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                  U.S. SECURITIES AND EXCHANGE COMMISSION
                          WASHINGTON, D.C. 20549
                                FORM 10-KSB

[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 28, 1997

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

                          COMMISSION FILE NUMBER
                           --------------------
                      NEW WORLD COFFEE & BAGELS, INC.
                      -------------------------------
              (Name of Small Business Issuer in its Charter)

          DELAWARE                                     13-3690261
          --------                                     ----------
      (State or Other Jurisdiction                (I.R.S. Employer
     of Incorporation or Organization)            Identification No.)

     379 WEST BROADWAY, 4TH FLOOR                      10012
     NEW YORK, NY                                      -----
     --------------                                  (Zip Code)
     (Address of Principal Executive Offices)

                              (212) 343-0552
                              ---------------
                         (Issuer's Telephone Number)
 
Securities registered under Section 12(B) of the Exchange Act:    NONE

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

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

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

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

     State issuer's revenues for its most recent fiscal year.  $15,867,868
                                                               -----------
     The aggregate market value of the voting stock held by non-affiliates
per the closing stock price as of March 29, 1998 is $18,279,906.
                                                    -----------
     As of March 29, 1998, 11,887,336 shares of common stock of the issuer
were outstanding.
==========================================================================

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                             ITEM 1.  BUSINESS

Certain statements in this 10-KSB constitute forward-looking statements or
statements which may be deemed or construed to be forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. 
The words "forecast," "estimate," "project," "intend," "expect," "should,"
and similar expressions are intended to identify forward-looking statements. 
These forward-looking statements involve and are subject to known and unknown
risks, uncertainties and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements to differ from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. Those factors are
more fully discussed in the Company's most recent Form SB-2.

General

     New World Coffee & Bagels, Inc. ("New World" or the "Company") owns,
operates and franchises coffee bars and integrated coffee bar/bagel bakeries
in New York, New Jersey, Connecticut, Pennsylvania and Germany.  The Company
opened its first coffee bar in 1993. The Company's coffee operations are
vertically integrated, with the Company purchasing beans from around the
world which are roasted in its Connecticut plant and then supplied to both
Company-owned and franchised stores.

     New World is a Delaware corporation and was organized in November 1992.

Recent Developments

     In 1997 the Company launched its franchising program and its new
integrated coffee bar/bagel bakery concept.  Since launching its franchising
program and new integrated concept, the Company has signed multiple franchise
agreements in New York, New Jersey, Maryland, Pennsylvania and Florida, its
first supermarket franchise, its first international franchise, and its first
co-branding franchise.  
     
     The Company now differentiates itself from coffee bars or bagel bakeries
by offering an integrated coffee bar/bagel bakery serving fresh roasted
coffees, fresh brewed coffee and specialty beverages, fresh baked bagels,
fresh prepared bagel sandwiches, pastries and desserts.  This integrated
concept allows the Company's stores to capture all three day parts, i.e.
breakfast, lunch and afternoon/evening neighborhood gathering place compared
to coffee-only or bagel-only retailers which generally capture two day parts. 

     The Company is in the process of converting its existing coffee bars to
integrated coffee bar/bagel bakeries, which the Company anticipates would
lead to substantial increases in same store sales.  New World's 1997
comparable store sales increased by 4.6% for its coffee bars and 32.6% for
its converted coffee bar/bagel bakery.  In addition, New World is in the
process of converting its company owned operations to franchises which the
Company anticipates would improve operations at such stores and generate
significant cash from such sales.  The Company anticipates that the
substantial majority of its existing stores will be converted to the coffee
bar/bagel bakery format and to franchised operations.
     
     At March 29, 1998 there were 34 company owned and seven franchised
stores under operation.  In addition, there were 26 franchises signed but not
yet operating.

Industry Overview

     The U.S. coffee market has broad and deep demographics. Fifty-six
percent of American adults drink coffee and they drink an average of 3.5 cups
per day, according to the National Coffee Association of U.S.A., Inc.'s 1996
Winter Coffee Study.  The gourmet coffee segment of the industry has
experienced strong growth over the past decade and is expected to continue to
grow through the end of the century.  According to the Specialty

                                   -1-

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Coffee Association of America ("SCAA"), the market for gourmet coffee nearly
doubled during the 1980s, as retail sales grew from approximately $763
million in 1979 to approximately $2.0 billion in 1994.  According to the SCAA
the gourmet coffee industry is expected to approach $5.0 billion in retail
sales by the year 2000 and coffee stores, including espresso carts and
kiosks, will be the fastest growing distribution channel.  The consumption of
specialty coffee drinks is also growing rapidly, with the percent of U.S.
population drinking cappuccino increasing 42% from 1995 to 1996.  The Company
believes these are the most up to date reports available on the specialty
coffee industry.

     Management believes that the U.S. bagel market is large, growing and
fragmented.  According to the American Bagel Association sale of bagels has
grown rapidly, from $429 million in 1993 to $2.3 billion in 1996.  Industry
sources estimate that the bagel market is growing by approximately 20% per
year.  According to the NPD Group, an independent research organization, the
per capita consumption of bagels rose 83% from 14 in 1993 to an estimated 26
per person in 1996. 

     Management believes this growth has been driven by (i) greater consumer
awareness and appreciation of gourmet coffee and fresh baked bagels as a
result of their increasing availability, (ii) increasing demand for all fresh
premium food products where the differential in price from the commercial
brands is small compared to the improvement in product quality and taste,
(iii) a switch by consumers to low fat baked items such as bagels from high
fat fried alternatives, and (iv) the popularity of coffee bars as gathering
places.

Business Strategy

     The goal of New World is to become a leading coffee bar/bagel bakery
chain in each market in which it operates.  Each element of the Company's
strategy is designed to differentiate and reinforce New World's brand
identity, to engender customer loyalty and to position the Company as a
leading coffee bar/bagel bakery franchisor.  The key elements of this
strategy include: 

     INTEGRATED COFFEE BAR/BAGEL BAKERY.   New World believes it is the only
publicly traded chain in the United States to combine a coffee bar and bagel
bakery under one roof designed to capture all three day parts.  Coffee bars
typically attract only breakfast and afternoon/evening traffic but miss the
lunch business because they lack a lunch menu.  Bagel bakeries primarily draw
breakfast and lunch patrons but miss the afternoon/evening business because
they lack the good coffee, pastries and comfortable environment needed to
attract "neighborhood gathering place" traffic.  By offering high quality
specialty coffees, cappuccino/espresso drinks, fresh baked bagels, fresh
prepared bagel sandwiches, pastries and desserts, New World stores capture
business throughout the breakfast, lunch and afternoon/evening dayparts.  The
Company's sales mix for the four week period ended February 28, 1998 was 47%
beverages, 41% food, 12% beans and merchandise in its coffee bar/bagel bakery
stores, compared to 62%, 27%, and 11%, respectively, for the coffee bar only
stores.

     GROWTH THROUGH FRANCHISING.  New World is committed to grow through
franchising to secure a leading position in its industry.  The Company
believes that it can grow more rapidly through franchising than through
company owned operations due to lower financial and human resource
constraints.  In addition the Company believes that it can improve its level
of operations and customer service through attracting quality owner/operators
as franchisees.  The Company is committed to developing a strong franchise
system by attracting qualified operators, expanding in a controlled manner
and ensuring that each franchisee adheres to the Company's high standards. 
To ensure consistent quality, each franchisee will be required to purchase
coffee beans from the Company and bagel dough and all other supplies from
approved suppliers.  The Company devotes significant resources to provide the
franchisees with assistance in employee training, marketing, site selection
and store design. 

     EFFICIENT OPERATING SYSTEMS.  New World believes that its operating and
distribution systems result in lower operating costs, improved product
quality and superior customer service.  The Company's dough specifications
and distribution system eliminate the need for each franchisee to commit
substantial capital and labor to dough preparation at either the store or
commissary level.  The Company's baking process eliminates the need for each
franchisee to commit substantial resources in hiring and retaining skilled
baking personnel.  In addition, the Company's sophisticated point-of-sale
system assists each franchisee in managing his cost of goods and labor
scheduling, therefore enabling the franchisee to concentrate on delivering
customer service and building sales.  Company management believes that its
efficient operating system is a competitive advantage in attracting and
retaining franchisees and in its ability to expand rapidly.

                                   -2-

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     COMFORTABLE, INVITING STORES.  New World believes that its stores are
designed to be conducive to capturing all three dayparts.  The store layout
is designed to process a large volume of transactions in a short timeframe
during the time critical breakfast and lunch dayparts.  In addition, the
store atmosphere is designed to be comfortable and inviting through the use
of natural materials, warm lighting, appropriate music and a comfortable
seating area to promote the stores use as neighborhood gathering places in
the afternoon/evening daypart.
 
     QUALITY PRODUCTS.  The Company pursues a strategy of delivering high
quality products to its customers.  New World selects high quality arabica
beans from throughout the world which are then roasted by its roastmasters in
small batches to ensure a peak roasted product.  Coffee is delivered to each
store generally within 24 hours of roasting, enabling the Company to
guarantee the freshness of coffee sold in its stores. The Company believes
this guaranteed freshness strategy distinguishes New World from its
competitors, most of whom deliver vacuum-packed or valve-packed coffee to
their stores.  The Company's bagel dough is purchased from a single supplier
to ensure quality and consistency at the store level.  
     
     CUSTOMER SERVICE.   The friendliness, speed and consistency of the
service and the knowledgability of New World franchisees and employees is
critical to developing the Company's quality brand identity and to building
a loyal customer base.  To this end, the Company places strong emphasis on
identifying and retaining qualified franchisees and employees, invests
substantial resources in training them in coffee knowledge, beverage
preparation, bagel baking, sandwich making, and customer service and sales
skills.
 
     MARKETING. The Company's marketing strategy is to differentiate its
concept based upon promoting the Company's status as an integrated coffee
bar/bagel bakery to establish its legitimacy in both the coffee and bagel
markets and distinguish itself from coffee-only or bagel only competitors,
and promoting the distinctive qualities of the Company's new products such as
the New World Freezer and seasonal blends to position the Company as a unique
and innovative retailer.  In 1998, the Company plans to introduce a new
restaurant level local marketing program which targets the trade area of each
franchise store, making extensive use of distinctive print materials in
direct mail and store to door promotions.  Local marketing efforts would also
include a variety of community oriented activities with schools, sports teams
and other organizations. The Company believes that its integrated brand
appeals to franchisees by enabling them to effectively purchase two
franchises for a comparable investment to a coffee-only or bagel-only
franchise.
 
     SITE SELECTION AND REGIONAL EXPANSION.  New World's site selection
strategy is to open stores in residential and shopping areas with strong
population, education and income levels, high traffic, high visibility, easy
accessibility and parking, with strong compatible retailers.  The Company's
expansion strategy is to expand its retail store base in both existing and
new markets, through new store openings or acquisitions, in order to secure
a leading presence in each of its markets and to enhance its brand awareness. 
Along with expansion in its existing markets, the Company plans to enter
other markets along the Atlantic seaboard, and has identified Florida, the
Washington, D.C. metropolitan area and the Boston metropolitan area as its
next expansion markets.

Coffee & Bagels

     New World is committed to marketing only the finest and freshest coffee
and bagel products.  New World offers a revolving selection that includes
over 30 whole bean blended, unblended and decaffeinated coffees and up to 21
plain, topped and filled bagels.  Rotating its coffee and bagel selections
allows the Company to provide its customers with a wider variety including
certain coffees which have limited availability.  The Company typically
offers up to 12 unblended and 8 blended coffees, and 17 bagel varieties at
any given time.

     COFFEE SOURCING.  The Company focuses on purchasing only the highest
grades of coffee available from the best crops.  Barry Levine and Bob
Williams, the Company's Vice Presidents-Coffee, evaluate crop samples on an
ongoing basis and make purchase commitments on the basis of quality, taste
and availability.  The Company makes forward commitments for the purchase of
all of its coffee to help ensure adequate supply.  The Company has long-

                                   -3-

<PAGE>

standing relationships with coffee brokers, allowing the Company access to
the world's best green coffees.

     New World purchases only the highest grades of arabica coffee as these
grades are the best available from each producing region.  These highest
grade arabica coffees are of superior quality to lower grade arabica
varieties or coffee beans of the robusta species.  Lower quality beans are
typically found in non-specialty or mass-merchandised coffees and even in
many specialty coffee outlets.

     COFFEE ROASTING.  The roasting of commercial coffee is often
accomplished through a uniform roasting process that does not differentiate
between the types of coffee.  Some specialty roasters also employ this
commercial method. New World's roasting process, however, varies based upon
the variety, origin and physical characteristics of the coffee and is
designed to develop the optimal flavor and aromatics of each coffee.  The
Company has several roastmasters who are directly responsible for overseeing
the roasting process. The roastmasters learn the Company's unique roasting
methods during an apprenticeship with the Company's Vice Presidents-Coffee. 
New World believes that its roasting facility has sufficient capacity for the
Company's planned expansion within the next 12 months. 

     COFFEE FRESHNESS.  New World is committed to providing its customers
with freshly roasted whole bean coffee and beverages.  Freshness is important
because once coffee is roasted it becomes a highly perishable product, and
within 2 weeks loses a significant amount of flavor.  The Company's coffee is
delivered to each store at least twice a week, generally within 24 hours of
roasting. This enables the Company to guarantee the freshness of the coffee
sold in its stores.  The Company believes that its freshly roasted coffee is
superior to its competitors who deliver vacuum-packed or valve-packed coffee
to their stores.

     BAGEL SOURCING.  The Company seeks to provide the consumer with a
superior quality bagel product.  The Company's bagels are prepared in each
store from frozen raw bagel dough using a technique which requires the bagels
to be proofed first, then baked, under the Company's quality control
guidelines.  The Company's frozen raw bagel dough is distributed to its
stores from a single supplier with which the Company has a supply
arrangement.  By controlling the supply of raw bagel dough and cream cheese,
the Company is able to control the quality of product sold in the stores.  

