<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                       THE SECURITIES EXCHANGE ACT OF 1934

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

                   For the fiscal year ended December 31, 1997
                                       OR

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

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


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


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

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

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

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

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

         The number of shares of common stock of the Registrant outstanding as
of March 11, 1998: 14,210,155 shares.

         The aggregate market value of the outstanding common stock of the
Registrant held by non-affiliates of the Registrant, based on the market price
at March 11, 1998, was approximately $8,440,160.

                       Documents Incorporated by Reference

         Certain portions of the following documents are incorporated by
reference into Part III of this Form 10-K: The Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held May 27, 1998.
<PAGE>   2
                            JERRY'S FAMOUS DELI, INC.

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Jerry's Famous Deli, Inc. (the "Company" or "JFD") is an operator of
New York deli-style restaurants. The Company currently operates 10 restaurants,
including eight in Southern California operating under the name "Jerry's Famous
Deli," one in Southern California operating under the name "Solley's" and one in
Miami, Florida, the venerable "Wolfie Cohen's Rascal House." The Company
recently acquired an existing location in Boca Raton, Florida, and is currently
renovating the location as a Rascal House. In addition, the Company expects to
complete its acquisition of The Epicure Market, a well-known gourmet food market
in Miami, Florida in April 1998.

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

         All of the eight Jerry's Famous Deli restaurants in operation at
December 31, 1997 had average annualized sales of approximately $5.8 million per
location for the year ended December 31, 1997. Solley's had sales of
approximately $3.7 million, and the Rascal House restaurant had sales of
approximately $9.5 million for 1997. In the September 1997 issue of The Los
Angeles Business Journal, six Jerry's Famous Deli restaurants were listed among
the top 25 highest grossing restaurants in Los Angeles County.

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

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

HISTORY AND BACKGROUND

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


                                        2
<PAGE>   3
          In October 1995, the Company completed its initial public offering of
1,955,000 shares of Common Stock (the "Public Offering"), which resulted in net
proceeds of approximately $9.2 million. The proceeds of the Public Offering were
used to finance the opening of new restaurants in 1996.

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

         In August and November of 1996, the Company sold 12,000 convertible
preferred shares to affiliates of Waterton Management, LLC ("Waterton"), raising
approximately $11 million. The proceeds of these issuances, together with bank
borrowings, were used in connection with the Company's acquisition, renovation
and opening of new restaurants. In December 1996 and March 1997, all of the
outstanding preferred shares were converted into a total of 3,656,405 shares of
Common Stock. Concurrently with the conversion, the Company entered into a
consulting agreement with Kenneth J. Abdalla, a director of the Company and
managing member of Waterton, to act as the Company's President and to provide
advice and consultation with respect to sites to be leased or purchased or other
assets or entities to be acquired by the Company through December 31, 1998.

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

RECENT DEVELOPMENTS

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

         In December 1997, the Company entered into an agreement to purchase The
Epicure Market of Miami Beach, Florida, a family-owned specialty gourmet food
store which has been in operation for more than 50 years. The acquisition is
scheduled to close in April 1998. The total purchase price for the business is
$7.1 million in cash and 934,509 shares of the Company's common stock.
Concurrently with the purchase, the Company entered into a 20-year term lease
agreement with additional options to renew with affiliates of the seller and
five-year term employment agreements with the two family members who, together
with their family, have managed the market for over 50 years. The Company plans
to increase the interior sales area of the market, install seating for in-house
dining, increase store operating hours, and expand into delivery, catering and
home meal replacement.

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

EXISTING RESTAURANTS

         The Company operates eight Jerry's Famous Deli restaurants in Southern
California, each of which features a Broadway New York theme, with an array of
lighting, posters and decor giving a "theatrical" setting. Each of the Jerry's
restaurants has a large deli style take-out counter displaying a wide range of
deli meats, salads and other prepared foods, along with a bakery display. Most
of the Southern California restaurants, including Solley's, provide attractive
patio dining, where smoking is permitted, and strategically placed televisions,
generally showing sports events, all of which


                                        3
<PAGE>   4
add to the casual atmosphere. The Company's nine Southern California restaurants
in operation at the end of 1997 averaged approximately 7,458 square feet of
dining and kitchen space and 323 seats.

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

         All of the restaurants feature an extensive menu emphasizing
traditional deli type fare (such as pastrami, corned beef, roast beef and turkey
sandwiches, knishes, blintzes, chopped liver, lox and bagels, chicken soup,
knockwurst and hot dogs), as well as an extensive assortment of pastas, salads,
omelettes, fresh baked breads and desserts, burgers, chicken and steaks. Also
offered at most restaurants is a complete line of pizzas, ranging from
traditional to specialty items, such as lox pizza, chicken pizza and deli pizza.
Most items, other than smoked fish and meat, are prepared on site at each
restaurant. Each restaurant also provides bar service.

         Annual sales for 1997 for each of the eight Jerry's Famous Deli
restaurants open during all of 1997 ranged from $3.3 million for the Pasadena
restaurant, with 295 seats, to $8.3 million for the West Hollywood restaurant,
with 375 seats. Annual sales at Solley's in Sherman Oaks, California totaled
$3.7 million, with 160 seats. Annual sales at Rascal House for 1997 totaled $9.5
million, with 375 seats. Annualized sales for the newest restaurant in Costa
Mesa, California which opened in August 1997, approximated $5.0 million, with
320 seats. Management believes that the Company's high sales volume per
restaurant coupled with efficient cost controls enable the Company to offer an
excellent value, while permitting the Company to maintain strong operating
margins. Based upon its ability to replicate the Jerry's Famous Deli concept in
Southern California and the Rascal House concept in Southern Florida, and
acquire The Epicure Market in Southern Florida, management believes that it can
acquire other famous brand name deli-style restaurants and markets in larger
metropolitan areas and achieve operating efficiencies through its management of
those operations. All of the Company's restaurants and markets will offer an
extensive menu of high quality food for moderate prices in a distinctive
environment with superior service.

INDUSTRY BACKGROUND

         Trade magazines estimate that 1997 restaurant industry sales were
approximately $320 billion. Within the industry, the casual dining segment
includes restaurants with full table service, a variety of contemporary foods,
moderate prices and surroundings that appeal to families and a variety of
customers. According to the National Restaurant Association Survey for 1997,
full service restaurant sales exceeded $104 billion in 1997.

MARKET NICHE

         Management's strategy has been to expand upon well-known brand name
restaurants in high profile sites within larger metropolitan areas. Management
believes that the Company's commitment to providing attractive locations that
stand out in major high traffic areas and a high level of customer service has
been its most effective approach to attracting customers. Accordingly, the
Company has historically relied primarily on word of mouth to attract new and
repeat customers. Management believes that this strategy has enabled its newer
restaurants to benefit from the name recognition and reputation for quality
developed by existing restaurants. With the acquisition of The Epicure Market
scheduled for April 1998, the Company plans to use many of its restaurant
operating techniques to enhance the operation of the market. In addition, the
Company may seek to acquire similar gourmet market operations in other
metropolitan areas in the future and also develop additional locations.

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


                                        4
<PAGE>   5
         -        an extensive menu at each of its restaurants emphasizing
                  traditional deli type fare (such as pastrami, corned beef,
                  roast beef and turkey sandwiches, knishes, blintzes, chopped
                  liver, lox and bagels, chicken soup, knockwurst and hot dogs),
                  as well as pastas, salads, omelettes, fresh baked breads and
                  desserts, burgers, chicken and steaks. All menu selections are
                  prepared with high quality fresh ingredients, attractively
                  presented in generous portions at moderate prices;

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

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

         -        take-out, delivery and catering service.

          The Studio City, Marina del Rey, West Hollywood, Pasadena, Westwood,
Woodland Hills, Costa Mesa and Rascal House restaurants have alcoholic beverages
available at the table with meals and maintain a full-service bar at which all
menu selections are available. The Encino and Sherman Oaks locations offers wine
and beer service only. The availability of alcoholic beverages is intended to
complement the meal service and is not a primary focus of the restaurant
operations at any location. Sale of alcoholic beverages in 1997 accounted for
approximately 3% of the Company's revenues.

FUTURE DEVELOPMENT STRATEGY

         The Company's growth strategy is to acquire and expand on well-known
brand name restaurants and markets located in major metropolitan areas
throughout the United States. With the opening of Jerry's Famous Deli in Costa
Mesa, California, the Company executed the initial phase of expansion strategy
for the Jerry's Famous Deli concept. With the acquisition of Solley's Deli in
1996, the acquisition of Rascal House in 1996 and the scheduled acquisition of
The Epicure Market in April 1998, the Company has executed the second phase of
its overall expansion strategy, which is to acquire and expand upon other
popular deli-style restaurants and markets, in addition to developing new
locations for each of its brand names.

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

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

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


                                        5
<PAGE>   6
         To date, the Company has relied upon bank borrowings, landlord
financing and equity contributions from its shareholder and the proceeds of
public and private offerings of common and preferred stock to fund growth. The
Company may consider additional public or private offerings of additional common
stock or preferred stock or debt to fund its future expansion plans.

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

COMPETITION

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

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

OPERATIONS

         RESTAURANT OPERATIONS AND MANAGEMENT

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

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

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

         The Company has a decentralized system of management for individual
restaurants and a training system that promotes, even requires, growth. Each of
the Company's restaurants are run on site by managers who place orders and
handle all on site issues except those noted below. All managers have cash
incentive plans based on performance of their restaurant and generally also
receive stock options. The Company's high volume operation provides for the
training of new floor and kitchen managers in every restaurant, so that each
location is constantly training assistant and alternative


                                        6
<PAGE>   7
shift managers who expect to move up as new locations are opened. In addition,
when expanding through acquisitions, the Company obtains experienced staff. Key
staff acquired in acquisitions are given intensive training in the restaurants's
menu while the computerized point of sale system and oversight is put in place.

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

         The Company intends to apply many of its operating systems to the
operation of The Epicure Market upon completion of its acquisition scheduled for
April 1998. In addition, the Company will retain the expertise of its current
owner-operators, Harry and Mitchell Thal, who, together with their family, have
operated The Epicure Market for over 50 years.

         TAKE-OUT AND DELIVERY OPERATIONS

         The Company's take-out and delivery service is a significant and
popular feature of each restaurant and is estimated by management to currently
account for approximately 15% to 20% of JFD's total revenue. The take-out
counters, with their displays of deli meats, salads, other prepared foods and
bakery items, are located in close proximity to the entrance of each restaurant.
Therefore, upon entering the restaurant the customer can view a full array of
appetizers, deli meats, salads, fish, and freshly baked breads and desserts. All
menu items are available for take-out and delivery. Take-out service is
available at each restaurant and delivery service is typically available from
6:00 a.m. to 1:00 a.m. daily.

         PURCHASING OPERATIONS

         Key food products and related restaurant supplies are purchased from
specified food producers, independent wholesale food distributors and
manufacturers. The Company is not materially dependent upon any particular
supplier. Each restaurant manager orders supplies directly from an approved list
of vendors on an as-needed basis. This process enables the Company to take
advantage of volume discounts and ensures the consistent quality of its products
and supplies while enabling individual restaurant managers to be efficient in
their purchasing procedures, tailored to each specific restaurant. Many supplies
are purchased in an unprocessed state, since each restaurant prepares most of
its own salads and cooked items, except smoked fish and meat and other prepared
foods. This system also allows the restaurants to maintain low inventory levels
and ensures freshness.

         The Company believes that the quantities of food and supplies it
purchases on a centralized basis enables it to obtain and maintain the desired
high quality products at the best available prices. In light of the Company's
historical negative working capital, the Company was not able to take advantage
of all prompt payment discounts offered by vendors until the completion of the
Public Offering. Since the completion of the Public Offering, the Company has
been taking advantage of those discounts, and has reduced its costs of sales as
a result. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."

         GOVERNMENT REGULATIONS

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


                                        7
<PAGE>   8
         Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a federal and state authority and, in certain locations,
municipal authorities for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause by such authority at any time. Alcoholic beverage control
regulations relate to numerous aspects of the daily operations of the Company's
restaurants, including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, and storage
and dispensing of alcoholic beverages. The Company has not encountered any
material problems relating to alcoholic beverage licenses or permits to date and
does not expect to encounter any material problems going forward. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect the Company's ability to obtain such a license
elsewhere.

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

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

EMPLOYEES

         As of March 1, 1998, the Company employed approximately 1,530 employees
at its ten restaurants. The Company also employs approximately 20 persons at its
corporate administrative office. Historically, the Company has experienced
relatively low turnover of key management employees. The Company believes that
it maintains favorable relations with its employees. There are no unions or
collective bargaining arrangements.

INSURANCE

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

TRADEMARKS AND COPYRIGHTS

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

         The Company has applications pending for registration of the trademarks
"Rascal House" and "Wolfie Cohen's Rascal House."


                                        8
<PAGE>   9
         The Company has not filed for registration of the Solley's trademark.

ITEM 2.  PROPERTIES

         Leased Properties. The Company's Sherman Oaks (Solley's), Studio City,
Encino, West Hollywood, Westwood, Woodland Hills and Costa Mesa restaurants are
all on leased premises. The Company owns the furnishings, fixtures and equipment
in each of its restaurants. Existing restaurant leases have expirations ranging
from 2003 through 2014 (excluding renewal options). Leases typically provide for
minimum base rents plus a percentage of gross sales above the minimum base
rents, plus payment of certain operating expenses. See Note 7 of Notes to
Consolidated Financial Statements for information regarding aggregate minimum
rents paid by the Company for recent periods and information regarding the
Company's obligation to pay minimum rents in future years. The Westwood
restaurant property, as well as the Guy's Place property adjacent to the West
Hollywood restaurant and three parking lots which service the West Hollywood
restaurant, are leased from The Starkman Family Partnership, which is owned by
the Starkman family, principally Isaac Starkman, the controlling beneficial
shareholder of the Company. See "Certain Relationships and Related
Transactions."

