | 30,437       |  | 18,931        |   |                        
|For the fiscal year ended December 30, 2003: |                                        |                                |   |              |  |               |   |                         
|                                             | Allowance for doubtful accounts        |                                | $ | 4,611        |  | 1,815         |   | (3,116                  
|                                             | Restructuring reserve                  |                                | $ | 2,768        |  | 2,420         |   | (1,115                  
|                                             | Valuation allowance for deferred taxes |                                | $ | 49,368       |  | 17,506        |   |                        
|For the fiscal year ended December 28, 2004: |                                        |                                |   |              |  |               |   |                         
|                                             | Allowance for doubtful accounts        |                                | $ | 3,310        |  | 177           |   | (1,012                  
|                                             | Restructuring reserve                  |                                | $ | 4,073        |  | (869          | ) | (3,183                  
|                                             | Valuation allowance for deferred taxes |                                | $ | 66,874       |  | 7,140         |   |                        

---

Notes:

See
accompanying report of independent registered public accounting firm

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

None

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of company management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended) as of December 28, 2004. Based upon that evaluation, our chief executive officer and our chief financial officer have concluded that the design and operation of our disclosure controls
and procedures were effective in timely making known to them material information relating to the Company required to be disclosed in reports that we file or submit under the Exchange Act rules.

It
should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance regarding management's control objectives. In addition, the
design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

During
the quarter ended December 28, 2004, there were no significant changes to our internal controls over financial reporting that were identified in connection with the
evaluation of our disclosure controls and procedures required by the Exchange Act rules and that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.

ITEM 9B. OTHER INFORMATION

None

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to Directors required by Item 10 will be included in our 2005 Proxy Statement, which will be filed within 120 days after the
close of the 2004 fiscal year, and is hereby incorporated by reference.

Information
relating to compliance with Section 16(a) required by Item 10 will included in our 2005 Proxy Statement, which will be filed within 120 days after the
close of the 2004 fiscal year, and is hereby incorporated by reference.

Information
regarding executive officers is included in Part I of this Form 10-K, as permitted by General Instruction G(3).

ITEM 11. EXECUTIVE COMPENSATION

This information will be included in our 2005 Proxy Statement, which will be filed within 120 days after the close of the 2004 fiscal year, and is hereby
incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information will be included in our 2005 Proxy Statement, which will be filed within 120 days after the close of the 2004 fiscal year, and is hereby
incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be included in our 2005 Proxy Statement, which will be filed within 120 days after the close of the 2004 fiscal year, and is hereby
incorporated by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

This information will be included in our 2005 Proxy Statement, which will be filed within 120 days after the close of the 2004 fiscal year, and is hereby
incorporated by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|No.   |  | Description                                                                                                                     
|----- |  | --------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Articles of incorporation(1)                                                                                                    
|3.2   |  | Restated Certificate of Incorporation(5)                                                                                        
|3.21  |  | Amendment to Restated Certificate of Incorporation(10)                                                                          
|3.22  |  | Amendment to Restated Certificate of Incorporation(11)                                                                          
|3.23  |  | Amendment to Restated Certificate of Incorporation(12)                                                                          
|3.24  |  | Amendment to Restated Certificate of Incorporation(13)                                                                          
|3.25  |  | Amendment to Restated Certificate of Incorporation(14)                                                                          
|3.26  |  | Amendment to Restated Certificate of Incorporation(15)                                                                          
|3.3   |  | Third Amended By-laws(2)                                                                                                        
|3.4   |  | Amendments to By-laws(8)                                                                                                        
|4.1   |  | Specimen Common Stock Certificate of Registrant(19)                                                                             
|4.7   |  | New World Restaurant Group, Inc. Certificate of Designation, Preferences and Rights of Series Z Preferred Stock(9)              
|10.1  |  | 1994 Stock Plan(2)                                                                                                              
|10.2  |  | Directors' Option Plan(2)                                                                                                       
|10.3  |  | Executive Employee Incentive Plan(20)                                                                                           
|10.4  |  | Stock Option Plan for Independent Directors(21)                                                                                 
|10.5  |  | Severance Agreement And Mutual General Release between Registrant and Anthony Wedo, effective as of October 24, 2003(19)        
|10.6  |  | Consulting Agreement between Registrant and Jill B.W. Sisson effective as of December 8, 2003(19)                               
|10.7  |  | Rights Agreement between Registrant and American Stock Transfer & Trust Company, as Rights Agent dated as of June 7, 1999(3)    
|10.8  |  | Asset Purchase Agreement dated as of February 10, 2001, by and between Einstein Acquisition Corp., GNW, ENBC and ENBP(4)        
|10.81 |  | Order of the United States Bankruptcy Court for the District of Arizona dated June 1, 2001 approving Asset Purchase Agreement(4)
|      |  |                                                                                                                                 