Stores

     New World currently operates 34 company owned and seven franchised
stores.  New World believes that its stores are designed to be conducive to
capturing all three dayparts.  The store layout is designed to process a
large volume of transactions in a short timeframe during the time critical
breakfast and lunch dayparts.  In addition, the store atmosphere is designed
to be comfortable and inviting through the use of natural materials, warm
lighting, appropriate music and a comfortable seating area to promote the
stores use as neighborhood gathering places in the afternoon/evening daypart. 
The Company's prototype store averages 1,400 - 1,800 square feet. 

     New World stores offer, over the course of any given year, more than 30
varieties and blends of fresh roasted coffee, in brewed and whole bean
format, from coffee producing countries around the world.  Regular and
decaffeinated "Coffees of the Day" are fresh brewed daily with strict brewing
and freshness standards.  The stores also offer a broad range of Italian-style
beverages such as espresso, cappuccino, caffe latte, caffe mocha and
espresso machiato.  All espresso based drinks are prepared to order which the
Company believes ensures quality and consistency.  New World stores offer a
selection of black, herbal and fruit teas, with one selection offered as the
fresh brewed "Iced Tea of the Day," and also offer freshly squeezed orange
and grapefruit juice.

     New World stores also offer a broad selection of up to 17 varieties of
fresh baked bagels, up to 10 types of cream cheese spreads, a variety of
freshly prepared bagel sandwiches.  Breakfast offerings also include
croissants, muffins, danishes and scones, lunch offerings include salads and
soups, and dessert items include various cakes and cookies, dessert muffins,
brownies and biscotti.  New World's coffee bar stores serve bagels and
sandwiches provided by outside suppliers.  Management is consistently working
with its suppliers to develop a selection of quality food items which will
complement its bagel and coffee sales.

                                   -4-

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     Some of the Company's stores also carry selected coffee related
merchandise items including coffee making equipment, french presses, grinders
and other small equipment.  For the four week period ended February 22, 1998,
the Company's sales mix was 47% beverages, 41% food, and 12% whole beans and
merchandise in its coffee bar/bagel bakery stores compared to 62%, 27%, and
11%, respectively, for its coffee bar stores.
 
     New World prices its coffee and bagel offerings competitively with the
prevailing high-end prices in each of its markets, which the Company believes
reflects the high quality of the Company's products and its high level of
customer service.

Site Selection and Store Locations

     New World's site selection strategy is to open stores in high-traffic,
high-visibility residential and shopping locations in each of its target
markets.  The Company's real estate selection process evaluates sites based
on a variety of factors including trade area population, income and education
levels, existing traffic patterns, site visibility, site accessibility,
availability of parking, proximity of compatible retailers and potential
competitors.  Following this analysis, each site must be approved by senior
management.
 
     The Company's site selection strategy is focused on seven day
residential and shopping area sites.  The Company's experience indicates that
residential and shopping area sites generally offer more attractive economics
as they typically are open seven days a week and capture breakfast, lunch and
afternoon/evening traffic, compared to business district sites which are open
five days and capture breakfast and lunch traffic only.  The residential and
shopping area units can also be staffed and operated more cost effectively
than business district sites due to lower peak traffic constraints.

Franchise Program     
   
     GENERAL. New World's integrated coffee bar/bagel bakery concept, growth
and quality reputation has allowed the Company to generate interest in a
substantial number of potential franchisees.  The Company considers
franchising to be an important part of its continued growth and considers its
relationship with its franchisees as excellent.  As of March 29, 1998, there
were seven franchised stores operating and the Company had 26 franchise
agreements signed but not yet operating. 
   
     APPROVAL. Franchisees are approved on the basis of the applicant's
business background, restaurant or retail operating experience and financial
resources. 
   
     FRANCHISE AND DEVELOPMENT AGREEMENTS. The Company's franchise agreements
typically provide for a ten year term, a non-refundable franchise fee of
$25,000 for the initial store and $20,000 for each additional store, a 5%
royalty, a marketing fund contribution of 2%, a required local advertising
and promotion expenditure of 2%, a requirement to purchase coffee beans at
prevailing market prices from the Company, and a $2,500 minimum grand opening
expenditure. The Company has the right to terminate any franchise agreement
for a variety of reasons, including a franchisee's failure to make payments
when due or failure to adhere to the Company's policies and standards. Many
state franchise laws limit the ability of a franchisor to terminate or refuse
to renew a franchise. See "Business--Government Regulation."     
          
     The Company's standard area development agreement provides for the
development of a specified number of stores within a defined geographic
territory in accordance with a development schedule of store opening dates.
The development schedule generally will range from two to five years and
contain benchmarks for the number of stores to be opened and in operation at
quarterly or semi-annual intervals. Area developers will generally pay a non-
refundable franchise fee of $25,000 for the initial store and $20,000 for
each additional planned store, fifty percent of which will be paid at the
execution of the agreement, with the remainder payable in quarterly
installments over two years. Breaches of the agreement, including failure to
meet development schedules, may lead to termination of the limited
exclusivity provided by the agreement, renegotiation of development and
franchise provisions or termination of the right to build future stores,
although such termination will not generally affect existing franchise
agreements for developed locations unless such breaches independently
constitute defaults of the franchise agreements. Any such termination could
be contested by the area developer.     

                                   -5-

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     The agreements generally preclude the Company from operating or
franchising stores within an exclusive territory, except that the Company
reserves the right to engage in certain special distribution arrangements
within the specified territory.     
   
     FRANCHISE STORE DEVELOPMENT. The Company furnishes each franchisee with
assistance in selecting sites and developing stores. The Company provides its
franchisees with the physical specifications for typical stores. Each
franchisee is responsible for selecting the location for its stores with the
Company's assistance based on accessibility and visibility of the site,
targeted demographic factors, existing traffic patterns, availability of
parking and proximity of compatible retailers and potential competitors. The
Company provides design plans to the franchisees.
   
     FRANCHISEE FINANCING PROGRAM.  The Company has established a
relationship with third party financing sources under which franchisees who
meet preset criteria may borrow funds for use in the construction and
development of their stores.  Under the program, the loans will typically
bear interest at floating rates and will be secured by the fixtures,
equipment and signage of each store, pledges of personal property and
personal guarantees.  A franchisee utilizing the financing program must fund
at least 25% - 30% of the total development costs with equity capital.

     FRANCHISE TRAINING AND SUPPORT. Every franchisee is required to have a
principal operator or manager approved by the Company who satisfactorily
completes the Company's two-week training program and who devotes his or her
full business time and efforts to the operation of the franchisee's stores.
In addition to this program, the Company provides an on-site training crew
for up to seven days during the opening of franchisee's stores and ongoing
supervision thereafter.  Multi-unit franchisees are encouraged to hire a
full-time training coordinator to train new employees for their stores.     
   
     FRANCHISE OPERATIONS. All franchisees are required to operate their New
World stores in compliance with the Company's policies, standards and
specifications, including matters such as menu items, ingredients, materials,
supplies, services, fixtures, furnishings, decor and signs. Each franchisee
has full discretion to determine the prices to be charged to its customers. 
   
     REPORTING. The Company collects daily, weekly and monthly sales and
other operating information from its franchisees through the POS system. The
Company's agreements permit the Company to electronically debit the
franchisees' bank accounts for the payment of royalties, marketing fund
contributions and purchases of products from the Company.  This system
significantly reduces the resources needed to process receivables, improves
cash flow and virtually eliminates past-due accounts related to these items. 
Franchisees are required to purchase and install New World's POSITOUCH system
in their stores.

Customer Service and Employee Training

     The Company believes that the training and knowledge of its employees
and the consistency and quality of the service they deliver are critical to
the Company's success. Management believes that an employee oriented culture
creates a sense of personal responsibility among all employees, and pride in
the Company's products, resulting in a higher level of customer service.

     Once hired, store employees undergo training in coffee knowledge,
beverage preparation, bagel baking, sandwich making and customer service and
sales skills. This training includes written training materials, observation
and simulation exercises and in-store training.  Retail store managers
receive additional training in advanced coffee and bagel knowledge,
communication skills and performance appraisal techniques. 

     New World seeks to attract and retain qualified personnel by offering an
attractive package of compensation, benefits and career growth potential. The
Company's incentive compensation system rewards employees for high quality
service and productivity from a store-level bonus pool.  The Company's
benefits package includes medical coverage for full-time and qualifying part-
time workers.  In addition, as a growing business, New World is able to offer
career advancement opportunities and incentive stock options to all
management personnel. The Company has not experienced any material
difficulties in retaining qualified personnel.

                                   -6-

<PAGE>


Store Operations

     The typical New World store is staffed with one manager, two assistant
managers and between 10 and 15 hourly employees, many of whom work part-time. 
The hours for each store are established based on location and customer
demand, but typically are from 7:00 a.m. to 9:00 p.m. or later in residential
and shopping area locations and from 7:00 a.m. to 6:00 p.m. in business
district locations.  The store managers are overseen by district managers,
who are responsible for supervising the operations of up to 10 stores and who
report to the Vice President - Operations.

     The Company maintains financial accounting controls for each of its
stores through the use of centralized accounting and management information
systems to track store-by-store performance, produce required management
reports, and track and manage consolidated inventory and purchasing
requirements. The Company's information system currently uses a central
computer and state-of-the-art POS System.  The POS System is polled nightly
via an interface to the central computer, which then creates daily, weekly
and monthly management reports. Sales information is collected daily from
each store and store managers are provided with operating statements for
their locations.

Marketing

     The Company's marketing strategy is to differentiate its concept and
build a brand identity based upon promoting its integrated coffee bar and
bagel bakery stores to establish its legitimacy in both the coffee and bagel
markets and by promoting the distinctive qualities of the Company's new
products such as the New World Freezer and seasonal blends to position the
Company as a unique and innovative retailer. 

     To date, the Company has relied primarily on the high visibility of its
real estate locations, word of mouth, public relations, and the inviting
atmosphere of its stores to attract first time customers.  The Company's
focus on larger, higher-visibility residential and shopping area sites
enhances its ability to develop a brand identity as they tend to be more
visible and also serve as neighborhood gathering places. The Company's
marketing materials and in-store decor package emphasize the Company's status
as a roaster and retailer and highlight the Company's efforts to source,
roast and sell only the finest, freshest coffees.  These materials also
educate consumers about New World's fresh roasted coffees as compared to
vacuum-packed or valve-packed coffee from other retailers.  The Company also
promotes the fact that its coffees have garnered numerous awards over the
years.

     In 1998, the Company plans to introduce a store level local marketing
program to target the trade area of each franchise store, making use of
distinctive print materials in direct mail and store-to-door promotions.  The
local marketing efforts would also include a variety of community oriented
activities with schools, sports teams and other organizations.  Each
franchised store is required to spend 2% of its sales on local store
marketing.  In addition to local store marketing, all franchised stores are
required to contribute 2% of sales to a marketing fund, which will provide
the stores with marketing support in terms of literature, sales promotions,
new product introductions and seasonal specials, along with possible print
and other mass media advertising, in order to increase consumer interest and
build sales.

Trademarks

     The Company has obtained federal registration rights in the trademark
and servicemark "NEW WORLD COFFEE(R)", and the trademarks "NEW WORLD COFFEE
& BAGELS(R)", "SUMMERTIME BLEND(R)", "WILLOUGHBY'S COFFEE & TEA(R)" (with
design), and "SERIOUS COFFEE(R)".  The Company believes these are significant
to its business.  The Company also has applied for the registration of the
federal servicemark "NEW WORLD COFFEE & BAGELS (inside a design), FRESH
BREWED, FRESH BAKED".  Trademarks are generally valid as long as they are in
use and/or their registrations are properly maintained, and they have not
been found to have become generic.  The Company is aware of the use of the
name "NEW WORLD COFFEE" by another person in California.  It is the Company's
policy to vigorously oppose any infringement of its trademarks.

                                   -7-

<PAGE>

Competition

     The Company's coffee beverages compete directly against all restaurant
and beverage outlets that serve coffee and a growing number of espresso
stands, carts and stores. The Company's whole bean coffees compete directly
against specialty coffees sold at retail through supermarkets, specialty
retailers, and a growing number of specialty coffee stores.  The Company's
bagel products compete directly against all restaurant and bakery outlets
that serve bagels, including the bakery section of supermarkets, and a
growing number of bagel bakeries.  The Company believes that its customers
choose among retailers primarily on the basis of product quality, service and
convenience and, to a lesser extent, on price.

     The coffee and bagel industries are intensely competitive and there are
many well established competitors with substantially greater financial and
other resources than the Company.  Although competition in the specialty
coffee market is currently fragmented, the Company competes and, in the
future will increasingly compete with Starbucks, the market's leading
retailer with over 1,500 stores.  Although competition in the bagel market is
fragmented, the Company competes and, in the future will increasingly compete
with Einstein/Noah Bagel Corp., a Colorado based retailer with over 550
stores, Bruegger's Bagels, a Vermont based retailer with over 300 stores, and
Manhattan Bagel Company, a New Jersey based retailer with over 300 stores. 
In addition to current competitors, one or more new major competitors with
substantially greater financial, marketing, and operating resources than the
Company could enter the market at any time and compete directly against the
Company.  In addition, in virtually every major metropolitan area in which
New World operates or expects to enter, local or regional competitors already
exist.

     The Company also expects that competition for suitable sites for new
stores will be intense. The Company competes against other specialty
retailers and restaurants for these sites, and there can be no assurance that
management will be able to continue to secure adequate sites at acceptable
rent levels.  The Company also competes with many franchisors of restaurants
and other business concepts with respect to the sale of franchises. 

Government Regulation

     The Company and its franchisees are subject to various federal, state
and local laws affecting the operation of their respective businesses.  Each
New World store is subject to licensing and regulation by a number of
governmental authorities, which include health, safety, sanitation, building
and fire agencies in the state or municipality in which the store is located. 
Difficulties in obtaining or failures to obtain required licenses or
approvals could delay or prevent the opening of a new store in a particular
area.

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

Employees

As of March 29, 1998 the Company employed a work force of 330 persons, 160 of
which were employed full-time, none of whom were covered by collective
bargaining agreements.  The Company believes its relations with its employees
are good.

