<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB

(Mark One)
 [X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES AND EXCHANGE ACT OF 1934
         FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
                                       OR
 [  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR
         15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

              FOR THE TRANSITION PERIOD FROM ________ TO ________

                        Commission file number 0-21837

                         ALL AMERICAN FOOD GROUP, INC.
          -----------------------------------------------------------
           (Name of Small Business Issuer in Its Charter) New Jersey

(State or other jurisdiction of (I.R.S. Employer incorporation or organization)
                        Identification No.) 22-3259558

             104 New Era Drive, South Plainfield, New Jersey 07006
             -----------------------------------------------------
              (Address of Principal Executive Offices) (Zip Code)

Issuer's telephone number, including area code: (908) 757-3022

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

                          Common Stock, No Par Value
                          --------------------------
                                Title of Class

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]

State issuer's revenues for its most recent fiscal year. $2,809,885.


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The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock on October 31,
1997 was $1,124,886.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS The number of
outstanding shares of Common Stock of the registrant as of October 31, 1997
was 5,924,397.

              DOCUMENTS INCORPORATED BY REFERENCE: Not Applicable

Transitional Small Business Disclosure Format (Check One): Yes      No  X
                                                              -----   -----



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                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                         PAGE
                                                                                         ----
<S>                                                                                      <C>
PART I                                                                                   1
         ITEM 1.      DESCRIPTION OF BUSINESS                                            1
         ITEM 2.      DESCRIPTION OF PROPERTY                                            16
         ITEM 3.      LEGAL PROCEEDINGS                                                  17
         ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                17

PART II                                                                                  18
         ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED
                      STOCKHOLDER MATTERS                                                18
         ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS
                      OR PLAN OF OPERATION                                               20
         ITEM 7.      FINANCIAL STATEMENTS                                               22
         ITEM 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTINGAND FINANCIAL DISCLOSURE                              22

PART III                                                                                 23
         ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
                      OF THE EXCHANGE ACT                                                23
         ITEM 10.     EXECUTIVE COMPENSATION                                             25
         ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                      AND MANAGEMENT                                                     26
         ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                     28
         ITEM 13.     EXHIBITS, LISTS AND REPORTS ON FORM 8-K                            29
</TABLE>



<PAGE>


PART I

ITEM 1.           DESCRIPTION OF BUSINESS

OVERVIEW

    All American Food Group, Inc. (together with its wholly owned
subsidiaries, the "Company") franchises two distinct bagel store concepts,
distributes bagel bakery equipment and currently operates ten retail bagel
stores. All of the Company's bagels are prepared using the Company's
proprietary bagel mix and dough conditioner, in the "Old World" style, by
first boiling and then baking the dough using the Company's own bagel kettle
and bagel oven. The Company believes that this process and the use of its
proprietary ingredients and its equipment ensure the consistent preparation of
premium quality bagels with a shine, crust, texture and overall flavor that
distinguish its products from those of its competitors.

    The Company franchises its concepts and operates its bagel stores under
the names "Goldberg's Original Old World Bagels" ("Goldberg's"), "Sammy's New
York Bagels" ("Sammy's") and variations thereof. Stores franchised under the
Goldberg's name and concept offer a traditional bagel/delicatessen menu,
consisting of bagels, spreads, sandwiches, salads, soups and "appetizing"
bakery items. Sammy's stores differ from Goldberg's stores in that they offer
bagels and related dairy items in a kosher store, under national Kof-K Kosher
Supervision. Management believes that Sammy's is the only franchised food
chain subject to national kosher certification currently available in the
United States.

    As of October 31, 1997, the Company's retail system consisted of nineteen
Goldberg's and eight Sammy's stores located in nine states, including eight
Goldberg's and two Sammy's stores owned and operated by the Company and eleven
Goldberg's and six Sammy's stores operated under franchise or license
arrangements with the Company.

    The Company also distributes and services its bagel bakery equipment for
use by its franchisees. The Company's equipment utilizes the old-fashioned
method of boiling, then baking bagels with revolving tray ovens. Management
believes that the Company is the only franchisor of bagel stores that provides
bagel equipment directly to its franchisees.

    The Company will seek to expand its retail operations primarily through
franchising, and to a lesser extent, through acquisitions in key markets.
Management believes that food service franchising in general, and the
franchising of bagel restaurants in particular, present a unique opportunity
for success in the current consumer and franchise markets. See "-- The Bagel
Business."

    PLAN OF OPERATIONS


    The Company will seek to increase its revenue, thereby generating

operating cash flow in the future, by implementing the following actions:

    - Expanding franchise operations. The Company will seek to increase the sale
of franchises by (i) advertising in national and regional publications and
business magazines and (ii) upgrading its promotional material. In addition,
depending upon the availability and utilization of existing staff, the
Company may hire additional sales personnel. The Company also will seek to
increase its sale of franchises by opening additional Company-owned flagship
stores to generate interest from experienced multi-store developers to enter
into 



<PAGE>


multi-unit Market Development Agreements. Management anticipates that the
sale of additional franchise territories and the opening of additional stores
in such territories should result in increases in franchise revenues.

    - Increasing product sales. The Company will seek to open new Company-owned
retail stores and expects increased sales from its commissary to new franchise
stores. The Company continuously develops new products, such as its new line of
Soup Chef(TM) specialty soups, which management believes will lead to increased
sales as the variety of products grows. The Company has retained an advertising
firm to help increase store revenues, increase franchise sales and promote brand
name recognition. See "-- Advertising."

    - Making acquisitions. The Company will seek to acquire other bagel stores
or complementary outlets which provide entry into new markets. Management
anticipates that, over a period of time, these acquisitions will increase
revenues significantly.

HISTORY OF THE COMPANY

The Company was formed for the purpose of establishing a chain of franchised
bagel restaurants using the recipes, procedures, experience and expertise of
an existing, well-seasoned bagel restaurant and bakery operation. In October
1993, the Company acquired all the assets of Howberg Bakery Equipment Co.,
Inc. (the "Equipment Company"), Bagels of New Milford, Inc. and Goldberg's
Famous Bagels of Orangeburg, Inc. (together, the "Goldberg Companies"), each a
retail and wholesale bagel and related foodstuff company. (The Goldberg family
continues to operate ten bagel stores that are not affiliated with the Company
and, subject to certain noncompetition covenants, may open additional stores
in the future.) 

    The assets of the Goldberg Companies consisted of two bagel stores
operated by the Goldberg family of Westwood, New Jersey (one of which
subsequently was sold), including the exclusive franchise rights to the
recipes, flour, mixes and proprietary equipment used in these stores. The
Goldberg family has been operating retail bagel shops for over 50 years under
variations of the Goldberg name.

    The Equipment Company was engaged in the manufacture, assembly, sale and
servicing of equipment used in the production of bagels. In connection with
the sale of equipment, the Equipment Company also provided consulting services
in the area of store design, equipment layout, training, food preparation and
virtually all other aspects of the retail food business. The Company currently
operates the business of the Equipment Company under the name "All American
Equipment Company."

    On September 29, 1994, the Company completed the acquisition of 100% of
the outstanding stock of four interrelated corporations (the "Sammy's
Companies") operating three retail stores (one of which subsequently was sold)
and a commissary under the trade name "Sammy's New York Bagels."

    Since its acquisition of the Goldberg's and Sammy's stores, the Company

has engaged in an extensive process of analyzing, standardizing and
documenting all aspects of its retail bagel operations, preparing franchise
materials and developing its franchise system and program. In addition, it
retrofitted one of the Goldberg's locations to serve as a prototype store for
purposes of marketing franchises and training personnel.

    The Company was incorporated as a subsidiary of Jutland Enterprises Inc.
("Enterprises") under the laws of 


                                       2


<PAGE>

the State of New Jersey on September 27, 1993, under the name "Jutland Food
Group, Inc." and changed its name to "All American Food Group, Inc." on
October 24, 1995.

    On December 17, 1996 the Company completed an initial public offering of
1,100,000 shares of its Common Stock at a price to the public of $3.50 per
share, yielding net proceeds to the Company of $2,752,000. On January 9, 1997
the underwriters of the initial public offering exercised their over-allotment
option by purchasing an additional 165,000 shares at a price of $3.50 per
share yielding net proceeds to the Company of $483,000.