         The Epicure Market and the future restaurant site in Boca Raton will
also be held under long-term leases. The Epicure Market lease will be for a 20
year term with four five-year options to renew and an option to purchase.
Concurrently with the completion of the acquisition of the Market, the Company
will acquire title to an adjacent parking lot. The Boca Raton lease is for a 15
year term, ending in 2013, with five five-year options to renew.

         Purchased Restaurant Properties. The Company owns the land and
buildings of its Pasadena and Marina del Rey Jerry's Famous Deli restaurants and
the Rascal House restaurant in Miami Beach. In April 1995, the Company purchased
the Pasadena restaurant site located at 42 South Delacey Street for $1,675,000.
The Company completed construction of a 7,400 square foot building at a cost of
approximately $2,894,000, and the new restaurant opened on February 20, 1996. In
March 1996, the Company purchased the Marina del Rey property including the
9,300 square foot, 405 seat Jerry's Famous Deli restaurant which has been in
operation since 1991, for a total purchase price of $3,963,510, paid $713,510 in
cash and $3,250,000 in the form of a collateralized promissory note payable to
the Marina Landlord. The note payable to the Marina Landlord provides for
interest only payments for five years at 9% per annum, and for principal and
accrued interest to be paid in full on March 27, 2001. In September 1996, as
part of the purchase of Wolfie Cohen's Rascal House in Miami, Florida, the
Company purchased 2.21 acres of land and the 23,000 square foot two story
restaurant building. The total purchase price of the real estate, fixtures and
equipment of $4,750,000 was paid in full at closing.

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

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

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


                                        9
<PAGE>   10
ITEM 3.  LEGAL PROCEEDINGS

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


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

         No matters were submitted to a vote of shareholders in the fourth
quarter of 1997.

EXECUTIVE OFFICERS

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


<TABLE>
<CAPTION>
NAME                                  AGE                                              POSITION
<S>                                   <C>                         <C>
Isaac Starkman                        60                          Director, Chief Executive Officer, Secretary and
                                                                  Chairman of the Board
Kenneth Abdalla                       34                          President and Director
Christina Sterling                    53                          Chief Financial Officer
Guy Starkman                          27                          Director, Director of Operations, and Vice-President
Jason Starkman                        23                          Director, Management Information Systems Director,
                                                                  Vice-President
Ami Saffron                           40                          Director of Development, Vice-President
</TABLE>


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

         Mr. Kenneth Abdalla became a director of the Company in December 1996
and President of the Company on March 27, 1997. As President of the Company, Mr.
Abdalla provides limited services to the Company in connection with restaurant
acquisitions through December 1, 1998. Mr. Abdalla is the founder and managing
member of Waterton Management, LLC, a private investment firm established in
July 1995. Mr. Abdalla was a Vice President at Salomon Brothers, Inc., where he
managed a team of professionals in the private investment department. Mr.
Abdalla obtained a Bachelor of Science degree from the University of the Pacific
in 1986.

         Ms. Christina Sterling has been with the Company since its inception in
1978 acting as the Controller until her promotion in November 1993 to Chief
Financial Officer. Ms. Sterling reports to Mr. Starkman and heads the Company's
accounting and finance departments. Between 1974 and her joining the Company,
Ms. Sterling was the Controller for


                                       10
<PAGE>   11
FACIT AB, a Swedish distributor of office machines. Prior to that Ms. Sterling
served as the Controller of Fasson AB, an affiliate of Avery International
Company, in Sweden. Ms. Sterling holds a B.S. degree in accounting and
engineering from The National College in Sweden.

         Mr. Guy Starkman has been involved with the general operations of the
Company since 1987. He became employed by the Company on a full-time basis in
1989, and has been a Director of the Company since January 1995. He has been a
Director of Operations since 1989 and Vice-President of the Company since
January 1995. Mr. Starkman is generally responsible for the overall
operations of the restaurants. Specifically, Mr. Starkman negotiates with
vendors, reviews purchases at each restaurant, oversees the delivery fleet and
participates in major personnel decisions. Mr. Starkman studied Business
Administration at the University of Southern California, and is the son
of Isaac Starkman.

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

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


                                       11
<PAGE>   12
                                     PART II

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

         Since October 22, 1995, the Company's Common Stock has been traded on
the Nasdaq National Market. The high and low sales prices for the Common Stock
for each of the quarters beginning with the fourth quarter of 1995, as reported
on the Nasdaq National Market, are as follows:

<TABLE>
<CAPTION>
                                             High              Low
                                             ----              ---
<S>                                        <C>               <C>
December 31, 1995                          $ 8.50            $7.00

March 31, 1996                             $ 8.63            $7.88
June 30, 1996                              $ 8.63            $7.00
September 30, 1996                         $10.38            $5.63
December 31, 1996                          $ 9.38            $4.13

March 31, 1997                             $ 5.38            $3.38
June 30, 1997                              $ 3.75            $2.06
September 30, 1997                         $ 4.63            $2.06
December 31, 1997                          $ 4.00            $2.00
</TABLE>

         On March 11, 1998, the closing sale price for the Common Stock reported
on the Nasdaq National Market was $2.31 per share.

         As of March 11, 1998, there were 129 shareholders of the Common Stock.

DIVIDEND POLICY FOR COMMON STOCK

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


                                       12
<PAGE>   13
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The selected financial data presented below for the years ended
December 31, 1997, 1996 and 1995 are derived from the consolidated December 31
(1997, 1996 and 1995) and combined (1994 and 1993) financial statements
(hereafter "consolidated financial statements") of the Company.

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                                 -----------------------
                  Description                              1997            1996            1995            1994            1993
                  -----------                              ----            ----            ----            ----            ----
                                                              (Dollars in thousands except Earnings Per Share and Restaurant
                                                                                    Operating Data)
<S>                                                    <C>             <C>             <C>             <C>             <C>
INCOME STATEMENT DATA:
Revenues                                               $ 56,418        $ 40,160        $ 28,030        $ 28,649        $ 20,620
Cost of sales                                            17,508          12,480        $  9,168          10,019           7,263
                                                       --------        --------        --------        --------        --------
Gross profit                                             38,910          27,680          18,862          18,630          13,357

Operating expenses                                       28,769          19,951          13,634          13,689          10,267
General and administrative expenses                       4,839           4,180           2,924           2,494           1,917
Restaurant concept discontinuation costs                   --              --               137            --              --
Depreciation and amortization expenses                    3,870           2,114             977           1,152             778
                                                       --------        --------        --------        --------        --------

Income from operations                                    1,432           1,435           1,190           1,295             395
Interest income (expense), net                             (600)           (366)           (110)           (222)           (117)
Other income (expense), net                                (135)           (206)           (111)           (138)             77
                                                       --------        --------        --------        --------        --------
Income before income taxes                                  697             863             969             935             355
Income tax provision                                       (134)           (284)           (187)            (22)            (19)
                                                       --------        --------        --------        --------        --------

Net income                                             $    563        $    579        $    782        $    913        $    336
                                                       ========        ========        ========        ========        ========

Preferred stock
   Cash dividends paid or accrued                                       $  (227)
   Accounting deemed dividend(4)                                         (5,000)
                                                                        -------
                                                                         (5,227)
Net loss applicable to common stock                                     $(4,648)
                                                                        =======
Net income (loss) per share
    Net income - Basic                                                    $0.06
                                                                        -------
    Net income - Diluted                                                  $0.05
                                                                        -------
Preferred stock:
   Cash dividends paid or accrued                                       $ (0.02)
   Accounting deemed dividend(4)                                          (0.48)
                                                                        -------
                                                                        $ (0.50)
                                                                        -------
Net income (loss) per share, applicable to
common stock - Basic(5)                                   $0.04          $(0.44)
Net income (loss) per share, applicable to
common stock - Diluted(5)                                 $0.04          $(0.44)
</TABLE>


                                       13
<PAGE>   14
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                              -----------------------
                  Description                       1997              1996             1995              1994               1993
                  -----------                       ----              ----             ----              ----               ----
                                                           (Dollars in thousands except Earnings Per Share and Restaurant
                                                                                  Operating Data)
<S>                                          <C>               <C>               <C>                <C>                <C>
Weighted average common shares
  outstanding - Basic(5)                      13,369,998        10,412,062
Weighted average common shares
  outstanding - Diluted(5)                    13,419,095        10,525,521

PRO FORMA DATA(1):

Pro forma net income per common                                                  $       0.08
share - Basic
Pro forma common shares outstanding
 - Basic                                                                           10,386,250

RESTAURANT OPERATING DATA(2):
For restaurants open for the full year:
    Average sales per restaurant             $ 6,040,515       $ 6,842,542       $  6,922,618       $ 7,027,555        $ 6,699,991
    Average sales per seat                   $    18,373       $    19,221       $     19,494       $    20,104        $    19,659
    Average sales per square foot            $       780       $       939       $        922       $       951        $       893
    Total number of restaurants open
      for the full year                                9                 4                  4                 4                  3

Total restaurants open at end of year                 10                 9                  4                 4                  3

BALANCE SHEET DATA (END OF YEAR):

Working capital (deficit)                    $       208       $       103       $      3,845       $    (4,911)       $    (4,215)
Total assets                                 $    37,978       $    36,563       $     18,782       $     7,541        $     7,080
Total debt (including current portion)       $     8,442       $     6,559       $      2,430       $     2,275        $     2,815
Minority interest(3)                         $       480       $       441       $        263       $       188        $       192
Equity                                       $    24,576       $    23,624       $     12,766       $       147        $       172
</TABLE>


Net income per share is not presented for fiscal years ended 1994 and 1993 as
the Company was privately held. The unaudited pro forma basic net income per
share is presented as if the Company was publicly traded for the entire fiscal
year ended 1995.

(1)     Pro forma net income per common basic share was calculated using net
        income and based on as if the 10,386,250 shares of common stock were
        outstanding for all of fiscal year 1995. The pro forma shares
        outstanding are based on (i) 7,460,000 shares outstanding at December
        31, 1994, (ii) 40,000 shares issued on January 9, 1995, per the terms of
        a consulting agreement, (iii) 931,250 shares sold through a private
        placement completed in March 1995 and (iv) an additional 1,955,000
        shares sold in the Public Offering in October 1995.

(2)     Determined as total sales divided by the number of all restaurants open
        for the full period, total seats, and total square feet. Three
        restaurants were open for the full year in 1993 and 1994, four for
        the full year in 1995 and 1996, and nine for the full year 1997.
        However, the West Hollywood restaurant, which opened on January 18,
        1994, has been included in the Restaurant Operating Data for 1994 as if
        it were open for the entire year. Total seats is based upon the typical
        seating configuration of each restaurant. Seating configurations in each
        restaurant are subject to change. Square foot data for 1997 is based on
        approximate square feet for the kitchen and dining room area.

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


                                       14
<PAGE>   15
(4)     In 1996, in accordance with the recent Securities and Exchange
        Commission position regarding accounting for Preferred Stock which is
        convertible at a discount from market price for Common Stock, the
        Company has reflected an accounting "deemed dividend." This accounting
        deemed dividend, which relates to the issuance of the Preferred Stock
        which has been reflected in the third and fourth quarters, is a
        non-cash, non-recurring accounting entry for determining income (loss)
        applicable to common stock and income (loss) per share.

(5)     Net income per share and weighted average shares outstanding for each of
        the two years ended December 31, 1997 have been restated in accordance
        with SFAS No. 128 (See Note 1 to the Consolidated Financial Statements).
        There was no impact to the year ended December 31, 1995.

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

         The following discussion and analysis of the Company's consolidated
financial condition and results of operations for the fiscal years ended
December 31, 1997, 1996 and 1995 should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere in this report.

GENERAL

         Statements contained herein that are not historical facts are forward
looking statements. Important factors which could cause the Company's actual
results to differ materially from those projected in, or inferred by, forward
looking statements are (but are not necessarily limited to) the following: the
impact of increasing competition in the moderately priced, casual dining segment
of the restaurant industry; changes in general economic conditions which impact
consumer spending for restaurant occasions; unforeseen events which increase the
cost to develop and/or delay the development and opening of new restaurants;
unexpected increases in the cost of raw materials, labor and other resources
necessary to operate the restaurants, including without limitation the recent
increase in the minimum wage; the amount and rate of growth of general and
administrative expenses associated with building a strengthened corporate
infrastructure to support the development and operation of new restaurants; the
availability, amount, type and cost of financing for the Company and any changes
to that financing; the revaluation of any of the Company's assets (and related
expenses); and the amount of, and any changes to, tax rates. See "Risk Factors"
below for further information on these considerations, and see the Company's
Prospectus dated October 20, 1995 and periodic and other reports filed by the
Company with the Securities and Exchange Commission.

         The Company's revenues are derived primarily from food and beverage
sales at its ten restaurants. In the latter part of 1996 the Company began
marketing its catering business in many of its restaurants which made a
significant contribution to overall revenues and should grow in future quarters.
As of December 31, 1997, the Company owned the following restaurants, except the
Encino restaurant in which it owns a general partner's and a limited partner's
interest:

<TABLE>
<CAPTION>
           Location                                   Date Opened or Acquired
           --------                                   -----------------------
<S>                                                   <C>
           Studio City, CA                            November 1, 1978
           Encino, CA                                 July 25, 1989
           Marina del Rey, CA                         July 23, 1991
           West Hollywood, CA                         January 18, 1994
           Pasadena, CA                               February 20, 1996
           Westwood, CA                               June 18, 1996
           Woodland Hills, CA                         July  1, 1996 *
           Sherman Oaks, CA (Solley's)                July  1, 1996
           Miami Beach, Fl. (Rascal House)            September 9, 1996
           Costa Mesa, CA                             August 19, 1997
</TABLE>

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


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


                                       15
<PAGE>   16
         Certain preopening costs, including direct and incremental costs
associated with the opening of a new restaurant, are amortized over a period of
one year from the opening date of such restaurant. These costs include primarily
those incurred to train a new restaurant management team and the food, beverage
and supply costs incurred to perform testing of all equipment, concept systems
and recipes. As of December 31, 1997, 1996 and 1995, unamortized preopening
costs incurred in connection with the opening or remodeling of restaurants were
approximately $105,000, $550,000 and $83,000, respectively.