                                   -8-

<PAGE>

ITEM 2.  PROPERTIES

FACILITIES

     New World leases approximately 7,550 square feet in New York, New York
for offices and a training center, approximately 1,600 square feet in
Branford, Connecticut for administrative offices and training facilities and
3,800 square feet for a roasting plant. As of the date of this 10-KSB filing,
New World operates a total of 34 retail stores and seven franchised stores
all of which are located in leased premises.


NEW WORLD STORE LOCATIONS AND SIGNED LEASES

                                                            Date
Company Owned Stores               Location            Opened/Acquired
--------------------               --------            ---------------

Sixth Avenue at 10th Street....... New York, NY        02/93
Madison Avenue at 47th Street..... New York, NY        09/93
West Broadway at Spring Street.... New York, NY        03/94
Bell Atlantic Tower............... Philadelphia, PA    04/94
Trump Plaza at 62nd Street........ New York, NY        05/94
Columbus Avenue at 80th Street.... New York, NY        06/94
Wall Street at Water Street....... New York, NY        08/94
Seventh Avenue at 38th Street..... New York, NY        09/94
57th Street at Lexington.......... New York, NY        10/94
Olympic Tower..................... New York, NY        11/94
Third Avenue at 50th Street....... New York, NY        12/94
One New York Plaza................ New York, NY        12/94
Market Street at 20th Street...... Philadelphia, PA    12/94
One Broadway at Battery Place..... New York, NY        12/94
Lexington at 84th Street.......... New York, NY        02/95
The Shops at Liberty Place........ Philadelphia, PA    02/95
Sixth Avenue at 12th Street....... New York, NY        06/95
Madison Avenue at 43rd Street..... New York, NY        08/96
125 Seventh Avenue................ Brooklyn, NY        06/96
Broadway at 75th Street........... New York, NY        06/96
Columbus at 67th Street........... New York, NY        06/96
Broadway at 114th Street.......... New York, NY        06/96
419 Main Street................... Ridgefield, CT      09/96
1006 Chapel Street................ New Haven, CT       10/96
28 Church Street.................. New Haven, CT       10/96
26 York Street.................... New Haven, CT       10/96
550 East Main Street.............. Branford, CT        10/96
752 Boston Post Road.............. Madison, CT         10/96
60 Temple Street.................. New Haven, CT       11/96
Route 59/Middletown............... Nanuet, NY          11/96
Third Avenue at 90th Street....... New York, NY        12/96
107-24 Continental................ Forest Hills, NY    12/96
1034 Willis Avenue................ Albertson, NY       12/96
Cross Roads Shopping Center....... Greenburgh, NY      01/97

                                   -9-

<PAGE>

NEW WORLD FRANCHISE LOCATIONS AND SIGNED LEASES

                                                            Date
Franchised Stores                  Location            Opened/Acquired
-----------------                  --------            ---------------

Third Avenue at 67th Street....... New York, NY        07/93
Third Avenue at 45th Street....... New York, NY        10/94
Riverside Square Mall............. Bergen County, NJ   04/95
Shop Rite......................... Oakland, NJ         09/97
30 East Main Street............... Freehold, NJ        12/97
Leopold Strasse 43................ Munich, Germany     01/98
102 Westwood Avenue............... Westwood, NJ        02/98
Second Avenue at 74th Street...... New York, NY        Second Qtr 1998 (est.)
Second Avenue at 58th Street...... New York, NY        Second Qtr 1998 (est.)
400 Washington Street............. Hoboken, NJ         Second Qtr 1998 (est.)
208 N.  Frederick Road............ Gaithersberg, MD    Second Qtr 1998 (est.)


                        ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any material legal proceedings.


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

      None


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

     The Company's Common Stock has been quoted on the Nasdaq National Market 
("Nasdaq") under the trading symbol "NWCI" since the Company commenced public
trading on February 1, 1996. Prior to such date there was no public market
for the Common Stock. The following table sets forth the range of high and
low closing sale prices (based on transaction data as reported by the Nasdaq)
for the Common Stock for each fiscal quarter during the periods indicated.

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

     Fiscal 1998                                       HIGH      LOW
     -----------                                       ----      ----
     First Quarter (From December 29, 1997 to
           March 29, 1998)                             $2.16     $1.25


     On March 29, 1998, the closing price for the Company's Common Stock as
reported by Nasdaq was $1.56 a share.

     As of March 29, 1998, there were approximately 249 holders of record of
the Common Stock.  This number excludes individual stockholders holding stock
under nominee security listings.

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

                                   -10-

<PAGE>

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

General

     New World currently operates 34 company owned and seven franchised
stores, consisting of 26 in New York, seven in Connecticut, three in
Pennsylvania, four in New Jersey and one in Germany.

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

     In 1997 the Company launched its franchising program and its new
integrated coffee bar/bagel bakery concept. The Company is in the process of
converting its existing coffee bars to integrated coffee bar/bagel bakeries,
which the Company anticipates would lead to substantial increases in same
store sales. In addition, New World is in the process of converting its
company owned operations to franchisees which the Company anticipates would
improve operations at such stores and generate significant free cash from
such sales.  The Company anticipates that a substantial majority of its
existing stores will be converted to the coffee bar/bagel bakery format and
to franchised operations.

     The Company forecasts the following for fiscal 1998:
 
     (a)  The Company expects to grow systemwide revenues through (i) new
          franchise sales, targeting 45 in 1998, (ii) new franchise store
          openings, (iii) conversion of existing coffee bars to coffee
          bar/bagel bakeries, and (iv) increasing royalty and product sale
          revenues from operating franchisees.  New World expects franchise
          royalty and product sale revenues to become the most significant
          and stable component of the Company's revenue structure over time. 
     (b)  The Company expects improved expense structure in its stores from
          (i) lower cost of goods as a percentage of sales and (ii) lower
          occupancy costs as a percentage of sales, both due to the bagel
          conversion program.  
     (c)  The Company expects its general and administrative expenses to
          continue to decline as a percentage of systemwide revenues as
          anticipated revenue growth will leverage its management
          infrastructure. 
     (d)  The Company also expects its depreciation and amortization expense
          to decrease both in dollar and percentage terms due to (i)its
          compliance with FASB 121, (ii) the conversion of company-owned
          stores to franchised stores, and (iii) increase in systemwide
          revenues.  


Results of Operations

YEAR ENDED DECEMBER 28, 1997 COMPARED TO YEAR ENDED DECEMBER 29, 1996

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

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

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

                                   -11-

<PAGE>

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

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

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

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

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

YEAR ENDED DECEMBER 29, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     REVENUES.  Revenues increased 18.5% to $11,340,199 for fiscal 1996 from
$9,572,019 for fiscal 1995.  Comparable store sales for the stores open for
both periods decreased 8.5%.  Management attributes this decrease to the
opening of additional stores in Manhattan to solidify the Company's market
presence, and the capacity constraints experienced in certain of the
Company's primarily residential stores which average approximately 615 square
feet in size and are achieving approximately $945 in average sales per square
foot.  The Company has, in response, expanded both its geographic focus (to
four states: New York, Connecticut, Pennsylvania and New Jersey) and its
average store size (to approximately 1,800 square feet for its newer stores).

     COSTS AND EXPENSES.  Cost of sales and related occupancy costs as a
percentage of revenues for fiscal 1996 decreased to 57.1% from 62.6% for
fiscal 1995.  The primary components were a decrease of 5.3% in cost of goods
due to the Company's implementation of the POS System which has allowed the
Company to better control store purchasing and waste as well as improved
coffee pricing due to vertical integration from the acquisition of
Willoughby's and improved vendor pricing due to greater economies of scale. 
Occupancy expense as a percentage of revenues decreased 0.2%.

     Store operating expenses as a percentage of revenues for fiscal 1996
decreased to 31.1% from 35.1% for fiscal 1995.  The primary components were
a 3.5% decrease in personnel costs due to improved labor scheduling as a
result of the Company's implementation of the POS System and a 0.6% reduction
in miscellaneous store expenses due to increased cash controls and reduced
store supplies costs.

     Depreciation and amortization expenses as a percentage of revenues for
fiscal 1996 increased to 11.9% from 10.8% for fiscal 1995 primarily due to
increased amortization resulting from the acquisitions and costs associated
with the implementation of the POS System.

     General and administrative expenses increased to $2,738,975 or 24.2% of
revenues for fiscal 1996 compared to $1,784,257 or 18.6% of revenues, for
fiscal 1995.  Corporate payroll and recruiting expense increased by $691,683
due to the addition of a Chief Operating Officer, a Vice President-Real
Estate, and Directors of Construction, Human Resources, and Training as the
Company added to its infrastructure to support its planned expansion. 
General and administrative expenses also included $149,519 relating to
investor relations and financial printing which were minimal in fiscal 1995. 

                                   -12-

<PAGE>

     In accordance with the Company's strategy of focusing on residential and
shopping area stores, the Company recorded a provision for store closings and
reorganization costs in the second quarter of fiscal 1996 of $1,800,000, of
which $1,014,888 was a non-cash writedown of the fixed assets in five
unprofitable stores, four of which were not in residential areas. The Company
has additionally developed a more rigorous site selection process.

     Interest expense, net for fiscal 1996 decreased to $74,348 or 0.7% of
revenues, from $297,587 or 3.1% of revenues for fiscal 1995.  This decrease
resulted primarily from the paydown of debt after the Company's initial
public offering.

     The Company recorded a write-off of debt issuance costs related to the
Company's bridge financing prior to its initial public offering of $1,050,000
in the first quarter of fiscal 1996. Of the charge $1,000,000 was a non-cash
charge related to the issuance of warrants in connection with the financing.

     NET LOSS.  Net loss for fiscal 1996 increased to $5,670,951 or 50.0% of
revenues from $2,901,557 or 30.3% of revenues for fiscal 1995.  The primary
components of this increase were one-time charges totaling 25.1% of revenues
and an increase in general and administrative expenses as percentage of
revenues of 5.6%, which more than offset improvements in store operating
margins of 9.7%, primarily from decreases in cost of sales and personnel
expenses, and a reduction in interest expense as a percentage of revenues of
2.4%.

Income Taxes

     The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109).  Realization of deferred taxes is
dependent on future events and earnings, if any, the timing and extent of
which are uncertain.  Accordingly, the benefit of deferred tax assets has
been fully reserved as of December 28, 1997 and December 29, 1996.  At
December 28, 1997, the Company had net operating loss carryforwards of
approximately $11,100,000 available to offset future taxable income. These
amounts expire at various times through 2012. As a result of ownership
changes resulting from recent sales of equity securities, the Company's
ability to use the loss carryforwards is subject to limitations as defined in
Sections 382 of the Internal Revenue Code of 1986, as amended.

Liquidity and Capital Resources

     On February 27, 1997, the Company completed a private placement of
1,000,000 shares of Common Stock (the "Private Placement") realizing
approximately $1,153,000 in net proceeds. 
     
     The Company completed the sale of 375 shares of Series A Convertible
Preferred Stock, par value $.001 on June 28, 1996 realizing approximately
$3,320,000 in net proceeds after commissions and costs. 

          On May 23, 1997, the Company filed a registration statement with
the Securities and Exchange Commission on Form SB-2 relating to the sale on
a minimum basis of such number of shares of Common Stock resulting in gross
proceeds of $250,000 and on a maximum basis of such number of shares
resulting in gross proceeds of $2,500,000. The Company also filed a form S-3
to register shares on May 23, 1997.  The Company realized approximately
$2,347,000 in net proceeds from the offering of approximately 2,420,000
shares of Common Stock.  In addition, the Company satisfied obligations
totaling approximately $770,000 through the issuance of approximately 615,000
shares of Common Stock to, among others, certain vendors.

                                   -13-

<PAGE>

     On August 29, 1997 the Company completed a private placement, with an
institutional investor, of 1,142,857 shares of Common Stock, realizing
approximately $850,000 in net proceeds.  These unregistered shares are
subject to a lockup of six months with respect to fifty percent of these
shares, and a lockup of twelve months with respect to the remainder.  An
additional 57,143 shares of Common Stock were issued as commissions in
relation to this offering.

The Company plans to further satisfy its capital requirements through the
sales of franchises in 1998, sales of Company-owned stores to franchisees
which should generate free cash, conversion of existing coffee bars to coffee
bar/bagel bakeries which should generate substantial same-store sales
increases, and increasing royalty and product sale revenues from operating
franchises.  New World Coffee & Bagels, Inc. expects franchise royalty and
product sale revenue to become the most significant and stable component of
the Company's revenue structure over time.  The Company expects improved
expense structure in its stores from lower cost of goods as a percentage of
sales and lower occupancy costs as a percentage of sales, both due to the
bagel conversion program. Furthermore, during 1998 the Company renegotiated
its debt payment relating to the Willoughby's acquisition reducing the
Company's immediate working capital requirements.  In addition, the Company
may seek additional capital or debt financing from time to time.  There can
be no assurances, however, that all of these objectives will be attained.

     At December 28, 1997, the Company had a working capital deficit of
$97,705 compared to a working capital deficit of $1,086,824 at December 29,
1996.

     The Company had net cash used in operating activities of $1,392,487 for
fiscal 1997 and net cash used in operating activities of $1,973,609 for
fiscal 1996.

     The Company had net cash used in investing activities of $1,714,840 for
fiscal 1997 and $5,023,416 for fiscal 1996.  The primary use of cash for
investing activities was for capital expenditures related to the Company's
retail store expansion.

     The Company had net cash provided by financing activities of $2,836,554
for fiscal 1997 and $7,465,456 for fiscal 1996.


Seasonality and General Economic Trends

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


                       ITEM 7.  FINANCIAL STATEMENTS

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


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

     None.