    In July 1997, the Company sold $900,000 of convertible debentures pursuant
to an exemption under Regulation S. In August 1997, the Company sold an
additional $50,000 of Convertible Debentures through private placement under
Regulation D. The Company obtained $1,300,000 of financing in the form of 6%
Convertible Debentures on September 16, 1997. The debentures so sold by the
Company were convertible into Common Stock of the Company at varying discounts
to the then market price of the Common Stock (see Note 18 to the Company's
Financial Statements included herewith). During fiscal 1997 the Company issued
1,052,367 shares of Common Stock upon conversion of such debentures.

    The Company's executive offices are located at 104 New Era Drive, South
Plainfield, New Jersey 07080 and its telephone numbers are (908) 757-3022.

    THE BAGEL BUSINESS

    Management believes that food service franchising in general, and the
franchising of bagel restaurants in particular, present a unique opportunity
for success in the current consumer and franchise markets. According to
industry and government statistics, U.S. per capita bagel consumption is
growing at the rate of 8% annually and U.S. per capita consumption (currently
an average of eight bagels per person annually) rose 45% over the last five
years. Management also believes that this increased demand for bagels arises
primarily from increased consumer demand for healthier, low-fat food products
and that the versatility, convenience and relatively low price of bagels add
to their appeal.

    Inasmuch as most flavors of bagels have no fat or cholesterol, they
represent an attractive alternative to doughnuts, pastries and other breakfast
baked goods, while at the same time offering substantially more versatility
and variety than more traditional bread products. Further, because bagels can
be used in sandwiches, bagel restaurants can be expected to attract customers
throughout the day. Management believes that lunch time business accounts for
approximately 40% of a typical bagel store's daily business. And, since
customers frequently desire to purchase bagels for home consumption, bagel
restaurants also can rely upon take-out trade for a significant portion of
their revenues.

    While bagels historically have been a staple ethnic food along the East
Coast and in certain other urban areas throughout the country, management
believes that there is a substantial potential market in smaller urban and
suburban areas. Further, until recently the retail bagel industry has been

composed almost exclusively of one and two-store operations and a few larger
regional chains, some of which have indicated the intention to expand to a
national scope. Management believes that there is a significant market for
high quality bagels and that there is a significant market niche for companies
able to provide such bagels on a consistent basis through a nationwide system
of retail outlets. The Company believes that its system of producing bagels in
each store using proprietary ingredients and its equipment is the optimal
method for delivering fresh, consistently high quality products to a large and
geographically dispersed market.


                                       3


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COMPETITIVE STRENGTHS

Management believes that the Company has a unique combination of
characteristics that will help it to successfully build a nationwide chain of
franchised bagel restaurants under both of its concepts. The Company's key
competitive strengths include the following:

        Quality Products. Management believes that the key to the Company's
    success lies with the quality of its products. Therefore, all of the
    Company's bagels are prepared, in the "Old World" style, using the
    Company's proprietary bagel mix and dough conditioner, by first boiling
    and then baking the dough using the Company's bagel kettle and bagel oven.
    The Company believes that this process and the use of its proprietary
    ingredients and its equipment results in premium quality bagels with a
    shine, crust, texture and overall flavor that distinguish its products
    from those of its competitors. Bagels sold in Goldberg's restaurants are
    produced on-site, in order to provide continuous availability of
    oven-fresh products. In order to ensure full compliance with the
    requirements for kosher certification, the Company produces pre-formed,
    uncooked bagels for its Sammy's stores at its central commissary in Lodi,
    New Jersey and ships such bagels frozen to the stores on a weekly basis
    for on-site preparation. See "-- Kosher Certification and Supervision."

        Experience. The Company's products and operating systems were
    developed based on the experience of the Goldberg family of Westwood, New
    Jersey during the 58 years of operation of its family-owned bagel shops.
    Based on this half century of experience and management's experience in
    operating and franchising other food concepts, the Company has analyzed,
    standardized and documented all aspects of its retail bagel operations to
    develop its operating and franchise systems. See "-- Franchising" and
    "Management."

        Complementary Concepts. Management believes that the Company's
    franchise program is unique in offering two complementary bagel concepts
    -- Goldberg's, which offers a traditional bagel/delicates- sen menu, and
    Sammy's, which offers bagels and related dairy items in a kosher store.
    Management believes that the availability of these two complementary
    concepts uniquely positions the Company to benefit from economies of scale
    in purchasing, while permitting it to penetrate distinct segments of the
    bagel market.

        Kosher Concept and Production Facilities. Management believes that
    Sammy's is the only franchised food chain subject to national kosher
    certification currently available in the United States. Kof-K Kosher
    Supervision estimates that the kosher market currently generates over $2
    billion in sales annually from 20,000 certified kosher products. With over
    6 million Jews nationally, another 6 million Muslims and Seventh Day
    Adventists subject to similar dietary restrictions, and a significant
    segment of the secular market that views kosher certification as a sign of
    high quality, authenticity and careful preparation, this market has
    experienced average annual sales growth of 20% or more since 1990. In

    order to ensure consistency in the quality of its products and achieve
    economies in kosher supervision, the Company operates a central commissary
    from which all Sammy's stores receive frozen, pre-formed, uncooked bagels
    on a weekly basis for on-premises preparation. Management anticipates
    that, in the future, it will utilize this facility for the production of
    bagels for sale to Goldberg's as well as Sammy's franchisees. See "--
    Properties."

        Equipment Business. Management believes that the Company is unique in
    designing and distributing its bagel bakery proprietary equipment and in
    its ability to provide consulting services in all areas of the retail
    bagel business, including store design, equipment layout, training and
    food preparation. Management also believes that these unique capabilities
    provide the Company with a distinct advantage in equipping and 


                                       4


<PAGE>


    advising its franchised outlets and in ensuring the quality of its
    products. In addition, since the Company continues to provide equipment to
    unaffiliated bagel shops and bakeries, equipment sales represent an
    additional source of revenue to the Company. Management believes that
    equipment sales will benefit from continued demand for bagels nationwide.
    See "-- Plan of Operations" and "-- The Bagel Business."

Menus and Format

    The Company's aim is to provide consumers with superior products,
consisting primarily of fresh bagels, spreads, salads and complementary items,
and superior service in a pleasant and attractive environment. All of the
Company's bagels are prepared using the Company's proprietary bagel mix and
dough conditioner, in the "Old World" style, by first boiling and then baking
the dough, using the Company's bagel kettle and bagel oven. The Company
believes that this process and the use of its proprietary ingredients and its
equipment ensures the consistent preparation of premium quality bagels with a
shine, crust, texture and overall flavor that distinguish its products from
those of its competitors.

    Goldberg's offers a traditional bagel/delicatessen menu, consisting of a
variety of flavors of bagels, spreads, sandwiches (served on freshly baked
bagels), salads, soups and "appetizing" bakery items. Sammy's offers bagels
and related dairy items in a kosher store, under National Kof-K Kosher
Supervision. Goldberg's bagels are prepared on-site "from scratch" and Sammy's
bagels are prepared from frozen, pre-formed dough delivered to the stores
weekly and baked on the premises, in each case providing a continuous supply
of fresh product and permitting customers to enjoy the aroma of freshly baked
bagels. Both concepts also offer an array of hot and cold beverages including
coffee, tea, juices and soft drinks. Depending upon local competitive and
other conditions, Goldberg's and Sammy's stores generally are open between the
hours of 6 a.m. and 6 p.m. seven days a week.

    The Company's restaurants typically are located in strip-style
neighborhood and community shopping centers or other high-traffic areas and
consist of an overall area of between 750 and 2,600 square feet, including a
dining area providing seating for between eight and 30 customers, a take-out
counter, and kitchen, food preparation and storage areas. Decor is intended to
evoke a 1938 bagel shop and includes an original photo montage of New York
City scenes from that era, additional vintage photographs and memorabilia,
wainscoting and a tin ceiling.



                                       5


<PAGE>

KOSHER CERTIFICATION AND SUPERVISION


    All of the Sammy's stores have earned certification from the
internationally recognized Kof-K Kosher Supervision ("Kof-K"), ensuring that
they operate in strict compliance with Kashruth, the Orthodox Jewish laws
pertaining to the content and preparation of kosher foods and related matters.

    Kof-K, headquartered in Teaneck, New Jersey, is one of two universally
recognized and accepted organizations responsible for certifying kosher
products and establishments. Founded almost 30 years ago, Kof-K employs more
than 150 experts in Kashruth and food service, as well as an international
network of regional and local coordinators and Rabbinical representatives.