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|10.9  |  | Loan and Security Agreement dated as of May 30, 2002 between BET and Registrant(7)                                                                                                                       
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10 |  | Amendment No. 1 to the Loan and Security Agreement dated as of July 18, 2002 between BET and Registrant(8)                                                                                               
|10.11 |  | Amendment No. 2 to the Loan and Security Agreement dated as of July 30, 2003 between BET and Registrant(8)                                                                                               
|10.12 |  | Amendment No. 3 to the Loan and Security Agreement dated as of February 1, 2003 between BET and Registrant(8)                                                                                            
|10.13 |  | Letter Agreement dated as of October 10, 2002, by and among Registrant, BET, Brookwood and Halpern Denny(8)                                                                                              
|10.14 |  | Amendment No. 1 to Warrant Agreement dated as of March 15, 2002 between Registrant and The Bank of New York, as successor in interest to the United States Trust Company of New York(17)                 
|10.15 |  | Escrow Deposit Agreement dated as of June 10, 2003, between Registrant and The Bank of New York, as Trustee(17)                                                                                          
|10.16 |  | Standstill Agreement dated as of June 17, 2003, between Registrant and BET(16)                                                                                                                           
|10.17 |  | Standstill Agreement dated as of June 17, 2003, by and among Registrant and the Increasing Rate Note Holders as set forth therein(16)                                                                    
|10.18 |  | Equity Restructuring Agreement dated as of June 26, 2003, by and among Registrant, Greenlight and Halpern Denny(16)                                                                                      
|10.19 |  | Purchase Agreement dated as of June 27, 2003, between Registrant and Jefferies & Company(17)                                                                                                             
|10.20 |  | Note Purchase and Put Agreement dated as of June 27, 2003, by and among Registrant, Jefferies & Co., Farallon Capital Partners, L.P. and its affiliates and Farallon Capital Offshore Investors, Inc.(16)
|10.21 |  | Indenture dated as of July 8, 2003, by and among Registrant, the Subsidiary Guarantors and The Bank of New York, as Trustee(17)                                                                          
|10.22 |  | 144A Global Note (including guarantees thereon) by and among Registrant, the Subsidiary Guarantors and The Bank of New York, as Trustee(17)                                                              
|10.23 |  | IAI Global Note (including guarantees thereon) by and among Registrant, the Subsidiary Guarantors and The Bank of New York, as Trustee(17)                                                               
|10.24 |  | Amendment to Note Purchase and Security Agreement dated as of July 8, 2003 by and among Jefferies & Co., Registrant and New World EnbcDeb Corp.(17)                                                      
|10.25 |  | Pledge and Security Agreement dated as of July 8, 2003, by and among Registrant, the Subsidiary Guarantors and The Bank of New York, as Trustee(17)                                                      
|10.26 |  | Patent Security Agreement dated as of July 8, 2003, by and among Registrant and the Subsidiary Guarantors, in favor of The Bank of New York, as Collateral Agent(17)                                     
|10.27 |  | Trademark Security Agreement dated as of July 8, 2003, between Registrant and The Bank of New York, as Collateral Agent(17)                                                                              
|10.28 |  | Trademark Security Agreement dated as of July 8, 2003, between Chesapeake Bagel Franchise Corp. and The Bank of New York, as Collateral Agent(17)                                                        
|      |  |                                                                                                                                                                                                          