                                   -14-

<PAGE>

                                 PART III

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

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

     Name                     Age            Position with the Company
     ----                     ---            -------------------------
     R. Ramin Kamfar          34             President and Chief Executive
                                             Officer
     Jerold E. Novack         42             Vice President - Finance
     Barry Levine             48             Vice President - Coffee
     Robert Williams          49             Vice President - Coffee
     Richard Windisch         37             Vice President - Operations
     Craig Ackerman           35             Director - Management
                                             Information Services
     Tim DeTraglia            33             Director - Budgets and
                                             Accounting Systems
     Harvey Elfenstein        54             Director - Real Estate
     Collin Gaffney           49             Director - Franchising
     Tony Ricci               52             Director - Franchising
     Keith F. Barket/(1)(2)   36             Director
     Karen Hogan/ (1)         36             Director
     Ronald S. Hari           56             Director
     Edward McCabe/ (2)       60             Director

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

     Mr. Kamfar has served as a director since the founding of the Company. 
Mr. Kamfar has served as President and Chief Executive Officer since May
1996. Between August 1994 and May 1996, Mr. Kamfar served as Co-President and
Co-Chief Executive Officer of the Company.  Between October 1993 and August
1994, Mr. Kamfar served as Chief Executive Officer and Chief Financial
Officer of the Company.  Between 1988 and 1993, he worked in the Investment
Banking Division of Lehman Brothers, Inc., most recently as a Vice President
in the firm's Private Placement Group.  Mr. Kamfar has a B.S. degree in
Finance from the University of Maryland and an M.B.A. degree in Finance from
The Wharton School at the University of Pennsylvania.

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

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

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

                                   -15-

<PAGE>

     Mr. Windisch rejoined the Company as Vice President - Operations in
January 1998, having served as Vice President - Operations from September
1994 to July 1996. From July 1996 to 1998, Mr. Windisch was self-employed. 
From 1983 to 1994, Mr. Windisch worked at the KFC (previously Kentucky Fried
Chicken) unit of PepsiCo Inc., most recently as Director of Operations -
Northeast Division.  Mr. Windisch has a B.B.A. degree in Marketing from the
New York Institute of Technology and an M.B.A. degree in Finance from Iona
College.

     Mr. Ackerman has served as Director - Management Information Systems
since December 1996.  Between January 1995 and December 1996, Mr. Ackerman
served as Director - Operations and Operations Support.  From 1990 to 1994,
Mr. Ackerman worked at the KFC unit of PepsiCo, Inc., initially as Division
Training Manager - Northeast Division and most recently as National Sales
Manager for the KFC Express licensing program.  Prior to 1990, Mr. Ackerman
served as an Officer in the United States Army Corps of Engineers.  Mr.
Ackerman has a B.S. degree in Computer Science from the United States
Military Academy at West Point and an M.B.A. degree in General Management
from Boston University.

     Mr. DeTraglia joined the Company in December 1994 as Director - Budgets
and Accounting Systems.  From 1993 to 1994,  Mr. DeTraglia worked at Jordache
Enterprises, Inc. as Budget Manager.  From 1989 to 1991, he served as a
Financial Analyst at Niagara Mohawk Power Corporation.  Mr. DeTraglia has a
B.A. degree from Hamilton College and an M.B.A. degree in Finance from
Syracuse University.

     Mr. Elfenstein joined the Company as Director - Real Estate in March
1998. From 1995 to 1996, Mr. Elfenstein served as Director of Real Estate for
Nutri/System, L.P.  From 1990 to 1995, Mr. Elfenstein served as Director -
Real Estate for Little Caesar Enterprises.  From 1986 to 1990, Mr. Elfenstein
served as Director of Real Estate for West Coast Video.  Mr. Elfenstein has
a B.S. degree in Accounting from Temple University.

     Mr. Gaffney joined the Company as Director - Franchising in March 1997. 
From 1992 to 1997, Mr. Gaffney was Director of Operations, Director of
Training and Director of Franchising for Manhattan Bagel Company during which
time the company grew from 9 to over 300 stores.  From 1991 to 1992, Mr.
Gaffney was a self-employed franchise and trade show consultant.  From 1989
to 1991, Mr. Gaffney was Vice President Operations for Epikur, Inc.

     Mr. Ricci joined the Company as Director - Franchising in March 1998. 
From 1997 to 1998, Mr. Ricci was employed as Manager of Franchising by 1-800-
FLOWERS.  From 1993 to 1996, Mr. Ricci owned a land development business. 
From 1990 to 1993, Mr. Ricci was a Sales Manager for the Pitney Bowes Corp. 
From 1986 to 1990, Mr. Ricci was an Account Executive for Wang Computer. 
From 1977 to 1986, Mr. Ricci was an Account Executive for Bell & Howell Co. 
 Mr. Ricci has a B.S. degree in Business Administration from St. John Fisher
College.

     Mr. Barket has served as a director of the Company since June 1995.  Mr.
Barket is the Managing Director - Real Estate for Angelo, Gordon & Co., a $2
billion hedge fund.  From 1988 to 1997, Mr. Barket was a Managing Director of
Amerimar Enterprises Inc., a real estate investment and development company
during which time he was involved in a variety of office, retail, residential
and hotel projects.  From 1984 to 1986, he worked as a senior tax accountant
with Arthur Andersen & Co. in New York City.  Mr. Barket has B.A. degree from
Georgetown University and an M.B.A. degree from The Wharton School at the
University of Pennsylvania.

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

     Mr. Hari has served as a director of the Company since February 1997. 
Mr. Hari has served as the President and Chief Executive Officer of Capico
International, a marketing, investment and consulting firm focusing in the
bakery and food industries since 1985.  Mr. Hari served as Executive Vice
President of Manhattan Bagel Company from 1994 to August 1996.  Mr. Hari has
a B.S. in Business Administration from the University of Vermont and an
M.B.A. degree in Marketing from the University of California, Los Angeles.

                                   -16-

<PAGE>

     Mr. McCabe has served as director of the Company since February 1997. 
Mr. McCabe is Chief Executive Officer of McCabe & Company, an advertising and
communications company he founded in 1991. From 1967 to 1986, Mr. McCabe
served in various capacities, most recently as President and Worldwide
Creative Director at Scali, McCabe, Sloves, Inc. an advertising agency he co-
founded and built into the tenth largest agency in the world.

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

                     ITEM 10.  EXECUTIVE COMPENSATION

Summary Compensation

     The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer for services
rendered in all capacities to the Company during 1996 and 1997, and any
executive officers of the Company who received compensation in excess of
$100,000 during 1996 and 1997 ("Named Executive Officers").

                         SUMMARY COMPENSATION TABLE


                                                                 Long
                                                                 term
                              Annual Compensation                compen-
                                                                 sation
                                                                 Awards

                                   Other          Securities
Name and                           annual         underlying     All other
Principal      Salary    Bonus     compen-        options/       compen-
Position       ($)       ($)       sation ($)     SARs (#)       sation($)
---------      ------    -----     ----------     -----------    ----------
R.  Ramin      $137,500  $28,000   $18,000(1)     200,000           -
Kamfar,
Chief
Executive 
Officer and
President

Jerold E.       110,000   27,500    12,000(1)      75,000           -
Novak, Vice
President -
Finance

Barry            75,000   30,000     6,000(1)      20,000           -
Levine(2)
Vice President-
Coffee

Robert           75,000   30,000     6,000(1)      20,000           -
Williams (2)
Vice President-
Coffee
-----------------
(1)  Represents car and commuting allowances for the respective individuals.
(2)  1996 compensation totaled $14,422.30 in salary.

                                   -17-

<PAGE>

Stock Option Grants

     Set forth below is information on grants of stock options for the Named
Executive Officers for the period December 30, 1996 to December 28, 1997.

                         OPTION GRANTS IN 1997

                           Individual Grants
                           -----------------

                                                         Potential
                                                         Realizable
                         Percentage                      Value
                         of Total                        at Assumed
                         Options                         Annual
          Number of      Granted to                      Rates of  
          Securities     Employees   Exercise            Stock Price
          Underlying     in          Price     Expira-   Appreciation
          Option         Fiscal      ($per     tion      for Option
          Granted        Year        share)    Date      Term (1)
          ----------     ----------  --------  -------   ------------

                                                            5%       10%
                                                            --       ---
 
R. Ramin  200,000(2)     44.6%       $1.50    09/23/07   $188,668 $478,123
Kamfar

Jerold E.  50,000(3)     11.2%       $2.13    02/01/07   $ 66,977 $169,734
Novack     25,000(4)      5.6%       $1.50    07/02/07   $ 23,584 $ 59,765

Barry      20,000(5)      4.5%       $1.97    10/15/07   $ 24,778 $ 62,793
Levine

Robert     20,000(5)      4.5%       $1.97    10/15/07   $ 24,778 $ 62,793
Williams
 
---------------------
(1)  The potential realizable value is calculated based on the term of the
     option at the time of grant (ten years).  Assumed stock price
     appreciation of 5%  and 10% is based on the fair value at the time of
     grant.
(2)  Options were granted on September 23, 1997 and are exercisable in three
     equal annual installments commencing on September 23, 1998.  The
     exercise price of the options is equal to the closing price on the
     Nasdaq of the Common Stock on September 23, 1997.
(3)  Options were granted on February 2, 1997 and are exercisable
     immediately.  The exercise price of the options is equal to the closing
     price on the Nasdaq of the Common Stock on February 2, 1997.
(4)  Options were granted on July 2, 1997 and are exercisable on July 2,
     1998.  The exercise price of the options is equal to the closing price
     on the Nasdaq of the Common Stock on July 2, 1997.
(5)  Options were granted on October 15, 1997 and are exercisable in four
     equal installments of 5,000 commencing on October 15, 1998.  The
     exercise price of the options is equal to the closing price on the
     Nasdaq of the Common Stock on October 15, 1997.

                                   -18-

<PAGE>

Fiscal Year-End Option Values

     The following table sets forth certain information with respect to the
stock options held at December 28, 1997 by the Company's executive officers.

                            1997 OPTION VALUES

                    Number of Securities          Value of Unexercised
                    Underlying Unexercised        In-the-Money Options
                         At Year End              at Year End ($) (1)
     Name         Exercisable  Unexercisable   Exercisable  Unexercisable
     ----         -----------  -------------   -----------  -------------

R. Ramin Kamfar     78,112         290,622        $24,783     $12,196
Jerold E. Novack   123,324          70,000        $ 2,292     $ 2,188
Barry Levine         5,000          75,000        $   0       $12,800
Robert Williams      5,000          75,000        $   0       $12,800

(1) Calculated based on an assumed share price of $1.53 per share, less the
exercise price payable for such shares.

Employment Contracts

     As of July 1996, the Company entered into a new employment agreement
with Mr. Kamfar, the Company's President and Chief Executive Officer. The
agreement expires on December 31, 1997 but is automatically renewed for
additional one-year periods commencing each January 1 unless either party
gives written notice to the other of its desire not to renew such term, which
notice must be given no later than ninety (90) days prior to the end of each
term on any such renewal. The agreement provides for a compensation package
of $137,500 per year, and an annual performance bonus of between 0% and 50%
of the base salary for calendar year 1997 and any subsequent calendar year.
Each bonus is based on the attainment of certain corporate and individual
goals. Pursuant to the agreement, Mr. Kamfar has agreed to maintain the
confidentiality of any confidential or proprietary information of the
Company.

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

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

     As of July 1997, the Company entered into an employment agreement with
Mr. Novack, the Company's Vice President - Finance.  The agreement expires on
June 30, 1998.  The agreement provides for a compensation package of $110,000
per year and an annual performance bonus of 35% to 50% of the base salary
based on the attainment of certain corporate and individual goals.  In
addition, pursuant to the agreement, the Company granted Mr. Novack options
on 25,000 shares of the Company's Common Stock, and repriced 118,324 of Mr.

                                   -19-

<PAGE>

Novack's existing options to a new strike price of $1.50.  The options were
classified as incentive stock options under the 1994 Plan.  Pursuant to the
agreement, Mr. Novack has agreed to maintain the confidentiality of any
confidential or proprietary information of the Company.

     In the event that the Company terminates Mr. Novack's employment other
than for cause, he will be paid severance compensation equal to his base
salary (at the rate payable at the time of such termination) for a period of
six months. In the event Mr. Novack and the Company fail to reach an
agreement to renew his employment contract by June 30, 1998, he will be paid
severance compensation equal to his base salary (at the rate payable at the
time of such termination) for a period of three months.  For a period of one
year following Mr. Novack's voluntary termination or termination for cause,
if the price of the Common Stock exceeds $4.00, Mr. Novack cannot perform
services for, have an equity interest (except for an interest of 5% or less
in an entity whose securities are listed on a national securities exchange)
in any business (other than the Company) or participate in the financing,
operation, management or control of, any firm, corporation or business that
engages in the marketing or sale of specialty coffee or bagels as its
principal business. 


Indemnification of Directors and Officers and Related Matters

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

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

                                   -20-

<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 20, 1998, (i) by each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than five percent of the Company's Common Stock, (ii) by
each of the named executive officers, (iii) by each of the Company's
directors and nominees, and (iv) by all directors and executive officers as
a group.  The Company believes that the persons and entities named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.

                                        Shares
                                        Beneficially
Name and Address of Beneficial Owner    Owned                    Percentage
------------------------------------    ------------             ----------
Entrprenurial Investors Ltd.........    1,142,857                9.6%
     Citibank Building, 2nd Floor
     East Mall Drive, P.O. Box 40643
     Freeport, Bahamas

R. Ramin Kamfar.....................    455,735(1)               3.8%
     Chief Executive Officer and
     President and Director

Jerold E. Novack....................    123,324 (2)              1.0%
     Vice President - Finance

Keith F. Barket.....................    47,837 (3)                  *
     Director

Ronald S. Hari......................    20,300 (4)                  *
     Director

Edward McCabe.......................    20,000 (4)                  *
     Director

Karen Hogan.........................    33,897 (5)                  *
     Director

All directors and executive officers
     as a group (6 persons).........    701,093                  5.9%
---------------------------
*    Less than one percent (1%).

(1)  Includes 78,112 shares which may be acquired upon the exercise of
     options which will be exercisable within 60 days.  Does not include
     290,622 shares underlying stock options which are not exercisable
     within 60 days.
(2)  Includes 123,324 shares which may be acquired upon the exercise of
     presently exercisable options.  Does not include 70,000 shares
     underlying stock options which are not exercisable within 60 days.
(3)  Includes 24,000 shares which may be acquired upon the exercise of
     presently exercisable options.  
(4)  Includes 20,000 shares which may be acquired upon the exercise of
     presently exercisable options.
(5)  Includes 10,000 shares which may be acquired upon the exercise of
     presently exercisable options.

         ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On May 30, 1996, the Company entered into a one year consulting
agreement with Gwenn M. Cagann whereby the Company was obligated to pay Ms.
Cagann $88,784 upon execution of such consulting agreement and $25,000 in
twelve (12) equal monthly installments.  Pursuant to such consulting

                                   -21-

<PAGE>

agreement Ms. Cagann may not directly or indirectly, without the prior
written consent of the Company, compete with the Company until June 1, 1997. 
In addition, Ms. Cagann has agreed that all confidential information relating
to the business or operations of the Company shall be treated as confidential
for a period terminating five (5) years after the end of the consulting
period thereafter except (a) as may be permitted in writing by the Company's
Board of Directors, or (b) as required by judicial or administrative process.

     Value Investing Partners, Inc. was paid a commission for selling certain
shares of the Series A Preferred Stock which was completed on June 28, 1996.
Kevin R. Greene is the Chairman and Chief Executive Officer of Value
Investing Partners, Inc.  and was a director of the Company at that time.  

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

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

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits
     3.1       Articles of incorporation(1)
     3.2       By-laws(2)
     4.1       Specimen Common Stock Certificate of Registrant(2)
     4.2       Form of Representatives' Warrant Agreement, including Form of
               Representatives Warrant(2)
     4.3       Certificate of Designation of Series B Preferred Stock(5)    
     4.4       Registration Rights Agreement by and among the Registrant and
               Barry H. Levine and Robert B. Williams(4)
     4.5       Promissory Note by and between the Registrant and Robert B.
               Williams(4)
     4.6       Promissory Note by and between the Registrant and Barry H.
               Levine(4)
     10.1      1994 Stock Plan(2)
     10.2      Employment Agreement by and between the Registrant and Barry
               H. Levine(4)
     10.3      Employment Agreement by and between the Registrant and Robert
               B. Williams(4)
     10.4      Employment Agreement with R. Ramin Kamfar(5)       
     10.5      Employment Agreement with Jerold Novack(5)
     10.6      Stock Purchase Agreement by and among Barry H. Levine, Robert
               B. Williams and Willoughby's Incorporated and the
               Registrant(4)
     10.7      Agreement with Willoughby's Incorporated(2)
     10.8      Investor Rights Agreement(2)
     10.9      Directors' Option Plan(2)
     10.10     Form of Franchise Agreement
     10.11     Form of Store Franchise Sale Agreement
     11.1      Statement re computation of per share earnings (included in
               the Financial Statements forming a part of this 10-KSB)
     21.1      List of Subsidiaries 
     27.1      Financial Data Schedule
                  
     (b) Reports on Form 8-K

          During the fourth quarter of 1996, the Company filed a Report on
Form 8-K with respect to the acquisition of Willoughby's.
- ----------
(1)  Incorporated by reference to Exhibit 3.2 from Registrant's registration
     statement on Form SB-2 (33-95764).
(2)  Incorporated by reference from Registrant's registration statement on
     Form SB-2 (33-95764).
(3)  Incorporated by reference from Registrant's Current Report on Form 8-K
     dated July 12, 1996.
(4)  Incorporated by reference from Registrant's Current Report on Form 8-K
     dated November 12, 1996.
(5)  Incorporated by reference from Registrant's Current Report on Form 10-KSB,
     for the Fiscal Year Ended December 29, 1996.

                                   -22-

<PAGE>

                               SIGNATURES

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

                                  NEW WORLD COFFEE & BAGELS, INC.


                                   By: /s/ R. RAMIN KAMFAR    Date: 4/10/98
                                      --------------------
                                        R. RAMIN KAMFAR
                                        President and 
                                        Chief Executive Officer


                                    By: /s/ JEROLD E. NOVACK   Date: 4/13/98
                                       ---------------------
                                       JEROLD E. NOVACK
                                   Vice President-Finance
                                   Chief Financial Officer

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

                                   By: /s/ R. RAMIN KAMFAR   Date:4/10/98  
                                       ------------------
                                        R. RAMIN KAMFAR
                                        Director


                                   By: /s/ KEITH BARKET      Date:4/13/98  
                                       -------------------
                                        KEITH BARKET
                                        Director

                                   By: /s/ KAREN HOGAN      Date: 4/13/98
                                       -----------------       
                                        KAREN HOGAN
                                        Director

                                   By:                      Date:
                                       -------------------
                                        RONALD S. HARI 
                                        Director

                                   By:                      Date:
                                       ---------------------
                                        EDWARD McCABE    
                                        Director<PAGE>

<PAGE>

                      NEW WORLD COFFEE & BAGELS, INC.
                      -------------------------------
                              AND SUBSIDIARY
                              ---------------


                INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                ------------------------------------------





                                                                      Page
                                                                      ----

          REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                    F-1

          FINANCIAL STATEMENTS:    

               Consolidated Balance Sheet as of December 28, 1997     F-2
               Consolidated Statements of Operations for the
               Years Ended December 28, 1997 and December 29, 1996    F-3
               Consolidated Statements of Changes in Stockholders' 
               Equity for the Years Ended December 28, 1997 and
               December 29, 1996                                      F-4
               Consolidated Statements of Cash Flows for the
               Years Ended December 28, 1997 and December 29, 1996   F-5-F-6
               Notes to Consolidated Financial Statements            F-7-F-20

PAGE
<PAGE>
   
   
                                  
              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                                   
   
   
   
   To New World Coffee & Bagels, Inc.:
   
   We have audited the accompanying consolidated balance sheet of New World
   Coffee & Bagels, Inc. (a Delaware corporation) and subsidiary as of December
   28, 1997, and the related consolidated statements of operations, changes in
   stockholders' equity and cash flows for the years ended December 28, 1997 and
   December 29, 1996.  These financial statements are the responsibility of the
   Company's management.  Our responsibility is to express an opinion on these
   financial statements based on our audits.
   
   We conducted our audits in accordance with generally accepted auditing
   standards.  Those standards require that we plan and perform the audit to
   obtain reasonable assurance about whether the financial statements are free
   of material misstatement.  An audit includes examining, on a test basis,
   evidence supporting the amounts and disclosures in the financial statements. 
   An audit also includes assessing the accounting principles used and
   significant estimates made by management, as well as evaluating the overall
   financial statement presentation.  We believe that our audits provide a
   reasonable basis for our opinion.
   
   In our opinion, the financial statements referred to above present fairly, in
   all material respects, the financial position of New World Coffee & Bagels,
   Inc. and subsidiary as of December 28, 1997 and the results of their
   operations and their cash flows for the years ended December 28, 1997 and
   December 29, 1996, in conformity with generally accepted accounting
   principles.
   
   
   
   
   /s/ ARTHUR ANDERSEN LLP
   ------------------------
   ARTHUR ANDERSEN LLP
   New York, New York
   March 13, 1998, (except with respect to the 
     matter discussed in Note 13, as to which 
     the date is March 30, 1998)
   
      PAGE
<PAGE>
           NEW WORLD COFFEE & BAGELS, INC. AND SUBSIDIARY
           ----------------------------------------------
                     CONSOLIDATED BALANCE SHEET
                     --------------------------
                         DECEMBER 28, 1997
                          ----------------
   
   
                               ASSETS
                               ------
CURRENT ASSETS:     
     Cash                                              $    1,149,013
     Franchise and other receivables                          936,015
     Inventories                                              632,606
     Prepaid expenses                                          33,914
                                                               ------
     Total current assets                                   2,751,548
   
   PROPERTY AND EQUIPMENT, net                                   6,686,807
   
   GOODWILL, net of accumulated amortization of $283,306         3,274,059
   
   OTHER ASSETS                                                  1,263,692
                                                            ---------
     Total assets                                      $   13,976,106
                                                       ===============
   
                LIABILITIES AND STOCKHOLDERS' EQUITY
                ------------------------------------
   
   CURRENT LIABILITIES:
     Accounts payable                                  $      921,576
     Accrued expenses                                       1,150,744
     Current portion of notes payable                         318,750
     Current portion of obligations under capital leases      230,869
     Other current liabilities                                227,314
                                                              -------
               Total current liabilities                    2,849,253
                                                            ---------
   
   DEFERRED RENT                                                   444,785
                                                              -------
   
   NOTES PAYABLE (Notes 5 and 13)                           2,407,953
                                                            ---------
   
   OBLIGATIONS UNDER CAPITAL LEASES                                367,926
                                                              --------
   COMMITMENTS AND CONTINGENCIES (Note 12)
   
   STOCKHOLDERS' EQUITY:
     Preferred stock, $.001 par value; 2,000,000 shares
          authorized                                             -
     Series A convertible preferred stock, $.001 par value;
          400 shares authorized, 375 shares issued, 0
          outstanding                                            -
     Series B convertible preferred stock, $.001 par value;
          225 shares authorized, 109.75 shares issued
          and outstanding                                        -
     Common Stock, $.001 par value; 20,000,000 shares 
          authorized; 11,634,143 shares issued and 
          outstanding                                          11,634
     Additional paid-in capital                            25,173,441
     Accumulated deficit                                  (17,278,886)
                                                           ----------
               Total stockholders' equity                   7,906,189
                                                            ----------
               Total liabilities and stockholders' equity $13,976,106
                                                           ==========
   
   The accompanying notes are an integral part of this consolidated balance
   sheet.
   
                                   F-2
   
      PAGE
<PAGE>
           NEW WORLD COFFEE & BAGELS, INC. AND SUBSIDIARY
           ----------------------------------------------
   
   
               CONSOLIDATED STATEMENTS OF OPERATIONS
               --------------------------------------
    FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
    -----------------------------------------------------------
   
   
                                                  1997           1996
                                                  ----           ----
   REVENUES:
     Store Sales                                $ 15,047,353  $11,340,199
     Franchise-related income (Note 1)               820,515        -
                                                  ---------      --------
                                                  15,867,868   11,340,199
   
   COST OF SALES AND RELATED OCCUPANCY COSTS       8,194,388    6,473,515
   
   STORE OPERATING EXPENSES                             4,944,235    3,521,350
                                                  ----------    ---------
          Store/franchise operating income         2,729,245    1,345,334
   
   DEPRECIATION AND AMORTIZATION                        2,281,360    1,352,961
   
   GENERAL AND ADMINISTRATIVE EXPENSES             2,978,532    2,738,975
   
   PROVISION FOR STORE CLOSINGS AND 
     REORGANIZATION COSTS                            300,000    1,800,000
   
   NONCASH CHARGE IN CONNECTION WITH THE REALIZATION
     OF ASSETS (Notes 1 and 8)                     3,480,977         -
                                                  -----------    --------
          Operating loss                          (6,311,624)  (4,546,602)
   
   INTEREST EXPENSE, net of interest income of
     $50,540 and $76,036 in 1997 and 1996,
     respectively                                    424,533       74,349
   
   WRITE-OFF OF DEBT ISSUANCE COSTS                         -        1,050,000
                                                  ----------     --------
          Net loss                               $(6,736,157) $(5,670,951)
                                                  ==========   ===========
   BASIC NET LOSS PER COMMON SHARE                $     (.80) $     (1.26)
                                                  ==========   ===========
   WEIGHTED AVERAGE NUMBER OF COMMON SHARES
     OUTSTANDING:
       Basic                                       8,442,198    4,517,801
                                                  ==========     ========
   
   The accompanying notes are an integral part of these consolidated statements.
   
                                      F-3<PAGE>
<PAGE>
   
           NEW WORLD COFFEE & BAGELS, INC. AND SUBSIDIARY
          -----------------------------------------------
     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
     ----------------------------------------------------------
    FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
    ------------------------------------------------------------
   
   <TABLE>
   <CAPTION>
   <S>                             <C>       <C>            <C>       <C>
   
                              Series A Preferred       Series B Preferred
                              Stock                    Stock
                              ------------------       ------------------
                              Shares    Amount         Shares    Amount
                              ------    ------         ------    ------
   
   BALANCE, December 31, 1995 -         $ -            -         $ -
   
   Issue of warrants in 
      connection with bridge 
      financing                    -           -            -           -
   Common stock issued in 
      connection with the 
      Initial Public Offering, 
      net of offering expenses     -           -            -           -
   Common stock issued in 
      connection with the 
      conversion of Series A,
      B and C convertible, 
      redeemable, preferred 
      stock and preferred stock
      warrants, net of 
      offering expenses       -           -            -           -
   Shares issued in connection 
      with the exercise of 
      stock options and bridge
      financing warrants      -           -            -           -
   Issuance of Series A convert-
      ible preferred stock, net 
      of offering expenses         375         -            -           -
   Common stock issued in 
      connection with the 
      conversion of Series A 
      convertible preferred 
      stock                        (55)        -            -           -
   Common stock issued in 
      connection with     
      acquisition (Note 10)        -           -            -           -
   Net loss                        -           -            -           -
   Dividends paid on Series   -           -            -           -
      A preferred stock
                              ----      ----           ----      ----
   BALANCE, December 29, 1996 320         -            -           -
   
   Shares issued in connection 
      with the exercise of 
      stock options and bridge 
      financing warrants      -           -            -           -
   Issuance of Series B 
      convertible preferred 
      stock and common stock 
      in connection with
      the conversion of
      Series A convertible 
      preferred stock              (175)       -            137.50      -
   Issuance of common stock, 
      net of offering expenses     -           -            -           -
   Common stock issued in 
      connection with the 
      conversion of Series B 
      convertible preferred 
      stock                        -           -            (27.75)     -
   Common stock issued in 
      connection with the 
      conversion of Series 
      A convertible preferred 
      stock                        (145)       -            -           -
   Common stock issued in 
      connection with 
      acquisition(Note 10)         -           -            -           -
   Net loss                        -           -            -           -
                              ----      ----           ------    ----
   BALANCE, December 28, 1997 -         $ -            109.75    $ -
                              ====      ====           ======    ====
   
   
   