    Prior to certifying an establishment as meeting Kashruth requirements,
Kof-K supervises and inspects the cleaning of the proposed site and obtains a
complete list of all products and ingredients to be used, as well as all food
handling and preparation procedures to be followed. Once Kof-K has established
that each relevant item complies with the requirements of Kashruth, it issues
an initial certification for the store. Throughout preopening preparations,
Kof-K works with the local religious community to enlist support for the new
store and to provide assurance that it will meet the Kashruth requirements.
After opening, Kof-K representatives inspect the store on a regular basis to
ensure continued compliance with Kashruth standards.

    Management believes that the kosher status of the Sammy's stores places
them in a unique niche as the only franchised food chain subject to national
kosher certification currently available in the United States.

FRANCHISING

    The Company offers single-unit franchises, as well as Market Development
Agreements covering a number of stores to be opened in a designated area within
a specified period of time. As of October 31, 1997, the Company may sell its
franchises in 40 states. The Company has entered into a Market Development
Agreement for the State of Ohio, covering 15 retail stores, a Market Development
Agreement for the State of Arizona, covering 15 retail stores, a Market
Development Agreement covering a portion of the State of New York covering 37
retail stores, a Market Development Agreement covering a portion of the State of
South Carolina covering 6 stores, a Market Development Agreement covering a
portion of the State of Pennsylvania covering 3 stores and a 


                                       6


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licensing agreement covering the country of Israel.

    Franchise revenue includes the sale of single unit franchises pursuant to
Single Unit Agreements, the sale of Company-owned stores to franchisees, the
sale of market development franchises pursuant to Market Development
Agreements and ongoing royalty and advertising fees.

    Single Unit Agreements provide for payment of a nonrefundable initial
franchising fee (an "Initial Franchise Fee"), a weekly royalty on gross sales,
and a weekly cooperative advertising fund contribution. The Company's material
obligations under the terms of all Single Unit Agreements are assisting in
site selection and franchisee training. Initial Franchise Fees under Single
Unit Agreements are recognized as revenues when the Company has no further
material obligations in respect of the establishment of such franchise, which
occurs upon the opening of the store.

    Market Development Agreements provide for the payment, by the Market
Developer, of a nonrefundable initial fee (a "Market Development Fee") based
on the size, population and overall market potential of the territory subject
to the Market Development Agreement (the "Market Area"). The Market Developer
assumes substantially all of the responsibilities that otherwise would be
assumed by the Company, as franchiser within the Market Area. In exchange, the
Market Developer receives (i) the exclusive right to build stores for the
Market Developer's own account or to seek third party franchisees within the
Market Area and (ii) the right to share with the Company, on a 50/50 basis,
initial and ongoing single store fees within the Market Area. The Market
Development Agreement includes a development schedule setting forth the number
of stores to be developed by the Market Developer during the term of the
Agreement. If the Market Developer fails to maintain the store development
schedule, the Market Developer loses the exclusive right to develop the Market
Area. Under Market Development Agreements, the Company's obligations in
respect of the development of single unit franchises within the Market Area
are limited to (i) approval of franchisees presented by the Market Developer
and (ii) approval of store sites. The Company has no further material
obligations in respect of a Market Development Agreement at the time of
execution of the Agreement. Market Development Fees paid in cash or by
promissory notes fully collateralized by liquid assets or as to which the
Company has obtained an independent third-party valuation are recognized as
revenues by the Company upon execution of the Market Development Agreement and
payment of the fee. In the absence of such collateral or valuation, the
Company recognizes Market Development Fees on a cash basis as payments on such
notes are received.

    The Company's portion of the Initial Franchise Fee on single unit
franchises sold within a Market Developer's Market Area is recognized as
revenues when the Company has no further material obligations in respect of
the establishment of such franchise, which occurs upon opening of the store.

    The Company seeks franchisees committed to the Company's high standards of
product quality and customer service. All franchised stores must operate in
strict compliance with the standards and procedures set out in the Company's

operations manuals. Each store must be under the management of a manager who
has completed the Company's training program, although franchisees are not
required to participate in the day-to-day management of their stores. The
Company conducts regular inspections (both scheduled and unannounced) to
ensure that franchises are operating in accordance with Company standards and
procedures. The Company provides support to its franchisees covering equipment
and technical issues 24 hours a day and seven days a week through a toll-free
hotline.


                                       7


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    Exclusivity. Each Single Unit Agreement provides the franchisee with an
exclusive area, within which the Company is not permitted to sell another
franchise. Such exclusive areas, which are determined on a unit-by-unit basis
based on population density, traffic patterns and other relevant
considerations, generally range from a radius of four blocks in densely
populated urban areas to one mile or more in suburban locations.

    Market Development Agreements provide that, if the franchisee meets his
development schedule, the Company will not sell other franchises within the
developer's territory ("Market Area").

    Real Estate and Local Regulation. Franchisees are obligated to purchase or
lease (for a term of at least ten years) the sites for their units.
Franchisees may designate a specific location or a locality in which they wish
to operate, subject to the exclusivity rights of other Goldberg's and Sammy's
franchisees. The Company provides assistance and guidance in site selection
and lease negotiation, and must approve all sites prior to lease execution. In
addition, the Company provides plans and specifications for a prototype store,
as well as assistance in obtaining financing, permits and licenses, and with
construction of leasehold improvements. Franchisees are expected to bear the
expense of any modification of the prototype plans and specifications required
to meet local building, fire or health codes and lease and other similar
requirements, as well as the costs of remodeling, fireproofing or other
leasehold improvements. Franchises also are responsible for, and expected to
bear the expense of, local licensing matters related to occupancy and
operation of the business.

    Financing. The Company does not offer direct or indirect financing in
connection with its franchises. Similarly, it does not guarantee the debt,
lease or other obligations of any franchisee. The Company will, however,
render assistance in arranging financing and negotiating leases.

    Training and Field Support. Prior to opening, each franchisee (or an owner
thereof) and at least one manager of each franchised Goldberg's or Sammy's
restaurant must complete a 13-day training program including approximately 35
and 70 hours of classroom and on-the-job training, respectively, covering
areas essential to the management and operation of both a retail and wholesale
bagel business, including bagel preparation and production; store operating
procedures; accounting and cost control; employee matters; in-and out-of-store
marketing; ordering; catering; equipment maintenance; and sanitation matters.
All training is conducted by senior Company personnel at the Company's
corporate headquarters in Fairfield, New Jersey, or in nearby Company-owned
stores. As of the date of this Prospectus, the Company had not established a
permanent schedule for its training courses, but instead schedules such
courses as needed to meet the opening schedules of new stores. The Company
does not charge for this training and provides all participants with their
midday meal, but franchisees are expected to defray living expenses for
themselves and their employees during the training sessions. Similar training
is required of all new managers subsequently hired and is provided by the
Company.


    Refresher and ongoing training is available to franchisees on an
individualized basis, through consultative meetings at franchise sites, at
corporate stores and at corporate headquarters.

    The Company provides on-site and other supervisory guidance and assistance
in connection with the opening of each Goldberg's and Sammy's store. Once
open, the Company conducts regular operational visits and provides ongoing
guidance and assistance based upon the results of such visits and review of
reports submitted to it. Such guidance and assistance may relate to standards,
methods and operating procedures; preparation of authorized food, beverages
and other products and services; selection, purchase and preparation of food,
beverage and other products, as well as fixtures, equipment, signs, materials
and 


                                       8


<PAGE>


supplies; formulation and implementation of advertising and promotional
programs; and establishment and operation of administrative, bookkeeping,
accounting, inventory control, sales and general operating procedures.

    The Company periodically distributes operational bulletins and newsletters
to its franchisees and provides ongoing assistance with technical and
equipment problems through its 24-hour hotline, as well as personal
consultations either at the franchise site or at the Company's executive
offices.

    Pricing. Prices are set by individual franchisees, pursuant to guidelines
provided by the Company, in light of local competitive and market conditions.

    Purchasing. Franchisees are required to purchase bagel mix and/or dough
conditioner, in the case of Goldberg's stores, and prepared dough, in the case
of Sammy's stores, directly from the Company. In addition, all franchisees are
required to purchase the Company's bagel kettle and bagel oven. Management
believes that purchase of these items from the Company is essential to
maintaining the Company's quality control standards, and to ensuring the
consistent high quality of the bagels offered at all of its Goldberg's and
Sammy's stores.