         The Company owns both the land and the building for its restaurants
located in Marina del Rey, Pasadena and Miami Beach; all other restaurant
locations are leased. All the Company's restaurants except the Encino restaurant
are wholly-owned. The Encino restaurant is owned and operated through
JFD-Encino, a limited partnership of which a wholly-owned subsidiary of the
Company is the 80% co-general partner and a 7.55% limited partner. The general
partners of JFD-Encino are entitled to 25% of the net income, loss or dividends
of the Encino restaurant and the limited partners are entitled to the remaining
75% until the limited partners have received a return of 100% of their capital
plus a cumulative return of 10% per annum. After payout of the limited partners'
initial contributed capital, the general partners are entitled to 65% of the net
income or loss of the Encino restaurant and the limited partners are entitled to
the remaining 35%. The Company consolidated the financial statements of the
Encino restaurant and separately stated the effect of minority interests in the
Consolidated Balance Sheets and Consolidated Statements of Operations based upon
the Company's current operating control of the Encino restaurant.

         The Company ceased operations of its Jerry's Famous Pizza restaurant on
June 25, 1995. As a result, the Company recorded a charge of approximately
$137,000 for disposal of related assets. Included in the Consolidated Statements
of Operations for the year ended December 31, 1995 are revenues from Jerry's
Famous Pizza of $236,000 and a net operating loss of $259,000, which includes
the restaurant concept discontinuation costs.


                                       16
<PAGE>   17
RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>
                                                              Percentage of Total Revenues
                                                              ----------------------------
                                                                 Years Ended December 31,
                                                                 ------------------------
                                                              1997          1996          1995
                                                            ------        ------        ------
<S>                                                         <C>           <C>           <C>
Revenues                                                     100.0%        100.0%        100.0%
Cost of sales
         Food                                                 28.5          28.2          30.1
         Other                                                 2.5           2.9           2.6
                                                            ------        ------        ------
Total cost of sales                                           31.0          31.1          32.7
                                                            ------        ------        ------
Gross profit                                                  69.0          68.9          67.3
Operating expenses
         Labor                                                36.7          36.0          33.4
         Occupancy and other                                  14.3          13.6          15.2
                                                            ------        ------        ------
Total operating expenses                                      51.0          49.6          48.6
General and administrative expenses                            8.6          10.4          10.4
Depreciation and amortization                                  6.9           5.3           3.5
Restaurant concept discontinuation costs                      --            --             0.5
                                                            ------        ------        ------
Total expenses                                                66.5          65.3          63.0
                                                            ------        ------        ------
Income from operations                                         2.5           3.6           4.3
Interest income                                                0.2           0.3           0.2
Interest expense                                              (1.2)         (1.3)         (0.6)
Gain on sale of assets and other                               0.0           0.2           0.2
                                                            ------        ------        ------
Income before provision for income taxes and minority
interest                                                       1.5           2.8           4.1
Provision for income taxes                                    (0.3)         (0.7)         (0.7)
Minority interest                                             (0.2)         (0.7)         (0.6)
                                                            ------        ------        ------
         Net income                                            1.0%          1.4%          2.8%
                                                            ======        ======        ======
</TABLE>

Fiscal Year 1997 Compared to Fiscal Year 1996

         Total revenues increased $16,258,000, or 40.5%, to $56,418,000 for 1997
from $40,160,000 for 1996. Contributing to this increase are full year revenues
of approximately $27,900,000 from the five new restaurants and bakery opened or
purchased during 1996 as compared to approximately $12,400,000 for 1996. Also,
the Costa Mesa restaurant, which opened in August 1997, contributed
approximately $1,880,000 to the increase in revenues. Same store


                                       17
<PAGE>   18
sales decreased approximately $1,220,000, due mainly to the opening of the
Westwood and Woodland Hills restaurants, as described below. In addition, the
Company also reduced the hours of operation from 24 hours a day in several
locations during 1997.

         Net income decreased approximately $16,000, or 3%, for 1997, to
approximately $563,000 from approximately $579,000 in 1996. The implementation
of the Company's expansion plan during 1996, which resulted in more than
doubling the number of restaurants from four to nine in one year, in addition to
the opening of the Company's tenth restaurant in August 1997, continued to
impact the Company's earnings for 1997. This was due to three factors which
generally impact the first year of each new restaurant operations. First, when a
new restaurant opens, it takes several months for a customer use pattern to
develop during which time the Company incurs relatively higher labor and food
costs; after customer use patterns are developed, the restaurant can be staffed
and food supply prepared, consistent with these patterns. Second, all preopening
expenses, such as training and food supply costs to perform testing of
equipment, are amortized over the first twelve months after opening each new
restaurant. Third, Jerry's Famous Deli restaurants have relatively high fixture
and restaurant equipment costs, which are necessary to create the atmosphere and
expansive menu which are the highlights of the Jerry's Famous Deli concept.

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

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

         Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased $8,819,000, or 44.2%, to approximately $28,769,000 in 1997
from $19,951,000 in 1996. As a percentage of revenues, operating expenses
increased 1.4 percentage points to 51.0% in 1997 from 49.6% in 1996. Labor
costs, the largest component of operating expenses, increased .7 percentage
points to 36.7% of revenues in 1997 from 36.0% in 1996. After Rascal House
restaurant experienced a 1997 second quarter seasonal decline in revenue without
a comparable decrease in labor costs, management's corrective action in June
1997, as discussed in the Company's June 30, 1997 Form 10-Q, brought about, as a
percentage of revenues for that restaurant, a 1.5% decrease in labor expense for
the 1997 third quarter and an additional 1.1% decrease in labor expense for the
1997 fourth quarter. Management believes that the minimum wage increases on
October 1, 1996, March 1, 1997 (California only) and September 1, 1997 to $5.15
from $4.25 an hour, which affected approximately 50% of the employees in each
restaurant, have not had a significant impact on labor expense for the 1997
period. Although rent expense, the next largest component of operating expenses,
increased $717,000 in 1997, as a percentage of revenues, it decreased .2%
points, to 4.7% from 4.9%. The opening of the Pasadena and Miami Beach
restaurants, where the Company owns the real property and the purchase of the
Marina del Rey restaurant property, which the Company formerly rented, have
decreased rent expense while increasing depreciation expense for 1997 and 1996.

         General and administrative expenses increased approximately $660,000,
or 15.8%, to approximately $4,840,000 in 1997 from approximately $4,180,000 in
1996. As a percentage of revenues, general and administrative expenses decreased
1.8% points, to 8.6% points from 10.4% points. A portion of the increase related
to $190,000 of additional costs incurred in 1997 related to the Company's legal
settlement with the Company's previous workers' compensation carrier in a
lawsuit involving the appropriate charge for premiums due for a period prior to
a change in carriers in a previous year. The Company also had a full year of
liability coverage and related expenses in 1997 for the five restaurants opened
during 1996, which increased when compared to 1996.


                                       18
<PAGE>   19
         Depreciation expense increased $1,291,000, or 75.5%, to approximately
$3,000,000 or 5.3% of revenues in 1997, from $1,709,000 or 4.3% of revenues in
1996. The increase in depreciation during 1997 was primarily due to the
acquisition or opening of three restaurants, whose property is owned by the
Company, and to the full year's effect of depreciation for leasehold
improvements and equipment for all five new restaurants opened in 1996.
Amortization expense increased approximately $466,000, or 115%, to $871,000 in
1997 from $405,000 in 1996, which included a full year of amortization charge of
$592,000 from the amortization of preopening costs of the new restaurants and
$262,000 from the amortization of goodwill and covenants not to compete arising
from the acquisition of the Sherman Oaks, Woodland Hills and Rascal House
restaurants.

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

Fiscal Year 1996 Compared to Fiscal Year 1995

         Income before provision for income taxes and minority interest
decreased approximately $8,000, or 0.7%, to approximately $1,141,000 for 1996
from approximately $1,149,000 for 1995 while net income decreased approximately
$204,000, or 26.0% for 1996. The implementation of the Company's expansion plan
during 1996, which resulted in more than double of the number of restaurants
from four to nine in one year, had a significant temporary impact on the
Company's earnings for 1996. This impact was due to three factors which impact
the first year of each new restaurant's operations, as described in the
comparison of fiscal year 1997 to 1996.

         Total revenues increased $12,130,000, or 43.3%, to $40,160,000 for 1996
from $28,030,000 for 1995. Included in this increase are revenues of
approximately $12,440,000 from the five new restaurants and the bakery opened or
purchased in 1996. Also Guy's Place, a private bar and cigar lounge adjoining
and operated as a part of the West Hollywood restaurant, which opened at the end
of September 1995, contributed additional revenues of $182,000 in 1996 over
1995. Comparable restaurant sales decreased approximately $390,000 or 1.4% for
1996. Generally, the decrease was due to increased competition.

         Cost of sales, which includes the cost of food, beverages and supplies
increased $3,312,000, or 36.1%, to $12,480,000 in 1996 from $9,168,000 in 1995,
primarily from sales at the new restaurants, but, as a percentage of revenues,
decreased 1.6 percentage points to 31.1% in 1996 from 32.7% in 1995. Most
significantly, the cost of food, which comprises over 90% of cost of sales,
decreased in 1996 as a percentage of sales to 28.2% from 30.1% in 1995.
 Management attributes this decrease in food costs primarily to its continuing
program of more effective buying, improved cost control and better financial
liquidity since the Company's October 1995 initial public offering, which allows
the Company to take advantage of vendor discounts for prompt or early payments.
As a result of decreased cost of sales, gross profits improved 1.6 percentage
points, to 68.9% of revenues in 1996 from 67.3% of revenues in 1995.

         Operating expenses, which include all restaurant level operating costs,
including, but not limited to, labor, rent, laundry, maintenance, utilities and
repairs, increased approximately $6,316,000, or 46.3%, to approximately
$19,951,000 in 1996 from approximately $13,634,000 in 1995. As a percentage of
revenues, total operating expenses increased 1.0 percentage point to 49.6% of
revenues in 1996 from 48.6% of revenues in 1995. Labor costs, the largest
component of operating expenses, increased 2.6 percentage points to 36.0% of
revenues in 1996 from 33.4% of revenues in 1995, primarily due to temporary
increases in labor costs at the five new restaurants opened or acquired in 1996.
Labor expenses for the five new restaurants (excluding the bakery) were
approximately 38.8% of revenues for these new locations, compared to labor
expenses of 33.5% of revenues for the four existing restaurants. Although rent
expense, the next largest component of operating expenses, increased by
approximately $311,000 in 1996, as a percentage of revenues, it decreased 1.0
percentage point, to 4.9% in 1996 from 5.9% in 1995. The opening of the Pasadena
and Miami Beach restaurants, where the Company owns the real property, and the
purchase of the Marina del Rey restaurant property which the Company formerly
rented, have decreased rent expense while increasing depreciation expense for
1996.

         General and administrative expenses increased approximately $1,256,000,
or 43.0%, to approximately $4,180,000 in 1996 from approximately $2,924,000 in
1995, but showed no change as a percentage of revenues. Major


                                       19
<PAGE>   20
components of the increase included approximately $364,000 of additional costs
related to the Company's change in status from a private to a public company,
including the audit and legal fees, public relations and other costs of the
Company's first Annual Report on Form 10-K, first Annual Report to Shareholders,
first Proxy Statement, first annual meeting and Quarterly Reports on Form 10-Q;
additional labor expense of approximately $269,000 resulting from the addition
of several new positions necessary to support the Company's expanded restaurant
operations and public reporting; performance incentive bonus of approximately
$230,000 paid to Isaac Starkman, Guy Starkman and Jason Starkman; and a
approximate $226,000 increase in insurance expense, due primarily to increased
liability coverage on the new and existing restaurants and on key officers and
directors. The $137,000 restaurant concept discontinuation costs in 1995 arose
from the closure of Jerry's Famous Pizza restaurant in June 1995, as mentioned
earlier in this discussion.

         Depreciation and amortization expense increased $1,138,000, or 116.5%,
to approximately $2,114,000, or 5.3% of revenues, in 1996 from $977,000, or 3.5%
of revenues, in 1995 primarily due to the acquisition or opening of Pasadena,
Marina del Rey and Miami Beach restaurants where the Company owns the real
property, and the purchase of leasehold improvements and equipment for all five
new restaurants opened in 1996. Amortization expense increased approximately
$389,000, to approximately $405,000 in 1996 from approximately $16,000 in 1995,
which includes approximately $283,000 from the amortization of preopening costs
of the new restaurants and approximately $108,000 from the amortization of
goodwill and covenants not to compete in connection with the acquisition of the
Sherman Oaks, Woodland Hills and Rascal House restaurants.

         The $77,000 increase in interest income in 1996 over 1995, arose mostly
from temporary investments of the proceeds from the 1995 Public Offering.
Minority interests, which increased approximately $99,000 in 1996, represent the
interests of the limited partners and the co-general partner in the Encino
restaurant.