   </TABLE>
   <TABLE>
   <CAPTION>
   <S>                             <C>            <C>       <C>
   
                                  Common Stock         Additional
                              ---------------------    Paid-in
                              Shares         Amount    Capital
                              ------         ------    ----------
   
   BALANCE, December 31, 1995 1,213,725      $ 1,214   $ 1,889,744
   
   Issue of warrants in 
      connection with bridge 
      financing                       -                -        246,373
   Common stock issued in 
      connection with the 
      Initial Public Offering, 
      net of offering expenses     2,500,000        2,500    10,884,920
   Common stock issued in 
      connection with the 
      conversion of Series A,
      B and C convertible, 
      redeemable, preferred 
      stock and preferred stock 
      warrants, net of 
      offering expenses         900,723          901     4,218,120
   Shares issued in connection 
      with the exercise of 
      stock options and bridge
      financing warrants        212,141          212        61,034
   Issuance of Series A convert-
      ible preferred stock, net 
      of offering expenses            -                -      3,320,189
   Common stock issued in 
      connection with the 
      conversion of Series A 
      convertible preferred 
      stock                          221,022         221           (221)
   Common stock issued in 
      connection with     
      acquisition (Note 10)           22,986          23        199,977
   Net loss                           -               -            -  
   Dividends paid on Series
      A preferred stock          -               -            -
                              ---------      ------    -----------
   
   BALANCE, December 29, 1996 5,070,597       5,071     20,820,136
   
   Shares issued in connection 
      with the exercise of 
      stock options and bridge 
      financing warrants         88,875          89          9,735
   Issuance of Series B 
      convertible preferred 
      stock and common stock 
      in connection with
      the conversion of
      Series A convertible 
      preferred stock                194,440        194            (194)
   Issuance of common stock, 
      net of offering expenses     4,620,670      4,621       4,345,423
   Common stock issued in 
      connection with the 
      conversion of Series B 
      convertible preferred 
      stock                          213,425        213            (213)
   Common stock issued in 
      connection with the 
      conversion of Series 
      A convertible preferred 
      stock                        1,411,654      1,412          (1,412)
   Common stock issued in 
      connection with  
      acquisition(Note 10)            34,482         34             (34)
   Net loss                           -             -               -
                              ----------     -------   ------------
   BALANCE, December 28, 1997 11,634,143     $11,634   $ 25,173,441
                              ==========     =======   ============
   
   
   </TABLE>
   <TABLE>
   <CAPTION>
   <S>                                  <C>            <C>
   
                                                      Total
                                   Accumulated    Stockholders'
                                     Deficit          Equity
                                   -----------    -------------
   
   BALANCE, December 31, 1995      $ (4,856,898)  $ (2,965,940)
   
   Issue of warrants in 
      connection with bridge 
      financing                               -             246,373
   Common stock issued in 
      connection with the 
      Initial Public Offering, 
      net of offering expenses                -          10,887,420
   Common stock issued in 
      connection with the 
      conversion of Series A,
      B and C convertible, 
      redeemable, preferred 
      stock and preferred stock
      warrants, net of 
      offering expenses                  -           4,219,021
   Shares issued in connection 
      with the exercise of 
      stock options and bridge
      financing warrants                 -              61,246
   Issuance of Series A convert-
      ible preferred stock, net 
      of offering expenses                    -           3,320,189
   Common stock issued in 
      connection with the 
      conversion of Series A 
      convertible preferred 
      stock                                   -               -  
   Common stock issued in 
      connection with
      acquisition (Note 10)                   -             200,000
   Net loss                               (5,670,951)    (5,670,951)
   Dividends paid on Series 
      A preferred stock                 (14,880)       (14,880)
                                   -------------  -------------
   BALANCE, December 29, 1996       (10,542,729)    10,282,478
   
   Shares issued in connection 
      with the exercise of 
      stock options and bridge 
      financing warrants                 -               9,824
   Issuance of Series B 
      convertible preferred 
      stock and common stock 
      issued in connection 
      with the conversion 
      of Series A convertible 
      preferred stock                         -                -
   Issuance of common stock, 
      net of offering expenses                -           4,350,044
   Common stock issued in 
      connection with the 
      conversion of Series B 
      convertible preferred 
      stock                                   -                -
   Common stock issued in 
      connection with the 
      conversion of Series 
      A convertible preferred 
      stock                                   -                -
   Common stock issued in 
      connection with  
      acquisition(Note 10)                    -                -
   Net loss                             (6,736,157)      (6,736,157)
                                 -------------    -------------
   BALANCE, December 28, 1997    $(17,278,886)    $  7,906,189
                                 =============    =============
   
   
   The accompanying notes are an integral part of these consolidated statements.
   
                                   F-4
   
      PAGE
<PAGE>
                  NEW WORLD COFFEE & BAGELS, INC.
                  -------------------------------
   
               CONSOLIDATED STATEMENTS OF CASH FLOWS
               -------------------------------------
    FOR THE YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996
    -----------------------------------------------------------
   
                                                     1997           1996
                                                     ----           ----
   CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                    $(6,736,157)   $(5,670,951) 
     Adjustments to reconcile net loss to 
     net cash used in operating activities-
     Noncash charge in connection with the
       realization of assets                    3,480,977          -
     Depreciation and amortization              2,281,360      1,352,961
     Employee compensation paid in
       common stock                                98,158          -
     Imputed interest on notes payable            121,039         34,881
     Gain on sales of fixed assets               (444,018)         -  
     Write-off of noncash debt issuance costs          -       1,000,000
     Changes in operating assets and liabilities-
          Receivables                             198,661        380,720
          Inventories                            (181,884)       (38,950)
          Prepaid expenses                         82,619          9,692
          Deposits and other assets              (593,935)      (263,264)
          Accounts payable                         55,478       (379,672)
          Accrued expenses                       (890,738)       296,336
          Deferred rent                          (169,500)       106,853
          Other current liabilities               227,314          -
          Changes due to restructuring and store
            closing activities-
               Provision for store closing costs
                and restructuring charges         300,000        785,112
               Payment for store closing costs
                and restructuring charges              -        (602,215)
               Write-off of fixed assets          778,139      1,014,888
                                                  -------      ----------
                  Net cash used in
                    operating activities       (1,392,487)    (1,973,609)
                                                ---------     -----------
   
   CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                       (2,140,200)    (3,604,514)
    Proceeds from sale of fixed assets            466,648          -
    Acquisitions                                       (41,288)    (1,418,902)
                                                  -------      ---------
               Net cash used in investing 
                 activities                    (1,714,840)    (5,023,416)
                                                ---------     -----------
   
   CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of Series A Convertible Preferred 
     Stock, net of issuance costs of 
     approximately $430,000                            -       3,320,189
    Issuance of common stock in connection with
     the initial public offering, net of offering
     expenses                                          -      11,063,126
    Redemption of Series C Convertible Redeemable
     Preferred Stock                                   -      (1,999,997)
    Shares issued in connection with the exercise
      of stock options and bridge financing
      warrants                                      9,375         61,246
    Issuance of common stock, net of offering 
      expenses                                  3,247,265           -
    Proceeds from bridge financing                     -         245,000
    Repayments of bridge financing                     -      (1,000,000)
    Repayments of capital leases                      (171,696)      (155,415)
    Repayments of notes payable                       (248,750)    (4,053,813)
    Dividend paid on Series A Convertible Preferred
     Stock                                             -         (14,880)
                                                  --------       --------
          Net cash provided by financing 
            activities                          2,836,554      7,465,456
                                                ---------      ---------
          Net (decrease) increase in cash        (270,773)       468,431
   
   CASH, beginning of year                           1,419,786        951,355 
                                                   ---------          -------
   CASH, end of year                                $1,149,013     $1,419,786
                                                  ==========     ==========
   
                                   F-5
   
      PAGE
<PAGE>
                                                  1997           1996
                                                     ----           ----
   
   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the period for interest,
     net of amount capitalized                  $ 362,815       $ 76,483
   
   NONCASH INVESTING AND FINANCING ACTIVITIES-
     Equipment disposed under capital leases      161,341           -
     Equipment acquired under capital leases      227,310        712,535
     Notes received from sale of fixed assets     846,347           -
     Conversion of Series A, B, and C
       Convertible Preferred Stock to Common 
       Stock                                           -       4,230,054
     Conversion of Series A Convertible
       Redeemable Preferred Stock to Common
       Stock                                    1,450,000        550,000
     Conversion of Series B Convertible
       Preferred Stock to Common Stock          1,750,000           -
     Issuance of Series B Convertible
       Preferred Stock and Common Stock issued
       in connection with the conversion of
       Series A Convertible Preferred Stock       275,000           -
     Issuance of warrants in connection with
       bridge financing                                -         246,373
     Issuance of notes related to 
       acquisitions                                    -       3,012,033
     Issuance of Common Stock related to 
       acquisition                                     -         200,000
     Issuance of Common Stock as payment of
       promissory note                            231,250           -
     Issuance of Common Stock to vendors as
       payment for property, equipment and
       services rendered                          768,750           -
   
   DETAILS OF ACQUISITIONS
     Fair value of assets acquired                     -      (1,662,672)
     Goodwill                                          -      (3,637,572)
     Liabilities assumed                               -         669,309
     Notes issued                                      -       3,012,033
     Common Stock issued                               -         200,000
                                                  --------       -------
          Net cash paid for acquisitions          $    -     $(1,418,902)
                                                  ========   ===========
   
   The accompanying notes are an integral part of these consolidated statements.
   
   
                                   F-6
      PAGE
<PAGE>
           NEW WORLD COFFEE & BAGELS, INC. AND SUBSIDIARY
           ----------------------------------------------
   
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             ------------------------------------------
              DECEMBER 28, 1997 AND DECEMBER 29, 1996
               --------------------------------------
   
   1. NATURE OF BUSINESS, ORGANIZATION
      AND SIGNIFICANT ACCOUNTING POLICIES
      -----------------------------------
   
   Nature of Business and Organization
   -----------------------------------
   New World Coffee & Bagels, Inc. ("New World" or the "Company") formerly New
   World Coffee, Inc. (a Delaware corporation) owns, operates and franchises
   coffee bars and integrated coffee bar/bagel bakeries in New York, New Jersey,
   Connecticut and Pennsylvania.  In May and July 1997, the Company launched its
   franchising program and its new integrated coffee bar/bagel bakery concept,
   respectively.  At December 28, 1997, there were 34 Company-owned stores and
   5 franchised stores under operation.
   
   Effective October 25, 1996, the Company began operating a roasting facility
   in connection with the acquisition of Willoughby's, Inc. ("Willoughby's"), a
   Connecticut corporation (Note 10).
   
   Management's Plans
   ------------------
   The strategy of the Company is to become a leading coffee bar/bagel bakery
   chain in each market in which it operates.  Each element of the Company's
   strategy is designed to differentiate and reinforce its brand identity, to
   engender customer loyalty and to position the Company as a leading coffee
   bar/bagel bakery franchisor.  The Company intends to continue its expansion
   plans through adding new franchised locations rather than Company-owned
   stores, thus reducing its capital requirements.  
   
   The Company plans to further satisfy its capital requirements through the
   sales of franchises in 1998, sales of Company-owned stores to franchisees
   which should generate free cash, conversion of existing coffee bars to coffee
   bar/bagel bakeries which should generate substantial same-store sales
   increases, and increasing royalty and product sale revenues from operating
   franchises.  New World Coffee & Bagels, Inc. expects franchise royalty and
   product sale revenue to become the most significant and stable component of
   the Company's revenue structure over time.  The Company expects improved
   expense structure in its stores from lower cost of goods as a percentage of
   sales and lower occupancy costs as a percentage of sales, both due to the
   bagel conversion program. Furthermore, during 1998 the Company renegotiated
   its debt payment relating to the Willoughby's acquisition (Note 13) reducing
   the Company's immediate working capital requirements.  In addition, the
   Company may seek additional capital or debt financing from time to time. 
   There can be no assurances, however, that all of these objectives will be
   attained.
   
                                   F-7
      PAGE
<PAGE>
Principles of Consolidation
   ---------------------------
   The consolidated financial statements herein include the accounts of the
   Company and its wholly owned subsidiary, Willoughby's.  All material
   intercompany accounts and transactions have been eliminated.
   
   Fiscal Year
   -----------
   The Company's annual accounting period ends on the Sunday closest to December
   31.  The fiscal year-end dates for 1997 and 1996 are December 28, 1997 and
   December 29, 1996, resulting in years containing 52 weeks.
   
   Inventories
   -----------
   Inventories are stated at the lower of cost or market, with cost being
   determined by the first-in, first-out method.
   
   Property and Equipment
   ----------------------
   Property and equipment are recorded at cost and include direct and
   incremental costs incurred in the development and construction of new stores. 
   Expenditures for maintenance, repairs and renewals of minor items are
   generally charged to expense as incurred.  Leasehold improvements are
   amortized over the shorter of their useful lives or the term of the related
   leases by use of the straight-line method.  Depreciation of property and
   equipment is provided using the straight-line method over the following
   estimated useful lives:
   
               Leasehold improvements        8 to 15 years
               Store equipment               3 to 7 years
               Furniture and fixtures        5 to 7 years
               Office equipment              5 years
   
   Goodwill
   --------              
   Goodwill is amortized using the straight-line method over periods ranging
   between 10 to 20 years.
   
   Capitalized Interest
   --------------------
   Interest on borrowed funds during the construction of new stores is
   capitalized.
   
   Long-lived Assets
   -----------------
   The Company's policy is to record long-lived assets at cost, amortizing these
   costs over the expected useful lives of the related assets.  In accordance
   with Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
   "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
   to Be Disposed Of," these assets are reviewed on a periodic basis for
   impairment whenever events or changes in circumstances indicate that the
   carrying amounts of the assets may not be realizable.  Furthermore, the
   assets are evaluated for continuing value and proper useful lives by
   comparison to expected future cash flows.
   
                                   F-8
   <PAGE>
   
   During 1997, the Company recorded a noncash charge to earnings of $3,480,977
   (Note 8) relating to the realizability of assets and other costs in
   accordance with SFAS 121.
   