    With respect to other items used in the operation of its stores, the
Company designates approved types and brands of products. In certain instances
the Company may designate a single supplier or a limited group of suppliers
for a product or brand of product, in order to increase the volume of
purchases from suppliers and permit the Company's franchisees as a whole to
benefit from discounts associated with quantity purchasing.

    In the event that a franchisee proposes to purchase any brand or type of
product not previously approved for purchase by the Company or to purchase
approved items from a supplier not previously approved, the franchisee is
required to submit to the Company information regarding the manufacturer's or
supplier's business reputation, delivery and service performance, reliability,
financial condition and credit worthiness. In addition, in the case of
previously unapproved products, the franchisee must submit samples for review
by the Company to determine compliance with the Company's specifications and
standards. The Company then reviews the submission and, within 30 days, makes
a determination whether or not to approve the supplier or product.

    The Company provides its franchisees with operational and accounting forms
for use in the operation of their stores. The Company also provides its
franchisees with promotional and advertising materials and other marketing
tools.

    Advertising. Each franchisee is responsible for developing local
advertising and promotional materials, all of which are subject to prior
review and approval by the Company. In addition, the Company administers
promotional funds for the benefit of all of its Goldberg's and Sammy's
franchisees. Franchisees are obligated to contribute to the applicable fund a
promotional fee equal to 1% of gross sales. Franchisees also may be required

to participate in local or regional advertising cooperatives. Contributions to
such cooperatives will be at least 1% of gross sales, and will be controlled
by the local cooperative. See "-- Advertising." Stores owned and operated by
the Company are required to contribute to the promotional funds and to
participate in advertising cooperatives on the same basis as franchised
stores.

    Franchise Fees and Royalty Payments. Current Single Unit Agreements
provide for an initial single unit payment of $25,000 for either a Goldberg's
or a Sammy's store. If a franchisee opens additional stores, either 


                                       9


<PAGE>


under a Market Development Agreement or pursuant to additional Single Unit
Agreements, the initial payment is $17,500 per unit. In addition, franchisees
of both concepts pay a bi-weekly royalty and service fee equal to 5% of gross
sales. Franchisees also must contribute a minimum of 1% of gross sales to a
local or regional advertising cooperative.

    Start-Up Time and Costs. Franchisees are required to enter into a lease
within 60 days of execution of a Single Unit Agreement and to open within 120
days following first possession of the leased premises. Subject to such
factors as the time to obtain a lease, financing or building permits, zoning
and local ordinances, weather conditions and availability of materials and
equipment, franchise stores generally can be expected to open within four to
six months following execution of a franchise agreement.

    While costs vary based on location and type of store, the Company
currently estimates that the cost to a new franchisee to open a typical
Goldberg's or Sammy's restaurant, including initial franchise fees, equipment,
signs, opening inventory and other start-up costs, but exclusive of real
estate costs (purchase price, lease payments and/or improvements) generally is
in the range of $105,000 to $177,500 for either a Goldberg's or Sammy's store.
In addition, the Company estimates that rent for a typical Goldberg's or
Sammy's store currently is between $12,000 and $45,000 annually and that a new
franchisee will incur between $30,000 and $80,000 in real estate related
expenses with respect to each store.

    Term and Termination. Each Single Unit Agreement runs for an initial term
of ten years, subject to renewal for up to two additional five-year terms upon
agreement of the franchisee to refurbish and redecorate or secure new
premises. The Company has the right to terminate franchise agreements for a
variety of reasons, including failure to open a restaurant or complete
training; loss or surrender of restaurant premises; material
misrepresentation; conviction of a felony; failure to attend required training
programs; unauthorized assignment of a restaurant; unauthorized use of
trademarks or confidential information; failure to comply with Company
specifications or procedures; failure to make payments due to third parties;
failure to make payments due to the Company or to submit required reports; and
sanitation problems.

STORE LOCATIONS

The following table sets forth, by location, the number of Company owned,
franchised and licensed Goldberg's and Sammy's restaurants open or under
development, as of October 31, 1997:

                             COMPANY-OWNED STORES:

                                                                   Date Opened
Location                                   Concept                 (Projected)
                                                                   -----------

1443 Queen Anne Road

Teaneck, NJ  07666...................    Sammy's                      6/92

40 North James Road
Columbus, OH  43213..................    Sammy's                      1/94

197 Bleecker Street
New York, NY  10012..................    Goldberg's                   2/96

121 Route 59 W.
Nanuet, NY  10954....................    Goldberg's                   1/97

1408 Whalley Avenue                      Goldberg's
New Haven, CT  06515.................    Bagel Connection             3/97


                                      10


<PAGE>


1865 2nd Avenue (96th St.)
New York, NY  10029..................    Goldberg's                  12/96

7043 4th Street North                    Goldberg's
St. Petersburg, FL  33702............    St. Pete Bagel               8/87

249 Central Avenue                       Goldberg's
St. Petersburg, FL  33701............    St. Pete Bagel               2/90

210 East Madison                         Goldberg's
Tampa, FL  33602.....................    St. Pete Bagel               5/95

4329 West Kennedy Blvd.                  Goldberg's
Tampa, FL  33609.....................    St. Pete Bagel               6/96



                                      11


<PAGE>


                        FRANCHISED AND LICENSED STORES:


                                                              Date Opened
                 Location                     Concept         (Projected)
                 --------                     -------         -----------

134 North Avenue
New Rochelle, NY  10803..................   Sammy's               10/92

4951 East Grant Rd.
Tuscon, AZ  85712........................   Goldberg's             9/95

421 Route 59
Monsey, NY  10952........................   Sammy's               11/95

1583 - A West Lane Ave.
Upper Arlington, OH .....................   Sammy's               12/95

6449 Oracle Ave.
Tucson, AZ  85712........................   Goldberg's             2/96

162 City Center Drive
Columbus, OH  43215......................   Sammy's                6/96

1312 Grandview Avenue
Grandview Heights, OH ...................   Sammy's                7/96

1461 Weaver Street
Scarsdale, NY  10583.....................   Sammy's               12/96

3318 Highway 17 So.
No. Myrtle Beach, SC  29582..............   Goldberg's             2/97

                                            Goldberg's
3735 West Dempster Street                   Kosher New
Skokie, IL  60076........................   York Bagels            4/97

42 Pershing Drive                           Goldberg's
Derby, CT  06418.........................   Bagel Connection       3/97

222 Main Street                             Goldberg's
Farmington, CT  06032....................   Bagel Connection       3/97

18 Old Stratford Road                       Goldberg's
Shelton, CT  06497.......................   Bagel Connection       3/97

11130 Seminole Blvd.                        Goldberg's
Largo, FL  34640.........................   St. Pete Bagel         2/95

5835 memorial Highway                       Goldberg's

Tampa, FL  33615.........................   St. Pete Bagel         2/97

2989 Dixwell Avenue
Hamden, CT  06518........................   Goldberg's            10/97

3650 Nazareth Pike
Bethlehem, PA  18017.....................   Goldberg's            10/97


                                      12


<PAGE>


STORES UNDER DEVELOPMENT:


White Plains, NY.........................   Sammy's                (2/98)

Mt. Kisco, NY............................   Sammy's               (12/97)

Albany, NY...............................   Goldberg's             (2/98)

East Haven, NY...........................   Goldberg's             (1/98)

Toledo, OH (FOUR STORES).................   Goldberg's             (3/98)


TRADEMARKS AND SERVICE MARKS

    Management believes that, in the food service industry, trademarks and
service marks are most effectively protected by constant, continued and
evolving use of various distinctive identifying symbols. The Company is not
dependent upon particular registered marks and does not believe that the
registration of such marks would materially enhance its competitive position,
business or prospects.

    The Company provides bagel ovens and kettles and other bagel bakery
equipment to its franchisees and believes that this equipment is uniquely suited
to the production of high quality bagels. Although the Company modifies and
installs this equipment in a proprietary manner, the Company does not believe
these modifications and refinements are patentable. It is the Company's practice
to protect its proprietary dough conditioner, bagel mix and bagel dough by
relying on trade secret laws and confidentiality agreements. There can be no
assurance that the confidentiality of its trade secrets will be maintained or
that others will not independently develop or obtain access to the same,
comparable or improved recipes and formulas. See "Risk Factors -- Lack of
Trademark and Patent Protection." The Company has filed a registration
application to register the trademark "Goldberg's New York Bagels est. 1938" on
the United States Patent and Trademark Office principal register. Members of the
Goldberg family currently operate ten independent bagel bakeries using the name
"Goldberg" in northern New Jersey and Rockland County, New York, which are not
affiliated with the Company.