Effect of Termination of Subchapter S Election

         As an S corporation until January 11, 1995, the Company's shareholder,
not the Company, paid federal income taxes. In addition, the Company's
shareholder paid California state income taxes on the profits of the Company and
the Company paid California state income taxes on its profits at a significantly
reduced rate. On January 11, 1995, the Company became a C corporation, liable
for federal income taxes and California state income taxes at a significantly
higher rate. If the Company had been subject to federal income tax for 1994, for
example, management estimates that earnings would have been reduced by
approximately $383,000 as a result of a provision for such federal and
California State income taxes. Taxation as a C corporation will generally
decrease net income as a result of the tax expense on a going forward basis.

Business Outlook

         The Company does not believe that its existing restaurants can show
substantial growth in per restaurant revenues. Therefore, management believes
that any significant sales growth will have to come from additional restaurants.

         The Company continues to search for prime locations appropriate for its
customer base and to develop them into restaurants, both in the Southern
California and Southern Florida areas, as well as new areas, while continuing to
provide quality food and service in its existing restaurants.

LIQUIDITY AND CAPITAL RESOURCES

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

         Since the completion of the 1995 Public Offering, the policy of the
Company has been to reinvest positive cash flow for restaurant development and
general working capital. Net cash flow from operating activities decreased to
approximately $1,679,000 for 1997 from approximately $3,437,000 for 1996 and
approximately $141,000 for 1995. In 1997, additions of approximately $3,870,000
in depreciation and amortization expense was the major component of net cash
provided by operations. In contrast, in 1996 the Company used approximately
$2,372,000 to pay down certain


                                       20
<PAGE>   21
accounts payable and accrued expenses, while it added $2,114,000 in depreciation
and amortization expense. In the future, the Company intends to use any positive
cash flow for restaurant development and general working capital. Because funds
available from cash sales are not needed immediately to pay for food and
supplies or to finance receivables or inventory, they could be used for capital
expenditures.

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

         The purchase and renovation of the Pasadena restaurant property, which
opened in February 1996, was funded through proceeds from a $1,219,000 loan from
United Mizrahi Bank. This loan, which has been reduced to a balance of $775,000
at December 31, 1997 as a result of monthly payments of principal and a paydown
with proceeds from the sale of preferred stock, bears interest at the bank's
reference rate plus 1.5% (with a minimum rate of 10% per annum) and matures in
April 1998. The Company is currently in negotiations to extend the term of this
loan.

         The March 1996 purchase of the Marina del Rey restaurant property from
the Company's landlord was funded primarily through a $3,250,000 note from the
landlord. It is collateralized by the property, requires interest only payments
at 9% per annum until maturity, and is due in March 2001.

         The purchase of the two Solley's Deli restaurants in Sherman Oaks and
Woodland Hills was funded from a $2,500,000 draw down by the Company on its line
of credit with Bank of America. In September 1996, this $2,500,000 was converted
into a term loan, which currently bears interest at the bank's reference rate
plus 1.5% (9.75% per annum at December 31, 1997) and is due in March 2002.

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

         The Company also has an unutilized revolving line of credit in the
aggregate amount of $965,000 from United Mizrahi Bank, which terminates in April
1998. The line bears interest at the bank's reference rate plus 1.50%, with a
minimum rate of 10.0% (currently 10% per annum). Interest on the credit line is
payable monthly. Prepayments are permitted at any time without penalty.
Borrowings under the credit line are collateralized by the fixtures and
equipment of the Pasadena restaurant.

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

         The Company entered into a $4,000,000 revolving line of credit
agreement with Bank Leumi USA in October 1997. The line bears interest at the
bank's reference rate plus 1.25%. Any borrowings between the agreement date and
January 1, 1999 shall be subject to interest repayment only. On January 1, 1999,
the line automatically converts to a term loan with principal and interest
payable in equal monthly installments until maturity on September 1, 2002.

         The Company also entered into a $2,000,000 non-revolving line of credit
with Bank of America, NTSA in October 1997, collateralized by the machinery,
equipment and inventory of the Company. The line bears interest at the bank's
reference rate plus 1.25% and is available for draw down until April 1, 1998.
Principal and interest are thereafter payable in equal monthly installments,
ending on October 1, 2002, with prepayments permitted at any time.

         Management believes that cash on hand, cash flow from operations and
its available lines of credit will be sufficient to finance the purchase of The
Epicure Market, renovation of the Boca Raton facility, and operation of the
Company's existing restaurants. Future anticipated capital needs, primarily for
development or acquisition of new restaurants, cannot be projected with
certainty. Additional capital expenditures will be required as new locations are


                                       21
<PAGE>   22
added. The Company generally intends to seek leased locations. The cost of
renovation will depend upon the style of restaurant being converted. Renovation
of Jerry's Famous Deli restaurants have cost between $2.0 million and $3.0
million per location, or $267 to $400 per square foot, while renovation of the
new Rascal House restaurant is anticipated to cost approximately $600,000.

YEAR 2000 COMPLIANCE

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

         Based on a recent assessment of the Company's computer systems
software, it has been determined that more than 75% of the Company's hardware
and software systems are either currently Year 2000 compliant or have an
existing upgrade available from the software vendor that is Year 2000 compliant.
All systems that are not currently Year 2000 compliant will either be upgraded
to be Year 2000 compliant or replaced with alternative systems that are Year
2000 compliant over the next eighteen months. While achieving Year 2000
compliance will be a major task, it is not expected to have a material impact on
the Company's financial condition or results of operations.

IMPACT OF INFLATION

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

SEASONALITY

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

RECENT ACCOUNTING STANDARDS

         SFAS 130, Reporting Comprehensive Income

         Although this Statement is applicable to the Company for the
         year ended December 31, 1997, there is no financial statement
         impact or reporting requirement.

         SFAS 131, Disclosures about Segments of an Enterprise and Related
         Information

         Currently, although this Statement is applicable to the Company for
         the year ended December 31, 1997, there is no financial statement
         impact or reporting requirement as bakery operations are not
         considered significant.

         SFAS 132, Employers' Disclosure about Pensions and Other Post-
         Retirement Benefits

         This Statement is not applicable to the Company for the year ended
         December 31, 1997.


                                       22
<PAGE>   23
         Statement of Position Reporting on the Costs of Start-Up Activities

         In April 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued a draft Statement of
Position (SOP) entitled "Reporting on the Costs of Start-Up Activities." The
proposed SOP would require entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. In
March 1998, the Financial Accounting Standards Board cleared the SOP for final
issuance, provided that certain changes were made to the SOP. The Company
believes the final SOP will be issued during the second quarter of fiscal 1998
and will be effective for fiscal years beginning after December 15, 1998.
Restatement of previously issued financial statements is not permitted by the
draft SOP, and entities are not permitted to report the pro forma effects of the
retroactive application of the new accounting standard.

         The Company's adoption of the new accounting standard proposed by the
SOP will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of the fiscal
year of adoption.

RISK FACTORS

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

         LIMITED OPERATING HISTORY WITH MULTIPLE RESTAURANTS. The Company was
founded in 1978 with the opening of its Studio City restaurant. Three additional
restaurants were opened in 1989, 1991 and 1994, respectively, and have each been
in operation for over two years. Two additional restaurants were opened in
February and June 1996, respectively, two additional restaurants (Solley's) were
acquired as of June 30, 1996, and one additional restaurant (Rascal House) was
acquired September 9, 1996. The newest restaurant was opened in August 1997.
Accordingly, the Company has a limited operating history in its current size and
configuration, and there is no assurance that such restaurants, or the Company
as a whole, will be profitable in the future.

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

         NEED FOR ADDITIONAL FINANCING. The expansion of the Company's
restaurant operations in 1996 and 1997 has been funded with the proceeds of the
October 1995 Public Offering and the August and November 1996 sales of preferred
shares, along with bank financing. Management believes that the Company has
sufficient funds to complete the renovation of the Boca Raton restaurant and the
acquisition of The Epicure Market, but additional funds will be needed for
future acquisitions and development of new locations. There is no assurance that
the Company will be able to obtain such additional financing, or that such
additional financing will be available on terms acceptable to the Company and at
the times required by the Company. Failure to obtain such financing may
adversely impact the growth, development or general operations of the Company.
If, on the other hand, such financing can be obtained, it will most likely
result in additional leverage or dilution of existing shareholders.

         UNCERTAIN ABILITY TO MANAGE GROWTH AND EXPANSION. In order to achieve
growth, Management believes that the Company must develop new restaurants. The
Company's expansion plan calls for the addition of several new restaurants per
year. Management has limited experience opening restaurants at the current
expansion plan rate. The Company's ability to successfully expand will depend on
a number of factors, including without limitation, the selection and
availability of suitable locations, the hiring and training of sufficiently
skilled management and personnel, the availability of adequate financing,
distributors and suppliers, the obtaining of necessary governmental permits and
authorizations, and contracting with appropriate development and construction
firms, some of which are beyond the control of the Company. There is no
assurance that the Company will be able to open any new restaurants, or that any


                                       23
<PAGE>   24
new restaurants will be opened at budgeted costs or in a timely manner, or that
such restaurants can be operated profitably.

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

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

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

         DEPENDENCE ON KEY PERSONNEL. The Company believes that the development
of its business has been, and will continue to be, highly dependent on Isaac
Starkman, the Chairman of the Board and Chief Executive Officer of the Company.
In addition, any outstanding balances under the Company's credit facility with
Bank of America become immediately due and payable upon the death of any
principal officer or majority shareholder. Isaac Starkman is currently 60 years
old. Mr. Starkman has an employment agreement which requires that he devote a
substantial majority of his time to the Company; however, he does have, and will
continue to have, limited involvement with certain concession and souvenir
businesses in New York, and other business ventures, each unrelated to the
Company and its business. Guy and Jason Starkman, Vice Presidents of the
Company, are currently 27 and 23 years old, respectively. The Company has
obtained key man life insurance of $1,000,000 face amount on Isaac Starkman.
However, if Isaac Starkman's services become unavailable for any reason, it
could affect the Company's business and operations adversely.

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


                                       24
<PAGE>   25
         CERTAIN DISCONTINUED RESTAURANT CONCEPTS HAVE BEEN UNSUCCESSFUL.
Certain other restaurant operations established by Isaac Starkman, the
controlling beneficial shareholder of the Company, have not met with success. In
November 1984, Isaac Starkman established a casual dining restaurant named
Starky's, which combined a deli operation with pizza parlor and arcade at the
top of the Beverly Center, a large shopping mall in Los Angeles, California.
Starky's had no street visibility, and due to its location in an enclosed mall,
had restricted hours of operation and problems with hygienic conditions at the
mall which were outside of Management's control. A lawsuit was filed by Starky's
primarily related to the landlord's property maintenance which resulted in a
settlement subject to a confidentiality agreement and the closing of the
restaurant in December 1992. In addition, Jerry's Famous Pizza, a 2,300 square
foot pizza restaurant in Sherman Oaks, California ("Jerry's Famous Pizza"),
operated by Pizza by the Pound, Inc., a wholly-owned subsidiary acquired by the
Company in January, 1995, was not profitable. Management determined that it was
in the interest of shareholder value that the Company focus on its core business
of high volume deli style restaurants rather than confuse the financial markets'
perception of the Company by developing comparatively low volume restaurants in
the fast food pizza segment. As a result, the Company ceased operations of
Jerry's Famous Pizza.

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

         INCREASE IN MINIMUM WAGE. The federal minimum wage increased from $4.25
an hour to $4.75 effective October 1, 1996, and again to $5.15 effective
September 1, 1997. In addition, the California minimum wage will increase to
$5.75 on April 1, 1998. President Clinton has proposed an additional increase in
the federal minimum wage to $6.15 an hour, which will be subject to
congressional approval. Approximately one-third of employees working in
restaurants operated by the Company receive salaries equal to the federal
minimum wage.

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

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

         POTENTIAL "DRAM SHOP" LIABILITY. Restaurants in California and most
other states are subject to "dram shop" laws, rules and regulations, which
impose liability on licensed alcoholic beverage servers for injuries or damages
caused by their negligent service of alcoholic beverages to a visibly
intoxicated person or to a minor, if such service is the proximate cause of the
injury or damage and such injury or damage is reasonably foreseeable. While the
Company has limited amounts of liquor liability insurance and intends to
maintain liquor liability insurance as part of its comprehensive general
liability insurance which it believes should be adequate to protect against such
liability, there is no assurance that it will not be subject to a judgment in
excess of such insurance coverage or that it will be able to obtain or continue
to


                                       25
<PAGE>   26
maintain such insurance coverage at reasonable costs, or at all. The imposition
of a judgment substantially in excess of the Company's current insurance
coverage would have a materially adverse effect on the Company and its
operations. The failure or inability of the Company to maintain or increase
insurance coverage could materially and adversely affect the Company and its
operations. In addition, punitive damage awards are generally not covered by
such insurance. Thus, any awards of punitive damages as to which the Company may
be liable could adversely affect the ability of the Company to continue to
conduct its business, to expand its operations or to develop additional
restaurants.

         TRADEMARK AND SERVICE MARK RISKS. The Company has not had a challenge
to its use of the "Jerry's" service mark as of this time. However, to date, the
Company has used the service mark only in Southern California. In addition, the
Company has not secured clear rights to the use of the "Jerry's" service mark or
any other name, service mark or trademark used in the Company's business
operations, other than "JFD," in connection with restaurants. There are other
restaurants using the name "Jerry's" throughout the United States, and use of
the service mark or any other name, service mark or trademark in the Company's
business operations, other than "JFD," may be subject to challenge.