   Franchise Fee Revenue Recognition
   ---------------------------------
   Pursuant to the franchise agreements, franchisees are required to pay an
   initial franchise fee and a monthly royalty payment equal to 5% of the
   franchisee's gross sales.  Initial franchise fees are recognized as revenue
   when the Company performs substantially all of its initial services as
   required by the franchise agreement.  Royalty fees from franchisees are
   accrued as earned.
   
   Royalty income, initial franchise fees and gains on sales of Company-owned
   stores to franchisees are included in franchise revenues.  Gains on sales of
   Company-owned stores to franchisees amounted to approximately $440,000 for
   the year ended December 28, 1997.
   
   Store Operating Costs
   ---------------------
   Store operating costs primarily consist of salaries, wages and benefits of
   store personnel, utilities and supplies.
   
   Advertising Costs
   -----------------
   The Company expenses advertising costs as incurred.
   
   Deferred Rent
   -------------
   Certain of the Company's lease agreements provide for scheduled rent
   increases during the lease term or for rental payments commencing at a date
   other than initial occupancy.  Provision has been made for the excess of
   operating lease rental expense, computed on a straight-line basis over the
   lease term, over cash rentals paid.
   
   Fair Value of Financial Instruments
   -----------------------------------
   Franchise notes receivable are estimated by discounting future cash flows
   using the current rates at which similar loans would be made to borrowers
   with similar credit ratings.  The fair value of notes payable outstanding is
   estimated by discounting the future cash flows using the current rates
   offered by lenders for similar borrowings with similar credit ratings.  The
   carrying amounts of franchise and other receivables and notes payable
   approximate their fair value.
   
   Net Loss Per Common Share
   -------------------------
   Effective December 28, 1997, the Company, as required, adopted SFAS No. 128,
   "Earnings Per Share."  In accordance with SFAS No. 128, net earnings (loss)
   per common share amounts ("basic EPS") are computed by dividing net earnings
   (loss) by the weighted average number of common shares outstanding and
   exclude any potential dilution.  Net earnings (loss) per common share amounts
   assuming dilution ("diluted EPS") are computed by reflecting potential
   dilution of the Company's securities.  Basic and diluted EPS are the same for
   the years ended December 28, 1997 and December 29, 1996, respectively, since
   all securities are considered antidilutive.  1,902,541 and 1,227,274 of
   options and warrants, respectively, were outstanding during the year and were
   not included in the computation of diluted EPS since they were considered
   antidilutive. In addition, 320 and 109.75 of convertible preferred stock,
   respectively, were outstanding and not included in the computation of diluted
   EPS since the if converted method would have had an antidilutive effect.
   
                                   F-9
   
      PAGE
<PAGE>
Income Taxes
   ------------
   The Company provides for federal and state income taxes using the liability
   method in accordance with SFAS No. 109.  SFAS No. 109 requires the
   recognition of deferred tax assets and liabilities for the expected future
   tax consequences of events that have been recognized in the Company's
   financial statements or tax returns.
   
   Stock-Based Compensation
   ------------------------
   In 1996, the Company, as required, adopted SFAS No. 123 "Accounting for Stock
   Based Compensation."  This statement establishes financial accounting and
   reporting standards for stock-based employee compensation plans.  SFAS No.
   123 encourages entities to adopt a fair-value-based method of accounting for
   stock compensation plans.  However, SFAS No. 123 also permits entities to
   continue to measure compensation costs under pre-existing accounting
   pronouncements with the requirement that pro forma disclosures of net income
   and earnings per share be included in the notes to financial statements.  The
   Company elected to adopt the disclosure requirements of SFAS No. 123 and show
   pro forma results of net loss and earnings per share data.
   
   Use of Estimates
   ----------------
   The preparation of financial statements in conformity with generally accepted
   accounting principles requires management to make estimates and assumptions
   that affect the reported amounts of assets and liabilities at the date of the
   financial statements and the reported amounts of revenues and expenses during
   the reporting period.  Actual results could differ from those estimates.
   
   Reclassifications
   -----------------
   Certain reclassifications have been made to the prior year's financial
   statements to conform to the current year presentation.
   
   2.     PROPERTY AND EQUIPMENT
     ----------------------
   Property and equipment consist of the following as of December 28, 1997:
   
   
     Leasehold improvements                            $5,916,226
     Store Equipment                                    3,529,023
     Furniture and Fixtures                             1,129,506
     Office Equipment                                   1,785,982
                                                       ----------
                                                       12,360,737
   
     Less:
          Accumulated depreciation and amortization    (3,280,502)
          Allowance for impairment of fixed assets     (2,393,428)
                                                       -----------
                                                      $ 6,686,807
                                                       ===========
   
   Approximately $158,000 of capitalized interest is included in property and
   equipment at December 28, 1997.  Depreciation and amortization expense for
   1997 and 1996 was approximately 2,067,000 and 1,390,000, respectively.
   
                                   F-10
   
      PAGE
<PAGE>
3.   FRANCHISE AND OTHER RECEIVABLES
     -------------------------------
   Franchise and other receivables consist of the following as of December 28,
   1997:
   
          Franchise notes receivable - current    $    471,614
          Other franchise related receivables           36,328
          Other                                        428,073
                                                       -------
                                                  $    936,015
                                                  ============
   
   During 1997, the Company issued promissory notes to franchisees to facilitate
   their construction of stores and provide other initial operating cash flows,
   including franchise fees.  The notes are payable with interest thereon at
   rates ranging from 6-8% per annum and are to be paid in full simultaneously
   upon the closing of a subsequent financing by the franchisee.  Should such
   financing not occur within 60 days of the date of the note, the interest rate
   increases to 12% per annum and the notes then become payable on the earlier
   of the consummation of a financing by the franchisee or will be paid in
   monthly installments based on the terms defined in the notes.  The notes have
   terms expiring from November 1999 to November 2004.  Substantially all of the
   assets of the franchisee's store are pledged as collateral for the notes. 
   The long-term portion of the franchise notes receivable is included in other
   assets (Note 4).
   
   Included in franchise notes receivable is approximately $175,000 due from
   officers of the Company related to the purchase of a Company-owned store.
   
   4.     OTHER ASSETS
     ------------
   Other assets consist of the following as of December 28, 1997:
   
          Security Deposits                       $  535,175
          Franchise notes receivable-long-term       374,733
          Other                                      353,784
                                                  ----------
                                                  $1,263,692
                                                  ==========
   
   5.     NOTES PAYABLE
     -------------
   (i) Notes payable consist of the following at December 28, 1997:
   
     Promissory note in connection with Cooper's
       acquisition (a)                            $ 577,500
     Promissory note in connection with Ridgefield
       acquisition(b)                               126,250
     Less- Discount                                 (34,413)
                                                  ----------
                                                    669,337
     Less- Current portion                          318,750
                                                  ---------
                                                  $ 350,587
                                                  =========
   
   
     (a)  In June 1996, a promissory note of $770,000 was issued by the
   Company in connection with the Coopers acquisition (Note 10).  The note is
   payable over four years in equal installments and bears interest at 6%.  The
   note was discounted using an interest rate of 10%.
   
                                   F-11
   
      PAGE
<PAGE>
     (b)  In August 1996, a promissory note of $175,000 was issued by the
   Company in connection with the Ridgefield acquisition (Note 10).  The note is
   payable over two years in equal installments bearing interest at 6%.  The
   note was discounted using an interest rate of 10%.
   
   Scheduled maturities of the notes payable as of December 28, 1997 are as
   follows:
   
          1998                               $318,750
          1999                                192,500
          2000                                192,500
                                             --------
                                             $703,750
                                             ========
   
   (ii) In addition to the notes described above, at December 28, 1997, included
   in long term notes payable are notes due in connection with the Willoughby's
   acquisition that were modified subsequent to year end (Note 13).  The notes
   will be payable in the future only through the conversion of such notes into
   common stock of the Company.  Accordingly, the carrying value of such notes,
   as discussed below, has been included in the long-term component of notes
   payable.
   
     Promissory notes in connection with
     Willoughby's acquisition (c)            $2,100,000
     Less-Discount                              (42,634)
                                             -----------
                                             $2,057,366
                                             ===========
   
   
     (c)  In connection with the acquisition of Willoughby's in October 1996
   (Note 10), a total of $2,300,000 remained due by the Company, $600,000
   payable on July 1, 1997, bearing no interest, $600,000 payable on January 5,
   1998 and $1,100,000 payable on January 5, 1999, the latter two payments
   accruing interest at 6% per annum.  The notes were further discounted using
   a 10% interest rate.
   
          During 1997, the Company paid $200,000 of the $600,000 balance due
             on July 1, 1997, with the remaining balance being initially
             extended to April 1, 1998, at an interest rate of 8.5% per annum. 
             In addition, the notes were restructured in order to extend the
             payment terms for the payment of $600,000 to April 1, 1998 and the
             payment of $1,100,000 to January 5, 1999, respectively.
   
          These notes and the scheduled maturities were further modified
             subsequent to December 28, 1997, as described in Note 13.
   
   Interest expense of approximately $315,000 and $74,000 was recorded in 1997
   and 1996, respectively, for the notes payable related to the acquisitions of
   Willoughby's, Coopers and Ridgefield.
   
   6.     ACCRUED EXPENSES
     ----------------
   Accrued expenses at December 28, 1997 consist of the following:
   
          Reserve in connection with
          realization of assets (Notes
          1 and 8)                           $622,053
          Accrued payroll                     205,754
          Other                               322,937
                                             --------
                                            $1,150,744
                                             =========
   
   
   7.     PROVISION FOR STORE CLOSINGS
     AND REORGANIZATION COSTS
     ------------------------
   During 1996, the Company recorded a provision for store closings and
   reorganization costs of $1,500,000 to provide for the closing of five
   
                                   F-12
   
      PAGE
<PAGE>
unprofitable stores.  This represents a provision for writedowns of property
   and equipment of $1,000,000 and provides for an additional accrual of
   $500,000 for other closure costs, which include losses for continuing lease
   payments on closed stores, severance for store employees, and other related
   costs to close the stores.  In addition, the Company provided for a
   reorganization charge of $300,000 which primarily consisted of severance and
   related benefits.  During 1997, the Company provided for additional $300,000
   provision relating to a shortfall in the provision for store closings
   originally provided for in 1996.  All stores provided for were closed as of
   December 28, 1997 and no additional reserve has been provided by the Company.
   
   8.     NONCASH CHARGE IN CONNECTION 
     WITH THE REALIZATION OF ASSETS
     ------------------------------
   
   During 1997, the Company recorded a noncash charge to earnings of
   approximately $3.5 million in accordance with SFAS 121 and in line with the
   Company's strategy to expand the franchising program through the opening of
   new franchised locations as well as franchising Company-owned stores.  This
   charge includes approximately $3.1 million of changes relating to the book
   value of the fixed assets of certain stores, $121,000 writedown of net
   goodwill related to the Ridgefield acquisition (Note 10) and certain other
   costs.  The carrying values of the stores were written down to estimated
   future discounted cash flows. 
   
   9.     STOCKHOLDERS' EQUITY
     --------------------
   
   Initial Public Offering
   -----------------------
   In February 1996, the Company completed its Initial Public Offering ("IPO")
   of 2,500,000 shares of common stock at a purchase price of $5.50 per share,
   for aggregate net proceeds of approximately $11.1 million.  A portion of the
   proceeds was used to repay the outstanding balance under the Company's then
   existing line of credit agreement ($3,500,000), the bridge financing
   ($1,000,000) and the redeemable Series C Preferred Stock ($1,999,997).  Also,
   in connection with the IPO, the Convertible Redeemable Preferred Stock Series
   A, B, and C were converted into common stock of the Company.
   
   Bridge Financing
   ----------------
   In December 1995 and January 1996, the Company received $1,000,000 in bridge
   financing from a group of lenders, which included $200,000 from certain
   related parties.  This borrowing bore interest at 10% and was repaid from the
   proceeds of the IPO.  In conjunction with this bridge financing, the Company
   issued warrants to purchase 181,818 shares at an exercise price of $.01 per
   share, of which 147,200 warrants were exercised in 1996.  The Company
   recorded a write-off of debt issuance costs related to the repayment of the
   bridge financing of $1,050,000, which has been reflected in the consolidated
   statement of operations for the year ended December 29, 1996.
   
   Stock Subscription Note Receivable
   ----------------------------------
   In October 1994, an officer of the Company purchased 29,213 shares of
   Redeemable Convertible Series A stock for cash and a promissory note totaling
   $80,000.  Such shares were converted to 17,035 shares of common stock by the
   officer.  The promissory note, which bears interest at 4.5% per annum,
   originally matured March 15, 1998, but was extended to March 15, 1999.  The
   shares of common stock issued have been pledged as collateral.
   
                                   F-13
   
      PAGE
<PAGE>
Preferred Stock Redeemed
   ------------------------
   On July 21, 1995, the Company entered into an agreement with a Series C
   preferred stockholder to purchase all the Preferred Stock and common stock,
   if such preferred stockholder exercised his conversion rights, for $1,999,997
   in cash and a warrant to purchase 87,469 shares of common stock at an
   exercise price of $.017 per share.  On December 29, 1995, the agreement was
   amended to extend the repurchase right until March 31, 1996.  In connection
   with the amendment, the Company issued an additional warrant to purchase
   25,000 shares at an exercise price of $.01 per share.  Under the terms of the
   agreement, as amended, the Company repurchased the stock at the closing of
   the Company's initial public offering in February 1996.  All warrants issued
   in connection with this Redeemable Preferred Stock were exercised upon
   completion of the Company's IPO.
   
   Series A and Series B Convertible Preferred Stock
   -------------------------------------------------
   In 1996, the Company completed the sale of 375 shares of Series A Convertible
   Preferred Stock, generating approximately $3,320,000 in net proceeds after
   commissions and costs of approximately $430,000.  During 1996, certain
   individuals exercised their rights and converted 55 shares of Series A
   Convertible Preferred Stock into 221,022 shares of Common Stock. 
   