COMPETITION

    The Company competes, and can be anticipated to compete, against well
established food service companies with greater product and name recognition
and with larger financial, marketing and distribution capabilities than the
Company's, as well as innumerable local food establishments that offer similar
products. The food service industry in general, and the take-out sector in
particular, are intensely competitive with respect to food quality, concept,
location, service and price.

    The bagel industry is highly fragmented and has traditionally been

dominated by "mom and pop" operators, which, management believes, creates a
unique growth opportunity for the Company's expansion. In addition, there is a
growing number of national, regional and local chains, operating both owned
and franchised bagel stores, including a number of such chains that have
indicated the intention to expand to a national scope. The Company believes
that its most direct competitors are Manhattan Bagel Company, Inc.
("Manhattan"), Einstein Brothers Bagel, Inc. ("Einstein Brothers"), Bruegger's
Corporation ("Bruegger's") and Big Apple Bagels ("Big Apple").

    Recently, the bagel industry has experienced rapid expansion, with an
estimated 3,000 bagel shops (including chains and independent stores) currently
in operation. In addition, Dunkin' Donuts began selling its own line of
fresh-baked bagels in June 1996 and expects to be selling in almost as many of
its own stores as all other bagel chains combined. A number of bagel companies
also have been involved in initial public offerings and acquisitions, resulting
in the entry of such companies into the public capital markets.


                                      13


<PAGE>


    There are also several regional bagel chains and independent bagel shops
which may be expected to compete with the Company. The Company's stores also
compete with take-out and fast-food restaurants, delicatessens and prepared
food stores, bakeries, supermarkets and convenience stores. The Company
believes that the start-up costs associated with opening a retail food
establishment offering similar products on a stand-alone basis are competitive
with the start-up costs associated with commencing a Goldberg's or Sammy's
store and accordingly, such start-up costs are not an impediment to entry into
the retail bagel business. See "Risk Factors -- Competition; Ease of Entry
into Business."

    As a franchiser, the Company competes for qualified franchisees with a
wide variety of other investment opportunities both within and outside of the
food service industry. Management believes that the consistent quality of its
products, the efficiency of its operating systems, its proprietary
ingredients, its equipment and its franchisee support arrangements will permit
it to compete effectively, particularly against other franchisers of bagel
stores.

ADVERTISING

    The Company presently advertises and plans to continue advertising, its
franchises in current stores, franchise trade shows, newspapers and business
opportunity magazines. The Company and its franchisees also advertise products
in newspapers, through direct mailing and on radio and television.
See "-- Franchising."

    The Company administers promotional funds ("Promotional Funds") to support
promotion and marketing programs designed to expand awareness of and demand
for Goldberg's and Sammy's products. Each Promotional Fund furnishes
Goldberg's or Sammy's franchisees, as the case may be, with promotional,
advertising and marketing materials, which may include such items as direct
mail pieces, media materials and brochures. The Company retains sole
discretion over creative concepts, materials and endorsements used in the
Promotional Funds' programs and over associated geographic, market and media
placement and allocation. The Promotional Funds may pay the cost of preparing
materials, employing advertising agencies and administering regional and local
promotional and advertising programs and public relations activities.

    Franchisees are obligated to contribute to the appropriate Promotional
Fund a promotional fee equal to 1% of gross sales.

    In the future, franchisees also may be required to participate in local or
regional advertising cooperatives. The cooperatives are expected to be made up
of franchisees within a given Designated Market Area for the purpose of
pooling advertising funds in order to purchase advertising effectively and
efficiently. Each franchisee will be entitled to one vote within the
cooperative for each store owned, and advertising purchases will be determined
by majority vote. Contributions will be determined by the members of each
cooperative, and will range from a required minimum of 1% of gross sales.
Stores owned and operated by the Company are required to contribute to the

promotional funds and to participate in advertising cooperatives on the same
basis as franchised stores within the same Designated Market Areas.

    Each franchisee is responsible for developing local advertising and
promotional materials, all of which are subject to prior review and approval
by the Company.


GOVERNMENT REGULATION


                                      14


<PAGE>


         The Company and its franchisees are required to comply with federal,
state, and local government regulations applicable to consumer food service
businesses generally, including those relating to the preparation and sale of
food, minimum wage requirements, overtime, working and safety conditions, and
citizenship requirements, as well as regulations relating to zoning,
construction, health, business licensing and employment. The Company believes
that it and its franchisees are in material compliance with these provisions.
Continued compliance with this broad federal, state and local regulatory
network is essential and costly and the failure to comply with such
regulations may have an adverse effect on the Company and its franchisees.

         The Company's franchise operations are subject to regulation by the
Federal Trade Commission ("FTC") in compliance with the FTC's rule entitled
"Disclosure Requirements and Prohibitions Concerning Franchising and Business
Opportunity Ventures," which requires, among other things, that the Company
prepare and update periodically a comprehensive disclosure document, known as
the Uniform Franchise Offering Circular ("UFOC"), in connection with the sale
and operation of its franchises. In addition, some states require a franchiser
to register its franchise with the state before it may offer the franchise.
The Company believes that its UFOC, together with any applicable state
versions or supplements, complies with both the FTC guidelines and all
applicable state laws regulating franchising in those states in which it has
offered franchises.

         In addition to the rules governing the offer and sale of franchises,
the Company is also subject to a number of state laws, as well as foreign laws
(to the extent it offers franchises outside of the United States), that
regulate substantive aspects of the franchiser-franchisee relationship,
including, but not limited to, those concerning termination and non-renewal.
Currently, 18 states, the District of Columbia, Puerto Rico and the Virgin
Islands, have franchise termination and non-renewal laws. These laws govern
the termination and/or non-renewal of the franchise agreement and, by and
large, require the franchiser to have good cause, reasonable cause or just
cause in order to terminate the franchise agreement or not to renew the
franchise agreement. In addition, some of these laws provide for longer cure
periods than currently contemplated by the Company's franchise agreements.

         Each store will be subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire
and other departments. Difficulties in obtaining or the failure to obtain
required licenses or approvals could delay or prevent the opening of a new
store. The Company believes that it is in substantial compliance with the
applicable laws and regulations governing its operations.

         While the Company intends to comply with all federal, state and
foreign laws and regulations, there can be no assurance that it will continue
to meet the requirements of such laws and regulations, which, in turn, could
result in a withdrawal of approval to franchise in one or more jurisdictions.
Any such loss of approval would have a material adverse effect upon the
Company's ability to successfully market its franchises. Violations of
franchising laws and/or state laws and regulations regulating substantive

aspects of doing business in a particular state could subject the Company and
its affiliates to rescission offers, monetary damages, penalties, imprisonment
and/or injunctive proceedings. The state laws and regulations concerning
termination and non-renewal of franchisees are not expected to have a material
impact on the Company's operations. In addition, under court decisions in
certain states absolute vicarious liability may be imposed upon franchisers
based upon claims made against franchisees. The Company currently does not
carry insurance against such claims although it intends to obtain coverage in
the future. However, there can be no assurance that the Company will be able
to obtain such coverage or that such coverage will be sufficient to cover
claims against the Company. Further, there can be no assurance that existing
or future franchise regulations will not have an adverse effect on the
Company's ability to expand its franchise program.

EMPLOYEES

         At October 31, 1997, the Company had 136 employees, consisting of
100 full-time and 36 part-time 


                                      15


<PAGE>


employees. The Company has never experienced a work stoppage and no employees
are represented by any labor union. The Company believes that its employee
relations are good.


ITEM 2.           DESCRIPTION OF PROPERTY

The Company's executive offices are located at 104 New Era Drive, South
Plainfield, New Jersey 07080. The Company first occupied this location on
April 1, 1997. The headquarters consist of approximately 23,000 square feet.
The Company's lease on its headquarters location, bagel producing commissary
and warehouse commenced February 15, 1997 and expires on January 31, 2007. The
lease provides a renewal option of one five-year term. The commissary operates
under kosher supervision and produces bagels for all Company-owned and
franchised Sammy's stores. See "-- Kosher Certification and Supervision."