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

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

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

         POSSIBLE ADVERSE IMPACT ON POTENTIAL BIDS TO ACQUIRE SHARES DUE TO
ISSUANCE OF PREFERRED OR COMMON STOCK. The Board of Directors of the Company has
authority to issue up to 5,000,000 shares of preferred stock of the Company (the
"preferred stock") and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
shareholders. In addition, the Company has authorized 60,000,000 shares of
Common Stock. Only 14,210,155 shares of Common Stock are currently outstanding,
and no preferred shares are currently outstanding. The potential issuance of
authorized and unissued preferred shares or Common Stock of the Company may
result in special rights and privileges, including voting rights, to individuals
designated by the Company and have the effect of delaying, deferring or
preventing a change in control of the Company. As a result, such potential
issuance may adversely affect the marketability and potential market price of
the shares. As additional acquisition opportunities become available, Management
may determine to issue and sell additional Common Stock or preferred shares at
any time in the future.

         RECENT CHANGES IN LOCAL ENFORCEMENT OF HEALTH CODE AND NEGATIVE
PUBLICITY. As a result of a November 1997 series of investigative reports on
local television regarding restaurant health code violations, the Los Angeles
County Health Department has instigated stricter monitoring and enforcement of
health code provisions. The Company's Studio City restaurant was one of several
prominent restaurants mentioned in the November 1997 report, which resulted in
negative publicity to the Company. Management believes that this may have
contributed to reduced revenues from the Southern California restaurants in the
fourth quarter of 1997. The Health Department's current policy is to grade every
restaurant "A," "B" or "C," with A being best, B being acceptable and C being
grounds for closing the restaurant. Four of the Company's six restaurants in the
Los Angeles County Health Department jurisdiction have been inspected to date,


                                       26
<PAGE>   27
and those have all received "A" ratings from the Health Department under the new
policy. The Company expects that the other two of its Los Angeles County
restaurants will be inspected within the next six months, and that they will
also receive "A" ratings. The Company's Orange County and Pasadena restaurants
have also been inspected recently by the appropriate local health department
authorities and received "no violations observed" ratings, which are comparable
to an "A" rating.

         NEGATIVE PUBLICITY FROM PRIVATE DAMAGE CLAIMS. Restaurants such as
those operated by the Company are subject to litigation in the ordinary course
of business, most of which the Company expects to be covered by its general
liability insurance. In 1994, after the Company catered a private function for
cast, crew and guests of the "Frasier" television show, several persons
complained of food poisoning symptoms, and filed claims against the Company. The
Company believes that the claims made against it have no merit, and its
insurance carrier has contested the action. In February 1998, as the case neared
trial, the suit received newspaper and television publicity due to the celebrity
status of the claimants, which may have a negative impact on revenues on the
Company's Southern California restaurants.

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

Not applicable.


                                       27
<PAGE>   28
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                               Page
<S>                                                                                                            <C>
Report of Independent Accountants ............................................................................   29

Consolidated Balance Sheets as of December 31, 1997 and 1996..................................................   30

Consolidated Statements of Operations for the years
     ended December 31, 1997, 1996 and 1995...................................................................   31

Consolidated Statements of Equity for the years
     ended December 31, 1997, 1996 and 1995...................................................................   32

Consolidated Statements of Cash Flows for the years
     ended December 31, 1997, 1996 and 1995...................................................................   33

Notes to Consolidated Financial Statements....................................................................   34
</TABLE>


                                       28
<PAGE>   29
                       REPORT OF INDEPENDENT ACCOUNTANTS

                                   ---------

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

We have audited the accompanying consolidated balance sheets of Jerry's Famous
Deli, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of Jerry's
Famous Deli, Inc. as of December 31, 1997 and 1996 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.


COOPERS & LYBRAND L.L.P.


Los Angeles, California
March 25, 1998


                                       29


<PAGE>   30
                            JERRY'S FAMOUS DELI, INC.
                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                            ----------------------
                                                                                            1997              1996
                                                                                            ----              ----
ASSETS
Currents assets
<S>                                                                                      <C>               <C>
   Cash and cash equivalents                                                             $ 2,264,308       $ 4,145,265
   Accounts receivable, net                                                                  272,511           347,148
   Inventory                                                                                 525,200           420,819
   Prepaid expenses                                                                        1,729,687           471,202
   Preopening costs                                                                          105,318           549,607
   Deferred income taxes                                                                      63,063                --
   Prepaid income taxes                                                                       24,605           210,153
                                                                                         -----------       -----------
          Total current assets                                                             4,984,692         6,144,194

Property and equipment, net                                                               29,835,529        25,694,476

Organization costs                                                                            92,143           104,483
Deferred income taxes                                                                        725,983           322,056
Goodwill and covenants not to compete                                                      1,757,342         3,868,909
Other assets                                                                                 581,917           428,867
                                                                                         -----------       -----------

          Total assets                                                                   $37,977,606       $36,562,985
                                                                                         ===========       ===========

LIABILITIES AND EQUITY
Current liabilities
   Accounts payable                                                                      $ 2,195,980       $ 3,350,099
   Accrued expenses                                                                        1,426,073         1,641,784
   Sales tax payable                                                                         402,220           434,379
   Current portion of long-term debt                                                         752,063           578,739
   Current portion of obligations under capital  leases                                           --            20,722
   Deferred income taxes                                                                          --            15,699
                                                                                         -----------       -----------
          Total current liabilities                                                        4,776,336         6,041,422

Long-term debt                                                                             7,690,219         5,959,959
Deferred rent                                                                                455,129           496,578
                                                                                         -----------       -----------

          Total liabilities                                                               12,921,684        12,497,959

Minority interest                                                                            480,379           440,998

Commitments and contingencies (Note 7)

Equity
   Preferred stock Series A , no par, 5,000,000 shares authorized,
      10,000 shares issued and outstanding at December 31,1996                                    --         9,153,078
   Common stock, no par value, 60,000,000 shares authorized, 14,210,155
      and 10,838,062 shares issued and outstanding in 1997 and 1996, respectively         23,724,484        14,175,109
   Equity                                                                                    851,059           295,841
                                                                                         -----------       -----------
          Total equity                                                                    24,575,543        23,624,028
                                                                                         -----------       -----------

          Total liabilities and equity                                                   $37,977,606       $36,562,985
                                                                                         ===========       ===========
</TABLE>


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




                                       30
<PAGE>   31
                            JERRY'S FAMOUS DELI, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS






<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                           --------------------------------------------
                                                                           1997                1996                1995
                                                                           ----                ----                ----
<S>                                                                    <C>                 <C>                 <C>
Revenues                                                               $ 56,418,387        $ 40,159,715        $ 28,030,135
Cost of sales                                                            17,507,824          12,480,215           9,167,992
                                                                       ------------        ------------        ------------
      Gross profit                                                       38,910,563          27,679,500          18,862,143

Operating expenses
   Labor                                                                 20,714,670          14,481,675           9,364,437
   Occupancy and other                                                    7,402,068           5,059,545           3,799,774
   Occupancy -- related party                                               652,067             409,167             469,936
General and administrative expenses                                       4,839,537           4,179,939           2,383,597
General and administrative expenses -- related party                             --                  --             540,106
Depreciation expense                                                      2,999,517           1,708,720             976,553
Amortization expense                                                        871,004             405,457                  --
Restaurant concept discontinuation costs                                         --                  --             137,396
                                                                       ------------        ------------        ------------
      Total expenses                                                     37,478,863          26,244,503          17,671,799
                                                                       ------------        ------------        ------------

      Income from operations                                              1,431,700           1,434,997           1,190,344

Other income (expense)
   Interest income                                                           83,822             148,525              71,758
   Interest expense                                                        (684,118)           (514,118)           (182,264)
   Other income (expense), net                                               (1,627)             71,939              69,277
                                                                       ------------        ------------        ------------
      Income before provision for income taxes and
         minority interest                                                  829,777           1,141,343           1,149,115

Provision for income taxes                                                 (134,005)           (284,184)           (187,051)
Minority interest                                                          (132,602)           (278,446)           (179,830)
                                                                       ------------        ------------        ------------

      Net income                                                       $    563,170        $    578,713        $    782,234
                                                                       ------------        ------------        ------------

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

Net income (loss) per share:
      Net income - Basic                                                                   $       0.06
                                                                                           ------------
      Net income - Diluted                                                                 $       0.05
                                                                                           ------------
      Preferred stock
            Cash dividends paid or accrued                                                        (0.02)
            Accounting deemed dividend                                                            (0.48)
                                                                                           ------------
                                                                                           $      (0.50)
                                                                                           ------------
Net (income) loss per share applicable to common stock - Basic         $       0.04        $      (0.44)
                                                                       ------------        ------------
Net (income) loss per share applicable to common stock - Diluted       $       0.04        $      (0.44)
                                                                       ------------        ------------

Weighted average common shares outstanding - Basic                       13,369,998          10,412,062
Weighted average common shares outstanding - Diluted                     13,419,095          10,525,521

Pro forma data
      Pro forma net income per common share - Basic                                                            $       0.08
                                                                                                               ------------

      Pro forma common shares outstanding - Basic                                                                10,386,250
</TABLE>


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





                                       31
<PAGE>   32

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






<TABLE>
<CAPTION>
                                                                    Jerry's Famous Deli, Incorporated
                                                           -----------------------------------------------------
                                                                Common Stock               Preferred Stock
                                                           -----------------------------------------------------
                                                             Shares                       Shares
                                                           Issued and                   Issued and
                                                           Outstanding      Amount      Outstanding     Amount
                                                           -----------    ----------    ----------    ----------
<S>                                                         <C>           <C>            <C>          <C>
Balance, December 31, 1994                                   7,460,000       $10,000             -             -
   Net income
   Noncash distributions to shareholder
   Reclassification of deficit due to
      termination of sub-S election
   Distributions to shareholders
   Issuance of common stock for services
      rendered                                                  40,000       130,000
   Private sale of common stock, net                           931,250     3,288,952
   Initial public offering of stock, net                     1,955,000     9,235,800
   Contributed stock of merged entities
   Contribution of general partner's
      interest
                                                            ----------    ----------     ---------    ----------
Balance, December 31, 1995                                  10,386,250    12,664,752             -             -

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

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

<TABLE>
<CAPTION>
                                                      Jerry's Famous Pizza

                                                          Common Stock                                         JFD-Encino
                                                       ----------------------
                                                         Shares                  Contributed     Retained      Partners'
                                                       Issued and                  Capital       Earnings       Capital
                                                       Outstanding    Amount      (Deficit)                    (Deficit)    Total
                                                       ----------   ---------     ---------     ----------    ----------  ----------
<S>                                                     <C>         <C>           <C>            <C>          <C>         <C>
Balance, December 31, 1994                                 70,000     $70,000   $        -        $257,570    $(190,529)    $147,041
   Net income                                                                                      737,277        44,957     782,234
   Noncash distributions to shareholder                                                          (795,054)                 (795,054)
   Reclassification of deficit due to
      termination of sub-S election                                               (537,484)        537,484                         -
   Distributions to shareholders                                                                                (26,137)    (26,137)
   Issuance of common stock for services
      rendered                                                                                                               130,000
   Private sale of common stock, net                                                                                       3,288,952
   Initial public offering of stock, net                                                                                   9,235,800
   Contributed stock of merged entities                  (70,000)    (70,000)        70,000                                        -
   Contribution of general partner's
      interest                                                                    (213,277)         44,957       171,709       3,389
                                                        ---------   ---------     ---------     ----------    ----------  ----------
Balance, December 31, 1995                                      -           -     (680,761)        782,234             -  12,766,225

   Net income                                                                                      578,713             -     578,713
   Issuance of preferred stock                                                                           -             -  10,992,694
   Preferred stock converted to common stock                                                             -             -           -
   Purchase and retirement of Company's common stock                                                                       (329,259)
   Purchase of limited partners' interest                                         (157,696)              -             -   (157,696)
   Distributions to preferred shareholders                                                       (226,649)                 (226,649)
                                                        ---------   ---------     ---------     ----------    ----------  ----------
Balance, December 31, 1996                                      -           -     (838,457)      1,134,298             -  23,624,028

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


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




                                       32
<PAGE>   33
                            JERRY'S FAMOUS DELI, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS







<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                   --------------------------------------------
                                                                                   1997                1996                1995
                                                                                   ----                ----                ----
Cash flows from operating activities:
<S>                                                                            <C>                <C>                 <C>
   Net income                                                                  $   563,170        $    578,713        $    782,234
   Adjustments to reconcile net income to net cash provided by
      operating activities
      Depreciation                                                               2,999,517           1,708,720             976,553
      Amortization                                                                 871,004             405,457
      (Gain) loss on sale of assets                                                 (2,756)              4,106             149,164
      Minority interest                                                            132,602             278,446             179,830
      Deferred income taxes                                                        (63,063)           (158,360)           (147,997)
      Shares issued for services provided                                               --                  --              17,500
      Changes in assets and liabilities
         Accounts receivable -- related party                                           --              16,020              (1,860)
         Accounts receivable                                                        74,637            (131,223)            (73,002)
         Inventory                                                                (104,381)           (227,437)             (6,854)
         Prepaid expenses                                                         (808,485)           (248,552)            (32,529)
         Preopening costs                                                         (148,011)           (737,041)              8,569
         Other assets                                                             (157,847)           (206,089)            (15,793)
         Organization costs                                                             --             (50,478)            (22,286)
         Accounts payable                                                       (1,154,119)          1,487,112          (1,178,360)
         Accrued expenses                                                         (215,711)            884,787            (559,338)
         Sales tax payable                                                         (32,159)            202,329              (5,202)
         Deferred rent and prepaid income taxes                                   (275,527)           (369,134)             70,712
                                                                               -----------        ------------        ------------
            Total adjustments                                                    1,115,701           2,858,663            (640,893)
                                                                               -----------        ------------        ------------
            Net cash provided by operating activities                            1,678,871           3,437,376             141,341
                                                                               -----------        ------------        ------------