   In the event of a transaction or series of transactions by the Company in
   which more than 50% of the voting power is transferred, the holders of the
   Series A Convertible Preferred Stock have the option of redeeming their
   shares at a redemption price equal to the original price of the stock
   purchased plus an amount equal to eight percent per annum of the original
   price from the date of original purchase through the date of redemption.   In
   addition, the holders have certain liquidation preferences and dividend or
   voting rights and they may convert into common shares at a conversion price
   calculation as set forth in the Certificate of Designation of Series A
   Convertible Preferred Stock Agreement. 
   
   In 1997, the Company repurchased 175 shares of the Series A Convertible
   Preferred Stock from certain holders and in exchange issued 137.5 shares of
   Series B Convertible Preferred Stock, $.001 par value, and issued 194,440
   shares of unregistered shares of common stock, par value $.001 per share. 
   The Series B Convertible Preferred Stock bears no dividend and has limited
   voting rights except as provided under the General Corporation Law of the
   State of Delaware.  The stock is convertible into shares of common stock in
   accordance with the Certificate of Designation of Series B Convertible
   Preferred Stock. 
   
   Additionally, during 1997, the remaining 145 shares of the Series A
   Convertible Preferred Stock were converted into 1,411,654 shares of Common
   Stock. 
   
   In 1997, 27.75 shares of the Series B Convertible Preferred Stock were
   converted into 213,425 shares of Common Stock.
   
                                   F-14
   
      PAGE
<PAGE>
Common Stock
   ------------
   On February 27, 1997, the Company completed a private placement of 1,000,000
   unregistered shares of common stock, realizing approximately $1,153,000 in
   net proceeds after expenses of approximately $221,000.
   
   On August 29, 1997, the Company completed a private placement of 1,142,857
   unregistered shares of common stock, realizing approximately $845,000 in net
   proceeds after expenses of approximately $154,000.  Additionally, 57,143
   shares of common stock were issued as commission in connection with this
   placement.
   
   On May 23, 1997, the Company completed a secondary public offering and a
   subsequent filing to register and issue additional shares of common stock. 
   1,898,806 and 521,864 shares of common stock were issued, respectively, at a
   purchase price of $1.25 per share, realizing approximately $2,347,000 in net
   proceeds after expenses of approximately $679,000.  308,000 and 307,000
   shares of common stock, respectively, were issued to vendors as payment for
   the fair value of property, equipment and other services received by the
   Company.  In addition, 58,526 and 205,000 of shares of common stock,
   respectively, were issued as payment for notes payable and employee
   compensation.
   
   Warrants
   --------
   As of December 28, 1997, the Company has 807,927 warrants outstanding.  These
   warrants have exercise prices ranging from $.01 - $9.08 per share and have
   terms ranging from 5 to 10 years.  Such warrants were issued in connection
   with the bridge loan financing and certain other services.
   
   Stock Options
   -------------
   The Company's 1994 Stock Plan (the "1994 Plan") provides for the granting to
   employees of incentive stock options and for the granting to employees and
   consultants of nonstatutory stock options and stock purchase rights.  Unless
   terminated sooner, the 1994 Plan will terminate automatically in August 2004. 
   The Board of Directors has the authority to amend, suspend or terminate the
   1994 Plan, subject to any required stockholder approval under applicable law,
   provided that no such action may affect any share of common stock previously
   issued and sold or any option previously granted under the 1994 Plan.
   
   Options generally become exercisable in ratable installments over a four-year
   period.  A total of 750,000 shares of common stock is currently reserved for
   issuance pursuant to the 1994 Plan.  There were 6,568 shares available for
   grant under the 1994 Plan at December 28, 1997.  
   
   On April 25, 1997, 137,658 of options previously granted were repriced at the
   fair value of the Company's common stock at that date.  These options were
   revalued to reflect the new exercise price, and the incremental compensation
   expense was recognized in 1997 and included in the pro forma amounts
   disclosed below.  In addition, in 1997 the Company granted 70,000 board-
   approved options to two officers outside of the 1994 Plan and the Directors'
   Option Plan.
   
   The Company's 1995 Directors' Stock Option Plan (the "Directors' Option
   Plan") was adopted by the Board of Directors and approved by the Company's
   shareholders in August 1995.  Unless terminated sooner, the Director's Option
   Plan will terminate automatically in August, 2005.  The Board of Directors
   may amend or terminate the Directors' Option Plan at any time; provided,
   however, that no such action may adversely affect any outstanding option
   
                                   F-15
   
      PAGE
<PAGE>
without the optionee's consent and the provisions affecting the grant and
   terms of options may not be amended more than once during any six-month
   period.  A total of 200,000 shares of common stock has been reserved for
   issuance under the Directors' Option Plan.  The Directors' Option Plan
   provides for the automatic grant of nonstatutory stock options to nonemployee
   directors of the Company.  These options vest immediately upon grant.  A
   total of 144,000 and 66,000 options were granted under the Directors' Option
   Plan as of December 28, 1997 and December 29, 1996, respectively.  A total of
   56,000 shares were available for grant under the Directors' Option Plan as of
   December 28, 1997.
   
   A summary of the status of the Company's two stock option plans at December
   28, 1997 and December 29, 1996, and changes during the years then ended is
   presented in the table and narrative below:
   
                                        1997                1996
                                   -----------------   -----------------
                                             Weighted            Weighted
                                             Average             Average
                                             Exercise            Exercise
                                   Options   Price     Options   Price
                                   -------   -----     -------   ------
   
   Outstanding, beginning of year  564,876   $3.09     202,750   $1.99
    Grant                          619,738    1.78     439,300    3.52
    Exercised                         -        -       (29,156)   2.37
    Forfeited                      (90,000)   2.46     (48,018)   3.74
                                   -------             --------
   Outstanding, end of year           1,094,614    2.48     564,876    3.09
                                 ---------             --------  
   Exercisable, end of year             476,960             205,943
                                   =======             =======
   Weighted average, fair value of
    options granted                $   .99             $  1.70
                                   =======             =======
   
   The following table summarizes information about stock options outstanding at
   December 28, 1997.
   
                         Weighted
            Number       Average                  Number
          Outstanding    Remaining   Weighted     Exercisable    Weighted
   Exercise    at December  Contractual   Average      at December    Average
   Prices 28, 1997       Life      Exercise Price   28, 1997   Exercise Price
   -------     ----------     --------  -------------- ----------   -----------
   $.77-$.85      89,415       8.32          $.85        89,415       $.85
   1.20-2.00     679,455       9.13          1.65       157,140       1.76
   2.13-5.50     325,744       8.90          3.29       230,405       3.50
            -------                               ---------
          1,094,614                                476,960
          =========                                =======
                                   F-16
      PAGE
<PAGE>
SFAS No. 123
   ------------
   Had compensation cost for these plans been determined consistent with SFAS
   No. 123, the Company's net income and earnings per share would have been
   reduced to the following pro forma amounts:
   
                                        1997           1996
                                        ----           ----
   Net loss:
     As reported                   $(6,736,157)     $(5,670,951)
     Pro forma                      (7,118,522)      (5,798,364)
   
   Basic net loss per common share:
     As reported                          (.80)           (1.26)
     Pro forma                            (.84)           (1.28)
   
   Diluted net loss per common share:
     As reported                          (.80)           (1.26)
     Pro forma                            (.84)           (1.28)
   
   The fair value of each option grant is estimated on the date of grant using
   the Black-Scholes option pricing model with the following weighted-average
   assumptions used for grants in 1997 and 1996, respectively: risk-free
   interest rates of 6.2% and 6.1%; expected dividend yields of 0%; expected
   lives of 5 years; expected stock price volatility of 57% and 51%.
   
   10.    ACQUISITIONS
     ------------
   
   On October 25, 1996, the Company purchased five Willoughby's locations (plus
   one under construction) and its roasting facility by acquiring the common
   stock of Willoughby's for total consideration of $3,100,000 (net of acquired
   debt of $700,000 paid at closing).  This amount consisted of $600,000 cash
   paid at the closing with an additional $600,000 due on July 1, 1997, $200,000
   worth of restricted shares of the Company's common stock, and two promissory
   notes totaling $1,700,000 (Notes 5 and 13).  The purchase price was allocated
   to the assets acquired and liabilities assumed based on their fair market
   value at the date of acquisition and the difference between the cost of
   acquiring the assets and the underlying fair market value of the net assets
   acquired was treated as goodwill, which is being amortized over 20 years.  In
   connection with the acquisition, the former shareholders of Willoughby's
   signed employment agreements with the Company which terminate in January
   1999.
   
   On June 13, 1996, the Company purchased three Coopers Coffee Bar ("Coopers")
   locations for $242,500 cash and a $770,000 note payable (Note 5).  The
   purchase price was allocated to the assets acquired based on their fair value
   at the date of acquisition and the difference between the cost of acquiring
   the locations, and the fair value of the net assets acquired was allocated to
   goodwill and is being amortized over 10 years.
   
   On August 26, 1996 the Company purchased the Ridgefield Coffee Company store
   ("Ridgefield") for $150,000 cash and a $175,000 note payable (Note 5).  The
   purchase price was allocated to the assets acquired based on their fair value
   at the date of acquisition and the difference between the cost of acquiring
   the locations and the fair value of the net assets acquired was allocated to
   goodwill.  During 1997, the remaining net goodwill of approximately $120,000
   was written off in accordance with SFAS 121 (Notes 1 and 8).
   
                                   F-17
   
      PAGE
<PAGE>
The consolidated statements of operations of the Company include the results
   of Willoughby's, Ridgefield and Coopers since the date of acquisition.
   
   Following is the unaudited pro forma presentation as if the purchase of the
   three Coopers locations, the acquisition of the stock of Willoughby's, the
   one Ridgefield location, and the closing of five unprofitable stores (Note 7)
   had occurred on January 1, 1996 (Unaudited):
   
               Revenue                  $14,149,000
               Store operating income     2,127,000
               Operating loss            (2,399,000)
               Net loss                  (5,430,000)
               Net loss per share             (1.20)
   
   The unaudited pro forma financial statements for 1996 include accrued store
   closing and restructuring costs of $1,800,000 and the write-off of debt
   issuance costs related to the bridge financing of $1,050,000.  The statements
   do not reflect the operating and net income benefit of $513,000 if the store
   closings had occurred as of January 1, 1996.
   
   The pro forma information presented above does not purport to be indicative
   of the results that actually would have been obtained if the combined
   operations had been conducted during the periods presented, nor does it
   purport to be indicative of future periods of the combined operations.
   
   11.    INCOME TAXES
   
   A summary of the significant components of deferred assets as of December 28,
   1997 is as follows:
   
     Operating loss carryforwards                 $(4,870,000)
     Non cash charge in connection with the
       realization of assets                       (1,531,000)
     Depreciation                                    (350,000)
     Other                                           (185,000)
                                                     ---------
               Deferred tax assets                  6,936,000
   
     Valuation allowance                           (6,936,000)
                                                   -----------
                                                  $      -
                                                  ============
   
   The Company has recorded a full valuation allowance against its deferred tax
   assets due to the uncertainty as to their future realization.  The change in
   the valuation allowance during 1997 was an increase of approximately
   $2,800,000.
   
   At December 28, 1997, the Company had net operating loss carryforwards of
   approximately $11.1 million available to offset future taxable income for
   federal income tax purposes.  These net operating loss carryforwards expire
   on various dates through 2012.  The Company's ability to utilize its net
   operating loss carryforwards may be subject to annual limitations in future
   periods pursuant to the "change in ownership rules" under Section 382
   of the Internal Revenue Code, as amended.
   
                                   F-18
   
      PAGE
<PAGE>
12.  COMMITMENTS AND CONTINGENCIES
     -----------------------------
   
   Operating Leases
   ----------------
   The Company leases office and retail space under various noncancelable
   operating leases.  Property leases normally require payment of a minimum
   annual rental plus a pro rata share of certain landlord operating expenses.
   
   As of December 28, 1997, approximate future minimum rental payments under
   noncancelable operating leases for the next five years and the period
   thereafter are as follows:
   
          Year ending:
               1998                               $2,851,994
               1999                                2,808,540
               2000                                2,823,604
               2001                                2,806,249
               2002                                2,707,577
               Thereafter                         11,830,171
                                                  ----------
                                                 $25,828,135
                                                  ==========
   
   Rent expense under operating leases was approximately $2,865,000 and
   $2,650,000 for the years ended December 28, 1997 and December 29, 1996,
   respectively.
   
   Capital Leases
   --------------
   The Company has capital leases for certain equipment used in its stores and
   offices.  As of December 28, 1997, remaining payments under such capital
   leases are as follows:
   
          Year ending:
               1998                               $ 378,425
               1999                                 316,117
               2000                                 117,447
               2001                                   2,077
                                                       ----
                                                    814,066
   
               Less- Amount representing
                    interest                       (215,271)
                                                    -------
                                                    598,795
               Less- Current portion                230,869
                                                    -------
                                                  $ 367,926
                                                  =========
   
   Employment Agreements
   ---------------------
   
   The Company has entered into employment agreements with four officers of the
   Company expiring between June 1998 and January 1999.  Minimum base salaries
   and bonuses for the term of these employment agreements total approximately
   $774,750, of which the Company is committed to pay $387,375 after December
   28, 1997.  In addition, the contracts provide for certain severance payments
   upon termination other than for cause or other events.
   
                                   F-19
   
      PAGE
<PAGE>
Contingencies
   -------------
   From time to time, the Company is a party to litigation arising in the normal
   course of its business operations.  In the opinion of management and counsel,
   it is not anticipated that the settlement or resolution of any such matters
   will have a material adverse impact in the Company's financial condition,
   liquidity or results of operations.
   
   13.    SUBSEQUENT EVENT
     ----------------
   Pursuant to the Modification Agreement dated March 30, 1998, the payment
   terms of the remaining principal amounts payable of $2,100,000 related to the
   Willoughby's acquisition (Note 5 (c)) were amended.  In accordance with the
   Modification Agreement, all payments of principal and interest shall be
   effected only through the conversion of these notes into common stock
   commencing on certain dates through March 1999.  The conversions of the notes
   into common stock, and sales of such shares, will be effected at such time as
   shall be determined by the holder of the notes, subject to certain
   limitations. 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                                        F-20
   
</TABLE>