    The Company purchases bagel bakery equipment from outside vendors for
distribution to Company-owned and franchised stores either directly from the
manufacturer or in one consolidated shipment from the Company's Lodi
warehouse. The Lodi facility currently is operating at full capacity, and
management expects that additional space will be needed for the Company to
continue to distribute equipment to its franchisees effectively.

    The following table sets forth the location, size and certain information
pertaining to the lease, on each of the Company's three Goldberg's stores, two
Sammy's stores and its commissary.


<TABLE>
<CAPTION>
                                                                               Lease Terms

                                                      Area         --------------------------------------

              Location                   Concept    (Sq. Ft.)      Commencement   Expiration     Renewals
              --------                   -------    ---------      ------------   ----------     --------
<S>                                   <C>           <C>            <C>            <C>            <C>     

1443 Queen Anne Road
Teaneck, NJ  07666.................   Sammy's             750           8/1/91       7/31/03     None

40 North James Road                                                                            
Columbus, OH  43213................   Sammy's            2600          11/1/93      10/31/03     None

197 Bleecker Street                                                                            
New York, NY  10012................   Goldberg's         1260          11/1/94      10/31/03     None

121 Route 59 West                                                                              
Nanuet, NY  10954..................   Goldberg's         1961           7/1/95       6/30/05     None

1408 Whalley Avenue                                                                            

New Haven, CT  06515...............   Goldberg's         3425           9/1/93       9/1/98      Five Year

1865 2nd Avenue (96th Street)                                                                  
New York, NY  10029................   Goldberg's        1,550           9/1/84      09/13/04     Five Year

7043 4th Street                                                                                  ThreeYear
St. Petersburg, FL  33702             Goldberg's        2,034           5/1/95      04/30/98     Option

249 Central Avenue                                                                             
St. Petersburg, FL  33701             Goldberg's        1,100           3/1/90      03/01/98     Two Year(2)

210 East Madison                                                                               
Tampa, FL  33701...................   Goldberg's        1,300          10/3/94      10/14/99     Five Year

4329 W. Kennedy Boulevard                                                                        Two Two
Tampa, FL  33609...................   Goldberg's        1,650           7/1/96      08/01/98     Year Terms
</TABLE>


ITEM 3.           LEGAL PROCEEDINGS


                                      16


<PAGE>


         From time to time the Company is involved in litigation arising in
the ordinary course of its business. The Company is not currently engaged in
any legal proceedings which are expected, individually or in the aggregate, to
have a material adverse effect on the Company.


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

         Not Applicable.

PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of the Company has been trading on Nasdaq SmallCap Market
under the symbol "AAFG" since December 1996.

The following table sets forth the range of high and low close prices for the
Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:

                                 COMMON STOCK

QUARTER ENDED                   HIGH                     LOW
-------------                   ----                     ---

December 31, 1997               $ 3/8                    $ 5/16
September 30, 1997              $ 2 1/32                $ 1 15/16
June 30, 1997                   $ 15/16                  $ 11/16
March 31, 1997                  $ 2                      $ 1 13/16

         As of January 31, 1998, there were approximately 506 holders of record 
of the Company's Common Stock.

DIVIDEND POLICY

         The Company has not paid any cash or other dividends on its Common
Stock since its inception and does not anticipate paying any such dividends in
the foreseeable future. The Company intends to retain any earnings for use in
the Company's operations and to finance the expansion of its business.

SELECTED FINANCIAL DATA



<PAGE>
                           SELECTED FINANCIAL DATA

The following financial information is qualified by reference to, and should be
read in conjunction with the Company's Consolidated Financial statements and the
notes thereto and "Management's Discussion and Analysis or Plan of Operation"
contained elsewhere in this Prospectus.

<TABLE>
<CAPTION>
                        Three Months                Year Ended                   
                           Ended     Nine Months    October 31,                  
                        January 31,     Ended          1995        Year Ended      Year Ended
                           1995      October 31,  (aggregated)(1)  October 31,     October 31,
                        (unaudited)     1995        (unaudited)        1996           1997
                        -----------  -----------  ---------------  -----------    -----------
<S>                     <C>          <C>          <C>              <C>             <C>
Revenues                                                                         
Store Sales              $ 530,665    $1,422,341   $1,953,006      $ 1,401,266     $1,777,274
                                                                                    
Franchising revenue             --       377,201      377,201          277,854        284,829
                                                                                 
Equipment and                                                                    
product sales              143,799       550,726      694,525          561,067       747,782
                         ---------    ----------  -----------      -----------    -----------
                           674,464     2,350,268    3,024,732        2,240,187      2,809,885
                                                                                 
Operating expenses                                                               
Cost of sales-equip-                                                             
ment and product costs                                                           
and store operations                                                             
exclusive of depreci-                                                            
ation and amortization     535,145     1,739,147    2,274,292        1,572,185      2,094,008
                                                                                 
Cost of sales-franchi-                                                           
sing activities,                                                                 
exclusive of depreci-                                                            
ation and amortization          --       213,408      213,408               --             -- 
                                                                                 
Selling, general and                                                             
administrative expenses    445,686     1,146,365    1,592,051        2,132,072      4,974,666
                                                                                 
Loss on disposal of                                                              
equipment                       --            --           --               --         72,397
                                                                                 
Depreciation and                                                                 
amortization                83,217       211,463      294,680          251,741        336,430
                                                                                 
Settlement costs-                                                                
Employment Contracts        56,784       170,352      227,136          224,341         47,010
                         ---------    ----------  -----------      -----------    -----------
                         1,120,832     3,480,735    4,601,567        4,180,339     $7,524,511
                         =========    ==========  ===========      ===========    ===========
                                                                                 
                                                                               
Operating loss            (446,368)   (1,130,467)  (1,576,835)      (1,940,152)    (4,714,626)
                                                                                 
Interest expense            28,988        21,078       50,066           33,440        983,893 
                         ---------    ----------  -----------      ------------   -----------
Net loss                 ($475,356)  ($1,151,545) ($1,626,901)     ($1,973,592)   ($5,698,519)
                                                                                 
Net loss per                                                                     
share                       ($0.27)       ($0.84)      ($1.10)          ($1.85)       ($1.58)
                                                                                 
Weighted average                                                                 
number of common                                                                 
shares outstanding       1,785,776     1,373,708    1,476,024        1,373,708      3,634,442

<CAPTION>
Balance Sheet Data:

                                        1/31/95       10/31/95     10/31/96         10/31/97
                                        -------       --------     --------         --------
<S>                                    <C>           <C>          <C>              <C>
Working capital
(Deficit)                                (539,020)     (902,920)  (1,039,059)           2,572

Total assets                            1,743,561     1,338,794    2,188,474        5,242,934

Total liabilities                       1,170,207     1,386,967    2,013,250        3,505,776

Redeemable preferred
stock                                          --            --      562,678          268,033

Common stock                            1,277,000       876,150    3,360,136       11,130,669

Non-redeemable
preferred stock                            54,000     1,022,580      537,905          322,470

Additional paid in
capital                                   365,000       365,000           --               --

Accumulated deficit                    (1,122,646)   (2,311,901)  (4,285,495)      (9,984,014)
</TABLE>

----------
(1) Represents the total of results for the nine-month fiscal period ended
    October 31, 1995 and the three-month interim period ended January 31, 1995.


                                      17


<PAGE>


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this document. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future. The Company changed its fiscal
year end to October 31 from January 31 during calendar year 1995. Therefore,
for purposes of the following discussion, the Company's unaudited interim
results for the three months ended January 31, 1995 have been combined with
its results for the nine months ended October 31, 1995, as reflected in its
audited financial statements for the period then ended to reflect results for
the 12-month period ended October 31, 1995 ("Fiscal 1995"), which have been
compared to the results for the full fiscal year ended October 31,1996
("Fiscal 1996").

OVERVIEW

The Year 2000 --

Management of the Company presently does not believe the Year 2000 data
processing problem poses any significant contingency with respect to future
sales, future production or other operating functions or results.