Cash flows from investing activities:
   Acquisitions of restaurants                                                          --          (7,722,964)                 --
   Additions to equipment                                                       (2,413,169)         (4,547,960)           (928,779)
   Additions to improvements--land, building and leasehold                      (2,958,726)         (8,472,807)                 --
   Deductions (additions)  to construction-in-progress                             115,602           3,720,918          (3,213,629)
   Purchase of land                                                                     --              (2,642)           (883,032)
   Purchase of building and related purchase option payments                            --            (744,137)            (12,000)
   Proceeds from sales of fixed assets                                               7,000              20,151              24,139
                                                                               -----------        ------------        ------------
            Net cash used in investing activities                               (5,249,293)        (17,749,441)         (5,013,301)

Cash flows from financing activities:
   Proceeds from issuance of preferred stock, net                                       --          10,992,694                  --
   Borrowings from credit facility                                                      --           1,080,525           3,044,475
   Payments on credit facility                                                          --          (1,385,000)         (1,845,000)
   Borrowings on long-term debt                                                  2,500,000           2,500,000              30,000
   Payments on long-term debt                                                     (634,937)           (118,428)         (1,488,232)
   Payments and advances to related parties, net                                        --          (1,154,036)           (375,145)
   Capital lease payments                                                          (20,722)            (43,140)            (43,734)
   Distribution paid to shareholder                                                     --                  --             (26,137)
   Dividends paid to minority shareholders                                         (93,221)           (100,660)           (104,532)
   Dividends paid to preferred stock shareholders                                       --             (42,082)                 --
   Proceeds from exercise of 65,000 warrants, net of related costs                  57,048                  --                  --
   Registration costs of the Company's common stock                                (15,500)                 --                  --
   Purchase of Company's common stock                                             (103,203)           (329,259)                 --
   Purchase of limited partner interest                                                 --            (157,696)                 --
   Proceeds from common stock issuance, net                                             --                  --          12,604,252
                                                                               -----------        ------------        ------------
            Net cash provided by financing activities                            1,689,465          11,242,918          11,795,947
                                                                               -----------        ------------        ------------

            Net increase (decrease) in cash and cash equivalents                (1,880,957)         (3,069,147)          6,923,987
Cash and cash equivalents, beginning of year                                     4,145,265           7,214,412             290,425
                                                                               -----------        ------------        ------------
Cash and cash equivalents, end of year                                         $ 2,264,308        $  4,145,265        $  7,214,412
                                                                               ===========        ============        ============
</TABLE>


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




                                       33
<PAGE>   34
                   JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Organization and Basis of Presentation

         The accompanying financial statements are comprised of the consolidated
financial statements ("consolidated statements") which consist of Jerry's Famous
Deli, Incorporated ("JFD--Inc."), a California corporation; JFD--Encino
("JFD--Encino"), a California limited partnership; and Pizza By The Pound, dba
Jerry's Famous Pizza ("Jerry's Famous Pizza"), a California corporation.
JFD--Inc., JFD--Encino and Jerry's Famous Pizza operate or operated family
oriented, full-service restaurants. These entities are collectively referred to
as "Jerry's Famous Deli, Inc." or the "Company."

         JFD--Inc. includes nine Southern California restaurant locations:
Studio City (established in 1978), Encino (established in 1989), Marina del Rey
(established in 1991), West Hollywood (established in 1994), Pasadena
(established in February 1996), Westwood (established in June 1996), Sherman
Oaks, Woodland Hills (purchased in July 1996) and Costa Mesa (established in
August 1997). JFD-Inc. also includes one Florida location in Miami called The
Rascal House (purchased in September 1996).

         From its inception on April 15, 1981 and through December 31, 1994, Mr.
Isaac Starkman owned Jerry's Famous Deli, L.A., Inc. ("JFDLA"), the co-general
partner of JFD--Encino. On January 12, 1995, Mr. Starkman contributed the shares
of JFDLA to JFD--Inc. for no additional consideration. JFDLA owns 80% of the
general partner interest which represents a 20% interest in JFD--Encino. The
general partners receive a management fee equal to 3% of the gross revenues of
the Encino restaurant. The general partners are also allocated 25% of net
profits, net gains and distributions of JFD--Encino until such time as the
limited partners have received cash distributions equal to 100% of their
contributed capital plus an amount equal to 10% per annum of their capital
contribution (the "Preferred Return"). After the limited partners have received
repayment of their initial capital contribution, the general partners will be
allocated 65% of net profits, net gains and distributions. The other co-general
Partner is Valley Deli, Inc., an unrelated California corporation.

         JFD--Encino has been presented on a consolidated basis due to the
operating and financial control of JFDLA, which as the co-general partner has
the ability to exert day to day control over the operations. A tender offer by
JFDLA to purchase the interests of the limited partners resulted in the May 1,
1996 purchase of one limited partner's share from Isaac Starkman, who is also
the Chief Executive Officer and the beneficial controlling shareholder of the
Company, for approximately $158,000. This resulted in a change in minority
interest to 72.45% from 80.00%.

         Jerry's Famous Pizza, which operated a 2,300 square foot pizza
restaurant in Sherman Oaks, California, was owned by Mr. Starkman and an
employee of that company. Mr. Starkman owned 50% of Jerry's Famous Pizza and had
the ability to exert control over the operations. On January 12, 1995, Mr.
Starkman and the employee contributed all of the stock of Jerry's Famous Pizza
to JFD -- Inc. for no additional consideration to Mr. Starkman and $100 to the
employee. Jerry's Famous Pizza ceased operations on June 25, 1995.

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


Reclassifications

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


Significant Accounting Policies

CASH EQUIVALENTS

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

INVENTORY

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




                                       34
<PAGE>   35
PREOPENING COSTS

         Capitalized preopening costs include the direct incremental costs
associated with the opening of a new restaurant. These are primarily costs
incurred to develop new restaurant management teams and the food, beverage and
supply costs incurred to perform testing of all equipment, concept systems and
recipes. The amortization period is one year from the restaurant's opening date.
Accumulated amortization at December 31, 1997 and 1996 was approximately
$592,000 and $283,000, respectively. A new accounting standard has recently been
adopted by the American Institute of Certified Public Accountants ("AICPA")
which would require preopening costs to be expensed as incurred for fiscal years
beginning after December 15, 1998.

GOODWILL (EXCESS OF COSTS OVER NET ASSETS ACQUIRED)

         The excess of costs over net assets acquired, relating to the purchase
of the Sherman Oaks, Woodland Hills and Rascal House restaurants, is amortized
utilizing the straight-line method over 30 years for the owned Rascal House and
over the lives of the leases for Woodland Hills (15 years) and Sherman Oaks (18
years). The accumulated amortization at December 31, 1997 and 1996 was
approximately $142,000 and $52,000, respectively.

COVENANTS NOT TO COMPETE

         Covenants not to compete are amortized utilizing the straight-line
method over the life of the agreement. For the purchase of the Sherman Oaks and
Woodland Hills restaurants, the agreement life is five years and for the
purchase of the Rascal House restaurant, the agreement life is two years.
Accumulated amortization at December 31, 1997 and 1996 was approximately
$240,000 and $68,000, respectively.

PROPERTY AND EQUIPMENT

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

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

                  Land improvements..........................      15 years
                  Buildings and improvements.................      30 years
                  Capital leases -- computers................       4 years
                  Computer equipment.........................     3-4 years
                  Transportation equipment...................       5 years
                  Fixtures and equipment.....................     4-5 years
                  Leasehold improvements.....................    4-20 years

ORGANIZATION COSTS

         Capitalized organization costs are amortized on a straight-line basis
over five years. Accumulated amortization at December 31, 1997 and 1996 was
approximately $31,000 and $29,000, respectively.

INCOME TAXES

         Prior to January 11, 1995, the Company and its shareholder elected to
be taxed under Section 1361 of the Internal Revenue Code as an S corporation.
Under these provisions, the Company did not pay federal corporate income taxes
on its taxable income. Instead, the principal shareholder was individually
liable for federal income taxes based on the Company's taxable income. This
election was also valid for state income tax reporting. On January 10, 1995, the
Company's status as an S corporation terminated, resulting in the Company
becoming a C corporation on January 11, 1995.

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

DEFERRED RENT

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




                                       35
<PAGE>   36
MINORITY INTEREST

         Minority interest represents the limited partners' and the other
general partner's interests in the Encino restaurant, not owned directly or
indirectly by the Company. For 1997, the minority interest represents the
limited partners' 67.45% share and the other co-general partner's 5% share of
net income or loss and equity. For May 1, 1996 to December 31, 1996, the
minority interest represents the limited partners' 67.45% share and the other
co-general partner's 5% share of net income or loss and equity. For January 1,
1996 to April 30, 1996, the minority interest represents the limited partners'
75% share and the other co-general partner's 5% share of net income or loss and
equity.

ADVERTISING

         Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1997, 1996 and 1995 was approximately $135,000,
$189,000 and $129,000, respectively.

USE OF ESTIMATES AND ASSUMPTIONS

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

CONCENTRATION OF CREDIT RISK

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

FINANCIAL INSTRUMENTS

         Fair values were estimated based on quoted market prices, where
available, or on current rates offered to the Company for debt with similar
terms and maturities. At December 31, 1997 and 1996, the fair value of the
Company's financial instruments approximates carrying value.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board (the "FASB")
issued two statements -- SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information ",
which are effective for the Company in fiscal year 1998. In addition, in
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Postretirement Benefits" which will also be effective for the
Company in fiscal year 1998. Presently these standards have no impact on the
Company's consolidated financial statements.

         In April 1997, the Accounting Standards Executive Committee of the
AICPA issued a draft Statement of Position ("SOP") entitled "Reporting on the
Costs of Start-Up Activities." The proposed SOP would require entities to
expense as incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. In March 1998, the FASB cleared the SOP for
final issuance, subject to certain changes. The Company believes the final SOP
will be issued during the second quarter of fiscal year 1998 and will be
effective for fiscal years beginning after December 15, 1998. Restatement of
previously issued financial statements is not permitted by the draft SOP, and
entities are not permitted to report the pro forma effects of the retroactive
application of the new accounting standard.

         The Company's adoption of the new accounting standard proposed by the
SOP will involve the recognition of the cumulative effect of the change in
accounting principle required by the SOP as a one-time charge against earnings,
net of any related income tax effect, retroactive to the beginning of the fiscal
year of adoption.



NET INCOME PER SHARE

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

         Basic net income per share is computed by dividing the net income
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted net income per common share is
computed by dividing the net income attributable to common shareholders by the
weighted average number of



                                       36
<PAGE>   37
common and common share equivalents outstanding during the period. Common share
equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options using the treasury stock method. Net income
per share and weighted average shares outstanding for all prior periods have
been restated in accordance with SFAS No. 128.


2.   ACQUISITIONS

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

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

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

         Subsequent to the Rascal House acquisition and upon completion (in May
1997) of the related appraisal of the land and building, a purchase price
reallocation was recorded. The purchase price reallocation resulted in an
increase of $1,950,000 to the value of the land and a decrease of $100,000 to
the value of the building, with a corresponding decrease of $1,850,000 to
goodwill. The cumulative financial statement impact of the purchase price
reallocation was reflected in the 1997 third quarter resulting in a decrease in
depreciation and amortization expense of approximately $30,000.

         The following summarized, unaudited pro forma results of operations for
the years ended December 31, 1996 and 1995 assume the acquisition of Solley's
and Rascal House occurred as of the beginning of the respective periods:

<TABLE>
<CAPTION>
                                                           Pro Forma                 Pro Forma
                                                          Year Ended                Year Ended
                                                       December 31, 1996          December 31, 1995
                                                       -----------------          -----------------
                                                       (in thousands, except per common share data)
<S>                                                        <C>                      <C>
         Revenues                                          $  47,952                $  43,265
         Net income                                        $     731                $   1,219
         Net income per common share - Basic               $    0.06                $    0.12
</TABLE>


3.   STOCK OFFERINGS AND EQUITY

Common Stock


         On January 11, 1995, the Company terminated its election to be taxed as
a subchapter S corporation and became a C corporation. As a result of the
termination of the subchapter S corporation election, the accumulated deficit on
that date of $537,000 was reclassified as required by accounting rules which
resulted in a deficit in contributed capital. The sole shareholder was
responsible for the Company's federal income tax liability based on earnings for
the first ten days of 1995 prior to termination of this election. The Company
was taxed as a C corporation for the remainder of 1995.

         In March 1995, the Company and the shareholder completed a private
placement, issuing 1,056,250 shares of common stock, at a price of $4.00 per
share. From the above 1,056,250 shares of common stock, the shareholder sold
125,000 shares. The net proceeds to the Company of $3,289,000 (net of issuance
costs of $436,000) were used to pay down certain debt and current operating
liabilities.

         On October 20, 1995, an initial public offering of common stock of the
Company (the "common stock") was completed. Of the shares of common stock
offered thereby, 1,700,000 shares were sold by the Company and 400,000 shares
were sold by the The Starkman Family Trust (the "Selling Shareholder"). An
additional 1,096,250 shares of common stock owned by certain non-affiliated
shareholders (the "Non-Affiliated Selling Security Holders") and one independent
director of the Company (the "Selling Director") were concurrently registered
with the above referenced shares offered by the Company and the Selling
Shareholder, but not through the underwriters, and were also eligible for sale
following the offering.




                                       37
<PAGE>   38
         The 1,700,000 shares of common stock sold by the Company generated
approximately $8,030,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $2,170,000. The Company did not receive any of
the proceeds from the Selling Shareholder, Selling Director or Non-Affiliated
Selling Security Holder shares.