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|10.29 |  | Trademark Security Agreement dated as of July 8, 2003, between Einstein/Noah Bagel Partners, Inc. and The Bank of New York, as Collateral Agent(17)                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | Trademark Security Agreement dated as of July 8, 2003, between Einstein and Noah Corp. and The Bank of New York, as Collateral Agent(17)                                                                                                                                                                                
|10.31 |  | Trademark Security Agreement dated as of July 8, 2003, between Manhattan Bagel Company, Inc. and The Bank of New York, as Collateral Agent(17)                                                                                                                                                                          
|10.32 |  | Loan and Security Agreement dated as of July 8, 2003, by and among Registrant and certain of its Subsidiaries (as therein defined), as Borrower(s) and Guarantors, AmSouth Bank, as Agent, AmSouth Bank and the financial institutions named therein,
as Lenders, and AmSouth Capital Corp., as Administrative Agent(16)
|10.33 |  | Security Agreement and MortgageTrademarks and Patents dated as of July 8, 2003, by and among Registrant, the Subsidiary Guarantors and the Bank of New York, as Trustee(16)                                                                                                                                            
|10.34 |  | Pledge Agreement dated as of July 8, 2003, by and among Registrant and certain of its Subsidiaries, as Pledgors in favor of AmSouth Bank, as Agent(16)                                                                                                                                                                  
|10.35 |  | Intercreditor Agreement dated as of July 8, 2003, by and among Registrant, the Subsidiary Guarantors, AmSouth Bank and the Bank of New York as Trustee(16)                                                                                                                                                              
|10.36 |  | Amendment Agreement with AmSouth Bank dated December 30, 2003(18)                                                                                                                                                                                                                                                       
|10.37 |  | Second Amendment Agreement with AmSouth Bank dated February 9, 2004(19)                                                                                                                                                                                                                                                 
|10.38 |  | Registration Rights Agreement dated as of July 8, 2003, between Registrant, the Subsidiary Guarantors and Jefferies & Company, Inc.(17)                                                                                                                                                                                 
|10.39 |  | Form of Common Stock Purchase Warrant issued to Halpern Denny, BET and Brookwood(6)                                                                                                                                                                                                                                     
|10.40 |  | Form of Common Stock Purchase Warrant issued to the Greenlight Entities(6)                                                                                                                                                                                                                                              
|10.41 |  | Registration Rights Agreement dated as of January 17, 2001, by and among the Company, Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore, Ltd.(6)                                                                                                                             
|10.42 |  | Form of Common Stock Purchase Warrant issued to Halpern Denny(22)                                                                                                                                                                                                                                                       
|10.43 |  | Amended and Restated Registration Rights Agreement dated as of January 18, 2001, by and among the Company, Halpern Denny, BET and Brookwood(6)                                                                                                                                                                          
|10.44 |  | Amendment No. 1 to Amended and Restated Registration Rights Agreement dated as of January 18, 2001, by and among the Company, Halpern Denny, BET and Brookwood(22)                                                                                                                                                      
|10.45 |  | Amendment No. 2 to Registration Rights Agreement dated as of June 19, 2001, by and among the Company, Halpern Denny, BET and Brookwood(4)                                                                                                                                                                               
|10.46 |  | Form of Common Stock Purchase Warrant issued to Halpern Denny, Greenlight Capital and Special Situations(4)                                                                                                                                                                                                             
|10.47 |  | Warrant Agreement dated as of June 19, 2001, by and among the Company, Jeffries & Co. and the United States Trust Company of New York(4)                                                                                                                                                                                
|10.48 |  | Registration Rights Agreement dated as of June 19, 2001, by and between the Company and Jefferies & Co.(4)                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                         

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|10.49 |  | Third Amendment Agreement with AmSouth Bank dated February 11, 2005*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.50 |  | Second Amended and Restated Project and Approved Supplier Agreement dated as of April 28, 2002 and Letter Agreement, effective as of December 14, 2004, dated February 23, 2005, by and among New World Restaurant Group, Inc.,
Einstein and Noah Corp., Manhattan Bagel Company, Inc., and Harlan Bagel Supply Company, LLC, Harlan Bakeries, Inc., Hal P. Harlan, Hugh P. Harlan and Doug H. Harlan (Certain information contained in this exhibit has been
omitted and filed separately with the Commission pursuant to a confidential treatment request under Rule 24b-2)*
|21.1  |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|31.1  |  | Certification of Principal Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2004*                                                                                                                                                                                                                                                                                                                                                   
|31.2  |  | Certification of Principal Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2004*                                                                                                                                                                                                                                                                                                                                                   
|32.1  |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                                                                                                                                                                                                                                
|32.2  |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act*                                                                                                                                                                                                                                                                                                                                                                                                                                

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77

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | NEW WORLD RESTAURANT GROUP, INC.
|-------------------- |  | --------------------------------
|Date: March 11, 2005 |  | By:                             

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
indicated on March 11, 2005.

|Signature                                               |  | Title                                                                        
|------------------------------------------------------- |  | -----------------------------------------------------------------------------
|                                                        |  |                                                                              
|/s/PAUL J.B. MURPHY, IIIPaul J.B. Murphy, III           |  | President, Chief Executive Officer and Director (Principal Executive Officer)
|/s/RICHARD P. DUTKIEWICZRichard P. Dutkiewicz           |  | Chief Financial Officer (Principal Accounting Officer)                       
|/s/MICHAEL W. ARTHURMichael W. Arthur                   |  | Director                                                                     
|/s/JOHN S. CLARK IIJohn S. Clark II                     |  | Director                                                                     
|/s/E. NELSON HEUMANNE. Nelson Heumann                   |  | Director                                                                     
|/s/FRANK C. MEYERFrank C. Meyer                         |  | Director                                                                     
|/s/S. GARRETT STONEHOUSE, JR.S. Garrett Stonehouse, Jr. |  | Director                                                                     
|/s/LEONARD TANNENBAUMLeonard Tannenbaum                 |  | Director                                                                     

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