Results of Operations - 1997 AND 1996

         Revenues for the year ended October 31, 1997 ("Fiscal 1997") were
$2,809,885 an increase of $569,698, or 25%, from $2,240,187 for the year ended
October 31, 1996 ("Fiscal 1996"). This increase is attributable to (I) an
increase in store sales of $376,008, or 27%, to $1,777,274 in the Fiscal 1997
from $1,401,266 in the Fiscal 1996, as a result of an increase to ten stores
from six stores by the Company during the year, (ii) an increase in commissary
and product sales of $94,793, or 26%, to $456,462 in Fiscal 1997 from $361,669
in Fiscal 1996, as a consequence of a greater number of franchise stores, and
a concomitant increase in demand for product during the Fiscal 1997, (iii) an
increase in equipment sales of $91,922, or 46%, to $291,320 in Fiscal 1997
from $199,398 in Fiscal 1996, and (iv) an increase in franchising activities
of $6,975, or 3%, to $284,829


                                      18


<PAGE>


in the Fiscal 1997 from $277,854 in Fiscal 1996 consisting of: (a) an increase
in ongoing royalties of $57,969, or 93%, to $120,445 in Fiscal 1997 from
$62,476 in Fiscal 1996,, which increase was offset by (b) a decrease in
initial non-recurring franchise and market development fees of $50,994, or
24%, to $164,384 in the Fiscal 1997 from $215,378 in Fiscal 1996. Future
equipment and commissary sales will be dependent on the Company's franchising
activities, and such sales will therefore increase or decrease in direct
proportion to Franchising revenue.

         Cost of sales increased by $521,823, or 33%, to $2,094,008 in Fiscal
1997 from $1,572,185 in Fiscal 1996. This increase is primarily due to an
increase in store sales. Cost of sales as a percentage of store and product
sales increased to 84% in Fiscal 1997 from 83% in Fiscal 1996, reflecting an
increase attributable to additional costs associated with the relocation of
the Company's Lodi, New Jersey commissary and production facility to its new
headquarters in South Plainfield, New Jersey. To the extent that future
increases in the Company's total revenues are attributable to franchise fees,
market development fees and franchise royalties, costs of sales can be
expected to decrease as a percentage of revenues.

         Selling, general and administrative expenses increased by $2,842,594,
or 133%, to $4,974,666 in Fiscal 1997 from $2,132,072 in Fiscal 1996. This
increase in both absolute dollars and as a percentage of revenues is
attributable to the implementation of the Company's national expansion plan,
substantial consulting fees incurred during the 1997 quarter and substantial
professional fees related to pending acquisitions and investment banking
services. The increase is primarily due to (i) an increase in salaries and
related costs of $509,543, or 59%, to $1,357,001 in Fiscal 1997 from $856,590
in Fiscal 1996, (ii) an increase in selling expense of $461,418, or 125%, to
$831,836 in Fiscal 1997 from $370,418 in Fiscal 1996, primarily due to
increased advertising costs to attract new franchisees and increased shipping
costs associated with increased product sales, (iii) an increase in occupancy
costs of $270,776, or 74%, to $636,732 in Fiscal 1997 from $365,956 in Fiscal
1996 attributable to an increase to ten stores operated by the Company from
six stores during the Fiscal 1996, and the move of the Company's headquarters
(iv) an increase in professional fees and related costs associated with the
Company becoming a public Company, investment banking services and pursuing an
acquisition strategy of $203,467, or 154%, to $335,964 in Fiscal 1997 from
$132,497 in Fiscal 1996, and (v) an increase in consulting fees of $1,100,117,
or 2,802%, to $1,139,373 in Fiscal 1997 from 39,256 in Fiscal 1996. This
increase is primarily attributable to charges incurred under consulting
contracts relating to investment banking services and financial public
relations.

         Depreciation and amortization increased by $84,690, or 34%, to
$336,430 in Fiscal 1997 from $251,740 in Fiscal 1996, primarily as a
consequence of the Company owning and operating four more stores in Fiscal
1997.

         Interest expense increased by $950,453, or 2,842%, to $983,893 in
Fiscal 1997 from $33,440 in Fiscal 1996. This increase is attributable to the

discount granted in the Company's convertible debentures

         The net loss increased by $3,724,927, or 189%, to $5,698,519 in Fiscal
1997 from $1,973,592 as a result of the factors discussed above, particularly
the lack of franchise sales and associated equipment sales, and the consulting
fees incurred in the period. To date, the Company has operated at a loss as a
result of the application of resources in excess of revenues to develop its
operating infrastructure, including the support structure necessary to fulfill
its obligations under its franchise agreements and the anticipation of
additional franchise sales. Consequently, total revenues are not yet sufficient
to support the Company's overhead. This creates an uncertainty about the
Company's ability to continue as a going concern. Management anticipates, that
during the fiscal year ending October 31, 1998, the Company's revenues will
increase due to additional franchise sales, increased royalty income from
existing stores, increased equipment sales to new franchisees, increased sales
in existing Company-owned stores and sales revenues from newly opened
Company-owned stores. There can be no assurance, however as to whether, and to
what extent, the Company will actually experience additional revenues from any
of these sources. The Company's ability to operate profitably in the future is
substantially dependent upon its ability to sell store and market development
franchises, to open additional franchise stores, and to reduce operating costs.


                                      19


<PAGE>


RESULTS OF OPERATIONS -- 1996 AND 1995

         Sales revenues for Fiscal 1996 were $2,240,187, a decrease of
$784,545, or 26%, from revenues of $3,024,732 in Fiscal 1995. This decrease is
attributable to (i) a decrease in store sales of $551,740, or 28%, to
$1,401,266 in Fiscal 1996 from $1,953,006 in Fiscal 1995, as a result of a
reduction from five stores to three stores operated by the Company during the
first three months of Fiscal 1996, and from five stores to four stores during
the succeeding six months of Fiscal 1996, (ii) a decrease in equipment sales
of $380,611, or 66%, to $199,398 in Fiscal 1996 from $580,009 in Fiscal 1995,
primarily due to the fact that, during Fiscal 1996, the Company has focused on
franchising activities rather than on sales of equipment to unaffiliated
purchasers, and (iii) a decrease in franchising activities of $99,347, or 26%
to $277,854 in Fiscal 1996 from $377,201 in Fiscal 1995, consisting of a
decrease in initial non-recurring revenue from the sale of Company-owned
stores to franchisees of $247,777, or 100% to $0 in Fiscal 1996 from $247,777
in Fiscal 1995, and partially offset by an increase in initial non-recurring
franchise and market development fees of $90,054, or 72%, to $215,378 in
Fiscal 1996 from $125,324 in Fiscal 1995 and an increase in ongoing royalties
of $58,376, or 1,424%, to $62,476 in Fiscal 1996 from $4,100 in Fiscal 1995.
The decrease in sales revenues was substantially offset by an increase in
commissary and product sales of $247,153, or 216%, to $361,669 in Fiscal 1996
from $114,516 in Fiscal 1995, as a consequence of a greater number of
franchise stores and a concomitant increase in demand for product during
Fiscal 1996.

         Management anticipates that future equipment and commissary sales
will be dependent upon the Company's franchising activities rather than on
sales to unaffiliated purchasers and that such sales will increase or decrease
in direct proportion to the Company's success in expanding its system of
franchise stores.

         Cost of sales decreased by $915,515, or 37%, to $1,572,185 in Fiscal
1996 from $2,487,700 in Fiscal 1995. This decrease is primarily due to a
decrease in the sale of Company-owned stores to franchisees, decreased store
sales and decreased equipment sales. Cost of sales as a percentage of product
sales decreased to 80% in Fiscal 1996 from 86% in Fiscal 1995, reflecting the
net effect of decreases in the sale of Company-owned stores to franchisees and
in equipment sales and an increase attributable to the upgrading of the
Company's Lodi, New Jersey commissary and production facility and increases in
payroll and fixed overhead costs associated with expansion of this facility.
To the extent that future increases in the Company's total revenues are
attributable to franchise fees, market development fees and franchise
royalties, costs of sales can be expected to decrease as a percentage of
revenues. To the extent that franchise fees, market development fees and
franchise royalties remain constant, cost of sales can be expected to remain
constant as a percentage of revenues.