         On November 17, 1995, the underwriters exercised in full the
over-allotment option to purchase up to an additional aggregate of 255,000
shares from the Company and an additional aggregate of 60,000 shares from the
Selling Shareholder. The over-allotment shares sold by the Company generated
approximately $1,206,000 in proceeds, net of underwriting commissions and other
related expenses of approximately $324,000. The Company did not receive any of
the proceeds from the Selling Shareholder shares. Also, the underwriters have
not exercised their warrant for the Company to issue and sell an additional
170,000 shares of common stock at the exercise price of $7.80 per share.

         The Company has used the proceeds from the public offering primarily to
pay off certain indebtedness and for certain improvements and equipment for
additional restaurant sites.

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

         In December 1996, 516,812 shares of common stock were issued upon
conversion of 2,000 shares of preferred stock. From December 13 through December
20, 1996, the Company purchased and subsequently retired 65,000 shares of its
own stock for market prices ranging from $4.52 to $5.38 per share.

         In March 1997, 3,139,593 shares of common stock were issued upon
conversion of 10,000 shares of preferred stock. In April 1997, the Company
purchased and subsequently retired 32,500 shares of its own stock for market
prices ranging from $3.06 to $3.56 per share.

Preferred Stock

         The Company is authorized to issue 5,000,000 shares of preferred stock.
The Company's Board of Directors is authorized to issue the preferred stock in
one or more series and, with respect to each series, to determine the
preferences and rights and the qualifications, limitations or restrictions
thereof, including the dividends rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund provisions,
the number of shares constituting the series and the designation of such series.

         On August 22, 1996, the Company entered into an agreement with Waterton
Management LLC ("Waterton") for the purpose of raising additional capital to
support further growth. Under the agreement with Waterton, the Company granted
Waterton an option, subject to certain conditions, to purchase, directly or
through one or more of its affiliates, a maximum of 19,000 Series A Preferred
Shares of the Company ("Series A Preferred Shares") at a purchase price of
$1,000 per share and a maximum 205,833 common stock purchase warrants (the
"Warrants") for nominal consideration. The Company completed the sale to Yucaipa
Waterton Deli Investors, LLC ("Yucaipa") of 6,000 Series A Preferred Shares and
a Warrant for 65,000 shares on August 30,1996, resulting in net proceeds of
approximately $5,537,000. On November 8, 1996, Waterton designated Jerry's
Investors, LLC ("JILLC") to exercise its right to purchase an additional 6,000
Preferred Shares and a warrant for 65,000 shares of common stock (as to which
JILLC designated Waterton as holder), resulting in net proceeds of approximately
$5,455,000. A substantial majority of the proceeds of the sale of Series A
Preferred Shares was used for the acquisition of "Wolfie Cohen's Rascal House,"
and to renovate the Woodland Hills and Costa Mesa restaurant properties.

         Each Series A Preferred Share had a right to dividends of $80.00 per
share per year, payable quarterly in arrears, in cash or shares of common stock.
Each Series A Preferred Share has a liquidation preference of $1,000 per share,
and is convertible at the option of the holder, at any time commencing ninety
days following the initial issuance of shares, or is automatically converted on
August 30, 1999, into common stock, at a conversion price equal to a 17%
discount from the average market price of the common stock for the five days
preceding the conversion, provided that the maximum conversion price is $6.00
per share and the minimum conversion price is $3.00 per share. The holders of
Series A Preferred Shares had no voting rights except as required by law.
However, the Company agreed to seek, and ultimately did obtain approval from
Nasdaq to issue a new class of Series B Preferred Shares, into which the Series
A Preferred Shares were converted in January 1997. The Series B Preferred Shares
are substantially identical to the Series A Preferred Shares, except that each
Series B Preferred Share has voting rights equal to 109 shares of common stock.
The Warrants are exercisable at any time for a period of three years from
issuance at an exercise price of $1.00 per share.

         In December 1996, Yucaipa converted 2,000 shares at a conversion price
of $3.87 per share into 516,812 shares of common stock.

         On March 27, 1997, the holders of the Series B Preferred Shares
converted all remaining 10,000 shares outstanding to 3,139,593 shares of common
stock at a conversion price of approximately $3.19 per share.


                                       38
<PAGE>   39
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation

         The Company has adopted the disclosure-only provision of SFAS No. 123
and will continue to use the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, since options were granted with an
option price equal to the grant date market value of the Company's common stock,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value of the option at the grant dates in 1996 and 1995 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts provided below:

<TABLE>
<CAPTION>
                                                              1997              1996
                                                              ----              ----
<S>                                                      <C>               <C>
Net income, as reported ..........................       $     563,170     $     578,713
Net income, pro forma ............................              60,922            23,320
Net income per share - basic, as reported ........                  --              0.06
Net income per share - basic, pro forma ..........                  --              0.00
Net income per share - diluted, as reported ......                  --              0.05
Net income per share - diluted, pro forma ........                  --              0.00
Net income applicable to common stock, as reported             563,170        (4,647,935)
Net income applicable to common stock, pro forma .              60,922        (5,203,328)
Net income per common share - basic, as reported .                0.04             (0.44)
Net income per common share - basic, pro forma ...                0.00             (0.50)
Net income per common share - diluted, as reported                0.04             (0.44)
Net income per common share - diluted, pro forma .                0.00             (0.50)
</TABLE>

         The fair value of each option grant issued in 1997 and 1996 is
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: (a) exercise prices were equal to
the fair market value on the grant date or the day before; (b) a risk-free
interest rate based on US Zero Coupon Bonds; (c) no dividend yield on the
Company's stock; (d) expected option lives vary from four to ten years; and (e)
an expected volatility of 83.27% and 65.01%, respectively, of the Company's
stock.


4.   PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                           1997                 1996
                                                           ----                 ----
<S>                                                    <C>                 <C>
Land improvements ..............................       $     59,508        $     24,877
Buildings and improvements .....................          6,984,415           6,847,607
Leasehold improvements .........................         13,343,547          10,642,517
Fixtures and equipment .........................         11,754,738           9,421,063
Transportation equipment .......................             91,655              47,480
Capital leases --- computers ...................                 --             213,749
                                                       ------------        ------------
                                                         32,233,863          27,197,293
Less:  Accumulated depreciation and amortization         (8,542,556)         (5,811,941)
Land ...........................................          5,925,089           3,974,389
Construction-in-progress .......................            219,133             334,735
                                                       ------------        ------------
                                                       $ 29,835,529        $ 25,694,476
                                                       ============        ============
</TABLE>

         The Company capitalized interest expense related to the construction of
its restaurant locations in Pasadena, Westwood, West Hollywood and Costa Mesa
totaling approximately $4,000 and $20,000 for the years ended December 31, 1997
and 1996, respectively.




                                       39
<PAGE>   40
5.   LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                                   ------------
                                                                              1997             1996
                                                                              ----             ----
<S>                                                                        <C>              <C>
Note payable to a bank; collateralized by the Pasadena
     property; interest rate at bank's reference rate plus
     1.5%, (minimum rate
     is 10%), 10% at December 31, 1997; due April 1998                     $  775,000       $  895,000

Note payable to a bank; collateralized by machinery, equipment,
     inventory and receivables; interest rate at bank's
     reference rate
     plus 1.5%; 9.75% at December 31, 1997; due March 2002                  1,931,815        2,386,363

Note payable to a bank; collateralized by real property;
     interest rate at the LIBOR rate plus 2.5%, 8.46% at
     December 31, 1997, due August 2004                                     2,444,444               --

Note collateralized by transportation vehicles and guaranteed by the
     principal shareholder; interest rate at 9%; due September 1998             3,143            7,335

Notes collateralized by transportation vehicles, interest rate                 37,880               --
     at 5.9%, due November 2002

Notes collateralized by real property; monthly interest payments at
     interest rate of 9%; principal due March 2001
                                                                            3,250,000        3,250,000
                                                                           ----------       ----------
                                                                            8,442,282        6,538,698
Less: current maturities                                                      752,063          578,739
                                                                           ----------       ----------
         Total long-term debt                                              $7,690,219       $5,959,959
                                                                           ==========       ==========
</TABLE>


         Of the Company's aggregate $2,800,000 revolving line of credit from
Bank of America available at December 31, 1995, $2,500,000 was converted in
September 1996 to a term loan and the remaining $300,000 was paid off in August
1996. Currently, the Company has a $965,000 revolving line of credit with United
Mizrahi Bank. There are no restrictions on the use of funds drawn on this line
and at December 31, 1997, there was no outstanding balance.

         The Company entered into a $4,000,000 line of credit agreement with
Bank Leumi USA in October 1997. There are no restrictions on the use of the
funds drawn on this line and at December 31, 1997, there was no outstanding
balance.

         The Company also entered into a $2,000,000 line of credit agreement
with Bank of America in October 1997. There was no outstanding balance at
December 31, 1997.

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

<TABLE>
<S>                  <C>
1998 .........       $  752,063
1999 .........          748,919
2000 .........        1,163,919
2001 .........        3,878,919
2002 .........          287,352
Thereafter ...        1,611,110
                     ----------
         Total       $8,442,282
                     ==========
</TABLE>

         The term loans require the Company to maintain certain financial
covenants, the most restrictive including the maintenance of (a) a minimum
tangible net worth, (b) a maximum ratio of total liabilities not subordinated to
tangible net worth, and (c) a minimum debt service coverage ratio.




                                       40
<PAGE>   41
6.   CAPITAL LEASES

         The Company leased certain computer equipment under non-cancelable
capital lease arrangements which expired in December 1997. The Company purchased
the equipment at an agreed upon price which equaled the fair market value at the
end of the relevant leases, whereby payments totaling $3,834, including
interest, were due monthly. Certain of these leases were guaranteed by the
principal shareholder. The obligations under capital leases had interest rates
ranging from 5.5% to 8.1% and matured at various dates through 1997.
Depreciation charged to expense on this equipment was approximately $18,000,
$38,000 and $52,000 for the fiscal years 1997, 1996 and 1995, respectively.

7.   COMMITMENTS AND CONTINGENCIES

         The Company leases seven of its facilities and its corporate offices
under non-cancelable operating leases, of which certain leases are guaranteed by
the principal shareholder. Rental expense for the fiscal years 1997, 1996 and
1995 was $2,671,479, $1,954,837 and $1,623,641, respectively. Certain leases
contain fixed escalation clauses and rent under these leases is charged ratably
over the term of the lease. A number of leases also provide for percentage rent
on sales above a specified minimum. The following are the future minimum base
rental payments under operating leases for each of the next five years ending
December 31 and in total thereafter:

<TABLE>
<S>                   <C>
1998 ..........       $ 2,478,363
1999 ..........         2,470,263
2000 ..........         2,432,671
2001 ..........         2,447,063
2002 ..........         2,456,963
Thereafter ....         9,263,737
                      -----------
          Total       $21,549,060
                      ===========
</TABLE>

         Rental payments made to related parties for the years ended December
31, 1997, 1996 and 1995 were approximately $652,000, $604,000 and $470,000,
respectively. At December 31, 1997, the Company had future minimum payments due
to related parties of $2,941,000.

         The Company has four operating leases which contain provision for
specified annual increases. Rent expense for these locations has been calculated
on a straight-line basis over the term of the leases. A deferred credit has been
established at December 31, 1997 and 1996 for the difference between the amount
charged to expense and the amount paid. The deferred credit will be amortized on
a straight-line basis over the lives of the leases.

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


8.   INCOME TAXES

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

<TABLE>
<CAPTION>
                                        1997             1996             1995
                                        ----             ----             ----
Federal:
<S>                                  <C>              <C>              <C>
         Current tax provision       $ 503,551        $ 325,429        $ 248,000
         Deferred tax benefit
                                      (443,431)        (120,292)        (120,587)
                                     ---------        ---------        ---------
                                        60,120          205,137          127,413
State:
         Current tax provision         113,143          117,115           87,049
         Deferred tax benefit          (39,258)         (38,068)         (27,411)
                                     ---------        ---------        ---------
                                        73,885           79,047           59,638
                                     ---------        ---------        ---------

                  Total ......       $ 134,005        $ 284,184        $ 187,051
                                     =========        =========        =========
</TABLE>

         Upon termination of the subchapter S election on January 11, 1995,
deferred income taxes became an asset of the Company and was recorded in the
balance sheet with a corresponding credit to the Consolidated Statement of
Operations. The estimated deferred tax asset, principally resulting from
temporary differences in the recognition of



                                       41
<PAGE>   42





depreciation expense for financial statement and tax reporting purposes as of
January 11, 1995, was approximately $241,000.

         The effects of temporary differences and other items that give rise to
deferred tax assets and deferred tax liabilities as of December 31, 1997 and
1996, respectively, are comprised of the following:

<TABLE>
<CAPTION>
                                                                          1997             1996
                                                                        ---------        ---------
Current deferred tax assets
<S>                                                                     <C>              <C>
         State tax current year provision .......................       $  36,613        $   1,492
         Accounts receivable ....................................           3,652            3.692
         Vacation accrual .......................................          26,477           14,146
         Accrued compensation ...................................              --          208,006
         Accrued workers' compensation and other ................         113,526               --
                  Deferred tax liabilities ......................        (117,205)        (243,035)
                                                                        ---------        ---------
                  Current deferred tax assets (liabilities), net        $  63,063        $ (15,699)
                                                                        =========        =========

Non-current deferred tax assets
         Property and Equipment .................................         411,019          388,133
         Intangible assets ......................................          70,102               --
         FICA Tip Credit ........................................         278,617               --
                  Deferred tax liabilities ......................         (33,755)         (66,077)
                                                                        ---------        ---------
                  Non-current deferred tax assets, net ..........       $ 725,983        $ 322,056
                                                                        =========        =========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                       -------------------------------------------
                                                         1997             1996             1995
                                                       ---------        ---------        ---------
<S>                                                    <C>              <C>              <C>
Federal income tax expense at the statutory rate       $ 237,040        $ 293,385        $ 329,557
State income taxes, net
      of federal income tax benefit ............          48,764           52,171           57,452
Effect of subchapter S tax status ..............              --               --               --
Tax rate change from S corp to C corp status ...              --               --         (147,997)
FICA credit ....................................        (150,801)         (61,849)         (42,206)
Permanent differences ..........................           2,930              477            3,898
Other ..........................................          (3,928)              --          (13,653)
                                                       ---------        ---------        ---------
Provision for income taxes .....................       $ 134,005        $ 284,184        $ 187,051
                                                       =========        =========        =========
</TABLE>



9.   SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                 ------------------------------------------
                                                                                    1997             1996            1995
                                                                                 ----------       ----------       --------
Supplemental cash flow information:
      Cash paid for:
<S>                                                                              <C>              <C>              <C>
         Interest ........................................................       $  650,580       $  489,734       $177,373
         Income taxes ....................................................       $  432,500       $  732,603       $256,300
Supplemental information on noncash investing and financing activities:
         Preferred Stock converted into common stock .....................       $9,153,000               --             --
         Building purchase under a collateralized note ...................               --       $3,250,000             --
         Increase in loan payable -- related party as a result of
               distributions .............................................               --               --       $795,054
         Increase in deferred costs capitalized to construction-in-
               progress or leasehold improvements ........................                        $   57,031       $ 82,537
         Issuance of common stock for services rendered ..................               --                        $130,000
         Issuance of 200,000 common shares in connection
               with a consulting agreement ...............................       $  450,000               --             --
         Reallocation of purchase price on Florida .......................       $1,950,000               --             --
              property and land
</TABLE>




                                       42
<PAGE>   43





<TABLE>
<S>                                                            <C>            <C>
Write-off of fully depreciated capital leases, equipment
    and leasehold improvements .........................       $268,000             --       --
Accrual of preferred stock dividends ...................       $     --       $184,566       --
Lease options paid in 1995 and exercised in 1996
   in conjunction with purchase of restaurant ..........       $     --       $ 55,000       --
</TABLE>

10.  STOCK OPTION PLAN

         On June 28, 1995, the shareholders of the Company adopted the Company's
1995 Stock Option Plan (the "Plan"). The Plan is designed to attract, retain and
reward managerial and other key employees and non-employee directors and
strengthen the mutuality of interests between the Plan's participants and the
Company's stockholders. Stock options generally are granted at an exercise price
equal to the fair market value of the shares on the date of grant and are
exercisable at the rate of one-third per year beginning one year from the date
of grant. Stock options generally expire ten years from the date of grant. From
October 20, 1995 through December 31, 1997, incentive stock option grants under
the Plan, to acquire 639,900 shares, were made to certain officers, directors
and key employees at exercise prices ranging from $2.28 to $8.00 per option. In
January 1997, the Company under its stock option plan canceled 173,500 options
previously issued at $9.00 and $8.50 per share and reissued replacement options
exercisable at $4.50 and $4.95 per share. All these options were outstanding at
December 31, 1997 and 280,568 were exercisable.

         The Plan also provides for the grant of stock options to non-employee
directors of the Company without any action on the part of the Board or the
Board Committee. Each non-employee director shall automatically receive
non-qualified options to acquire 5,000 shares of common stock upon appointment
and shall receive options to acquire an additional 2,000 shares of common stock
for each additional year that such director continues to serve on the Board of
Directors. Each option becomes 50% exercisable on each of the first and second
anniversary dates of the grant and expires ten years from the date of the grant.
Accordingly, on October 20, 1995, options for 5,000 shares were granted to each
of the Company's two non-employee directors at an exercise price of $6.00 per
share. Furthermore, on May 27, 1997, an additional 2,000 options were granted to
these directors at an exercise price of $2.50 per share. All these options were
outstanding at December 31, 1997 and 10,000 options were exercisable.


<TABLE>
<CAPTION>
         Shares Under Option               Shares              Exercise Price
         -------------------               ------              --------------
<S>                                        <C>                 <C>
         Outstanding at
            December 31, 1994                     --                   --
         Granted                            407,000             $6.00 - $6.60
         Exercised
         Terminated
         Outstanding at
            December 31, 1995               407,000             $6.00 - $6.60
                                            -------
         Granted                            242,700             $4.69 - $9.00
         Exercised
         Terminated
         Outstanding at
            December 31, 1996               649,700             $4.69 - $9.00
                                            -------
         Granted                            375,200             $2.28 - $4.95
         Exercised
         Terminated                         191,000             $6.00 - $9.00
         Outstanding at
            December 31, 1997               833,900             $2.28 - $8.00
                                            -------
</TABLE>


11.  RELATED-PARTY TRANSACTIONS

         During 1995 and 1994 the principal shareholder's family partnership,
the Starkman Family Partnership, ("family partnership") purchased properties in
Westwood, California for the construction of a new restaurant. The Company has
been paying lease payments of approximately $35,000 per month in 1997 and 1996,
respectively, to the family partnership. The Company has a two-year option to
purchase the Westwood properties at the then current fair market value and a
seven-year right of first refusal on either or both of these properties.

         The Company pays monthly rental payments in the amount of $16,000 to
the family partnership for use of three properties adjacent to the West
Hollywood restaurant. Two of these properties are used as parking lots and the
third property has additional parking and a building used as a private bar and
lounge.




                                       43
<PAGE>   44
         On March 28, 1997, the Company announced that Kenneth Abdalla had
assumed the office of President on an interim basis with the specific objective
of assisting in the execution of the Company's acquisition and expansion
strategy. In connection therewith, the Company entered into a consulting
agreement with Kenneth Abdalla and a company affiliated with him for services to
be provided to the Company through December 1998 in consideration for 200,000
shares of common stock to Kenneth Abdalla and $600,000 to his affiliated company


12.  RESTAURANT CONCEPT DISCONTINUATION COSTS

         During fiscal 1995 the Company incurred $137,000 of costs related to
the discontinuation of the Jerry's Famous Pizza concept and restaurant.
Abandonment of leasehold improvements, abandonment of fixtures and equipment and
leasehold termination costs and other related costs accounted for approximately
$96,000, $34,000 and $7,000, respectively, of this amount. The operating loss up
to the close of business on June 25, 1995, totaled approximately $259,000.
Included in 1995 total revenues in the Consolidated Statements of Operations are
sales of $236,000 from Jerry's Famous Pizza. Operating losses of approximately
$162,000 and $178,000 are included in the Company's operating income for fiscal
years 1994 and 1993, respectively.


13.  PRO FORMA DATA (UNAUDITED)

         Pro forma net income per common share for 1995 was calculated using net
income and based on, as if, 10,386,250 shares of common stock were outstanding
for all of the fiscal year. The pro forma shares outstanding are based on (i)
7,460,000 shares outstanding for the Company at December 31, 1994, (ii) 40,000
shares issued on January 9, 1995, per the terms of a consulting agreement, (iii)
931,250 shares sold through a private placement which was completed in March
1995 and (iv) an additional 1,955,000 shares sold through an initial public
offering in October 1995.


14.  SUBSEQUENT EVENTS

         In December 1997, the Company entered into an agreement to purchase The
Epicure Market of Miami Beach, Florida, a family-owned gourmet food store which
has been in operation over 50 years. The total purchase price for the business
is $7.1 million in cash and 934,509 shares of the Company's common stock.
Concurrently with the purchase, the Company entered into a 20-year term lease
agreement with additional options to renew with affiliates of the seller and
five-year term employment agreements with the two family members who, together
with their family, have managed the market for over 50 years. The company plans
to increase the interior sales area of the market, install seating for in-house
dining, increase store operating hours, and expand into delivery, catering and
home meal replacement. The acquisition is scheduled to close in April 1998,
subject to due diligence and other requirements of the purchase agreement.

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


15.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

         Selected, summarized quarterly financial data for the four quarters of
fiscal years 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 (in thousands, except per share data)  First        Second        Third          Fourth
------------ ---------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>           <C>
       Revenues                            $14,812       $13,026       $13,797       $ 14,784
       Gross Profit                         10,433         8,991         9,394         10,087
       Net Income                              406           154           104           (101)
       Net Income (Loss) Per Share -
           Basic                           $  0.04       $  0.01       $  0.00       $  (0.01)
       Net Income (Loss) Per Share -
           Diluted                         $  0.04       $  0.01       $  0.00       $  (0.01)
</TABLE>





                                       44
<PAGE>   45

<TABLE>
<CAPTION>
1996 (in thousands, except per share data)    First         Second            Third               Fourth
---------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>             <C>                  <C>
Revenues                                   $    7,735      $    8,001      $   10,923           $   13,501
Gross Profit                                    5,388           5,465           7,514                9,312
Net Income                                        320              91               9                  159
Net Income per Common Share                       320              91          (1,199)              (3,860)
Net Income (Loss) Per Share -
    Basic                                  $     0.03      $     0.01      $     0.00           $     0.02
Net Income (Loss) Per Share -
    Diluted                                $     0.03      $     0.01      $     0.00           $     0.01
Net Income (Loss) Per Common Share-
    Basic                                  $     0.03      $     0.01      $    (0.11)(1)       $    (0.37)
Net Income (Loss) Per Common Share -
    Diluted                                $     0.03      $     0.01      $    (0.11)(1)       $    (0.37)
</TABLE>





COMMON STOCK DATA

<TABLE>
<CAPTION>
1997                                              First             Second             Third            Fourth
------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                <C>                <C>
      Price range:
         High                                    $  5 3/8          $  3 3/4           $  4  5/8          $  4
         Low                                     $  3 3/8          $  2 1/16          $  2 1/16          $  2


1996                                              First             Second             Third            Fourth
------------------------------------------------------------------------------------------------------------------
      Price range:
         High                                    $  8 5/8          $  8  5/8          $  10 3/8          $  9  3/8
         Low                                     $  7 7/8          $  7               $   5 5/8          $  4  1/8
</TABLE>


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


                                       45
<PAGE>   46



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

               None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               The information required by this Item with respect to directors
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the information contained in the Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 27,
1998 which will be filed with the Securities and Exchange Commission no later
than 120 days after the close of the year ended December 31, 1997. Information
with respect to executive officers is included in Part I of this Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               The information required by this Item is incorporated herein by
reference to the information contained in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 27, 1998, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1997.

                                     PART IV

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

               (a)(1) List of Financial Statements

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

               (a)(2) List of Financial Statement Schedules

                      None.

               (a)(3) List of Exhibits


                                       46
<PAGE>   47
Exhibit
Number                              Description

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

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

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

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

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

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

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

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

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

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

10.4     Amendment and Extension of Employment Agreement of Isaac Starkman,
         dated as of July 1, 1997.

10.5     Amendment and Extension of Employment Agreement of Guy Starkman, dated
         as of July 1, 1997.

10.6     Amendment and Extension of Employment Agreement of Jason Starkman,
         dated as of July 1, 1997.

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

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


                                       47
<PAGE>   48
Exhibit
Number                              Description

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

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

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

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

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

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

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

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

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

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

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

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

10.21    United Mizrahi Bank Loan Agreement, incorporated by reference to
         Exhibit 10.20 of the Registration Statement.

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

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

10.24    Intentionally omitted.

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

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

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


                                       48
<PAGE>   49
Exhibit
Number                              Description

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

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

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

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

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

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

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

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

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

10.37    Letter Agreement dated August 22, 1996 between The Starkman Family
         Trust and Waterton Management, L.L.C., incorporated by reference to
         Exhibit 10.3 of the Waterton 8-K.

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

10.39    Asset Purchase Agreement, dated August 2, 1996, among the Company, One
         Hundred Seventy-Second Collins Corp., L. Jules Arkin, as Trustee of the
         L. Jules Arkin Living Trust, Rosalie Arkin and Stanley H. Arkin, as
         Trustees of The Norman Arkin Living Trust, Stanley H. Arkin, Lewis
         Zachary Cohen, Barbara R. Rodriguez, Robin Sherwood f/k/a Robyn
         Sherwood, Susan Spatzer and Steven Stamler, incorporated by reference
         to Exhibit 10.1 of the Company's Report on Form 8-K for September 9,
         1996.

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

10.41    Revolving Credit and Term Loan Agreement, dated as of October 27, 1997,
         by and between Jerry's Famous Deli, Inc. and Bank Leumi USA.


                                       49
<PAGE>   50
Exhibit
Number                             Description

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

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

21.1     Subsidiaries

23.0     Consent of Coopers & Lybrand, LLP

27.0     Financial Data Schedule

         (b)      The Company filed no Reports on Form 8-K during the last
                  quarter of 1997.


                                       50
<PAGE>   51
                                   SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 30, 1998.

                             JERRY'S FAMOUS DELI, INC.



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


<TABLE>
<CAPTION>
     Signature                             Capacity                                 Date
     ---------                             --------                                 ----
<S>                               <C>                                           <C>
/s/ Isaac Starkman
----------------------------      Director, Chief Executive Officer             March 30, 1998
Isaac Starkman                    and Chairman of the Board



/s/ Kenneth Abdalla
----------------------------      President and Director                        March 30, 1998
Kenneth Abdalla


/s/ Guy Starkman
---------------------------       Vice President and Director                   March 30, 1998
Guy Starkman

/s/ Jason Starkman
---------------------------       Vice President and Director                   March 30, 1998
Jason Starkman

/s/ Christina Sterling
--------------------------        Chief Financial Officer and                   March 30, 1998
Christina Sterling                Principal Accounting Officer


/s/ Paul Gray
--------------------------        Director                                      March 30, 1998
Paul Gray

/s/ Stanley Schneider
--------------------------        Director                                      March 30, 1998
Stanley Schneider
</TABLE>