         Selling, general and administrative expenses increased by $540,021,
or 34%, to $2,132,072 in Fiscal 1996 from $1,592,051 in Fiscal 1995. This
increase is primarily due to (i) an increase in salaries and related costs of

$334,067, or 64%, to $856,590 in Fiscal 1996 from $522,523 in Fiscal 1995,
(ii) an increase in selling expense of $64,960, or 19%, to $409,674 in Fiscal
1996 from $344,714 in Fiscal 1995, primarily due to increased travel expenses
related to franchise sales efforts, visits to proposed retail locations and
provision of on-site store training and assistance, and (iii) an increase in
professional fees of $39,562, or 43%, to $132,497 in Fiscal 1996 from $92,935
in Fiscal 1995, primarily associated with general corporate matters.

         Depreciation and amortization decreased by $42,940, or 15%, to
$251,740 in Fiscal 1996 from $294,680 in Fiscal 1995, primarily as a
consequence of the fact that the Company owned and operated two fewer stores
for the first three months of Fiscal 1996 and one fewer store for the
succeeding six months of Fiscal 1996.

         Interest expense decreased by $16,626, or 33%, to $33,440 in Fiscal
1996 from $50,066 in Fiscal 1995, as a consequence of a continued reduction in
the ordinary course of business of the Company's outstanding debt.

         The net loss increased by $346,691, or 21%, to $1,973,592 in Fiscal
1996 from $1,626,901 in Fiscal 1995. To date, the Company has operated at a
loss as a result of the application of resources in excess of revenues to
develop its operating infrastructure in anticipation of additional franchise
sales, Company-store growth and commissary growth. Consequently, total
revenues are not yet sufficient to support the Company's overhead. 


                                      20


<PAGE>


Management anticipates that, during the fiscal year ending October 31, 1997,
the Company's revenues will increase due to additional franchise sales,
increased royalty income from existing stores, increased equipment sales to
new franchisees, increased sales in existing Company-owned stores, and sales
revenues from newly opened, Company-owned stores. Management believes tht the
anticipated increase in revenues will enable the Company to meet its overhead
by the end of the current fiscal year. There can be no assurance, however, as
to whether, and to what extent, the Company will actually experience
additional revenues from any of these sources. The Company's ability to
operate profitably in the future is substantially dependent upon its ability
to sell single unit and market development franchises and to open additional
franchise stores, and to ensure that its existing Company-owned and franchise
stores operate profitably.


Liquidity and Capital Resources

         In April 1996, the Company completed the Private Placements of its
Common Stock pursuant to which it received proceeds of $2,413,986. Of the net
proceeds, $410,000 consisted of property in the form of two unopened retail
bagel stores in the final stages of construction.

         In December 1996 and January 1997, the Company completed an initial
public offering of 1,265,000 shares of its Common Stock (including 165,000
shares to cover the underwriters' over-allotments) at a price to the public of
$3.50 per share, yielding net proceeds to the Company of $3,235,000. The
proceeds of the offering were used to redeem Series A and Series B Preferred
Stock, open additional Company-owned flagship stores, expand the Company's
equipment inventory, relocate and consolidate its headquarters and commissary
facilities, expand its marketing and promotional activities, reduce accounts
payable and accrued expenses, develop its franchising system and for working
capital and general corporate purposes.

         During July, August and September 1997 the Company raised $2,250,000
through the sale of convertible debentures.

         In addition, during fiscal 1997, the Company issued 1,010,000 shares of
S-8 Stock which was used for the purchase of services rendered to the Company in
the amount of $1,634,063 of which $748,022 is reflected in the fiscal 1997
financial statements.

         The Company's revenues are not yet sufficient to support the
Company's operating expenses. Cash used by operating activities for the year
ended October 31, 1997 was $4,007,950 compared to cash used by operating
activities of $1,727,159 during the year ended October 31, 1996. See Note 1 in
Consolidated Financial Statements for going concern considerations. Management
of the Company is developing a plan to reduce its operating loss and to raise
additional outside capital, but there can be no assurance that the Company will 
be successful. 

         Additional funds will be required to support the Company's capital

requirements during the period it continues to operate at a loss.


ITEM 7.           FINANCIAL STATEMENTS

         The consolidated financial statements of All American Food Group,
Inc. and its subsidiaries, including the notes thereto and the report of
independent accountants thereon, commence at page F-1 of this Report.

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

         None.


                                      21


<PAGE>

                                   PART III

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

DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL

Directors, Executive Officers and Key Personnel

    The directors, executive officers and key personnel of the Company as of
October 31, 1997 are as follows:

             Name                   Age      Positions with the Company
             ----                   ---      --------------------------

Directors and Executive Officers
Andrew Thorburn.................    54    Chairman of the Board and Chief
                                          Executive Officer
Chris R. Decker.................    50    Director, Executive Vice President,
                                          Chief Financial and Administrative
                                          Officer (tendered resignation to be
                                          effective subsequent to the filing of
                                          this Form 10K-SB)
John Chitvanni..................    48    Director
Anthony G. Foster...............    40    Director, President (Resigned January
                                          1998)
Key Personnel                             
Raymond Johnson.................    32    District Manager
Larry Wiese.....................    32    Director of Design and Equipment
Tom Lisker......................    65    Consulting Advertising Director
Lenord Allen                        42    Director of Technical Services
                                          (Deceased January 1998)
Glenn Addis                         48    Regional Director Operations
Lloyd Allen                         47    Mid-West Regional Director Operations

    Each director is elected to hold office until the next annual meeting of
shareholders and until his successor is elected and qualified or until his
earlier resignation or removal. All officers serve at the discretion of the
Board of Directors.

    The following sets forth certain biographical information with respect to
the directors, executive officers and key personnel of the Company.

Directors and Executive Officers

    Andrew Thorburn has been President, Chief Executive Officer and Chairman
of the Board of Directors of the Company since October 1993. From 1987 until
October 1993, he was President of All American Enterprises, Inc., Somerset,
New Jersey, an unrelated company that was the franchiser of Treats Bakery
Stores ("Treats") and Perkits Frozen Yogurt ("Perkits"). From December 1994 to
February 23, 1996, he served as Chairman of the Board (a non-executive

position) of Blue Chip Computerware, Inc. ("Blue Chip"), which became a
shareholder on July 1, 1994, but no longer is a shareholder of the Company. He
also has served as Chairman, President and Chief Executive Officer of Jutland
Enterprises Inc., founder of the Company, commencing in March 1988. He has
been in the food industry since 1985 and prior to that time was Chief
Marketing Officer of H.C. Copeland and Associates, Inc., a subsidiary of the
Travelers Insurance Company, which he helped to develop from a start-up
venture into a national sales company with 600 


                                      22


<PAGE>


employees.

    Chris R. Decker became Chief Financial and Administrative Officer of the
Company in May 1995, after serving for two years, first as a Divisional
Controller and later Assistant Corporate Controller, for Leslie Fay
Corporation, a leading apparel manufacturer. Previously, Mr. Decker, a
certified public accountant, worked with Mr. Thorburn as a consultant to
various franchised food operations, including Arby's and Schlotsky's. From
1988 to 1993, he and Mr. Thorburn were chief operating officers and
franchisers of Treats and Perkits. Prior to that time, Mr. Decker had worked
for eight years at Deloitte & Touche, where he served as an audit supervisor
during his last two years. Mr. Decker tendered his resignation to be effective
subsequent to the filing of this Form 10K-SB.

    John Chitvanni joined the Company's Board of Directors in March 1994. He
has been President of National Restaurant Search, a national search firm in
the hospitality industry, since 1981. He has 25 years of experience in the
food industry and previously was employed by Brigham's, Inc. and as a Regional
Manager for Dunkin Donuts Corp. Mr. Chitvanni attended Boston State College.
He has served as a guest speaker at industry conventions, written articles for
various industry publications and was a contributing author for the book
"Dining in Corporate America."

    Anthony G. Foster has been Chief Operating Officer of the Company since
January 1, 1996. Prior to that time, he spent five years with Arby's Inc.,
where he had most recently been Vice President of Franchising and he
previously served as National Franchise Director for McMaid, Inc. and United
Consumers Club of Mericille, Indiana. From 1982 to 1986, Mr. Foster was with
the 7-Eleven Division of Southland Corporation, where he was responsible for
all franchise development in New England and approximately 40% of the
personnel function for the 425 stores and corporate offices in the Northeast
Division. He received his BS in Management and Industrial Relations from the
University of Bridgeport. Effective January 1998, Mr. Foster resigned his
position with the Company.

Key Personnel

    Raymond Johnson , former District Manager for All American, is Director of
the New England Region. Ray joined All American in March, 1996, after a three
year stint as general manager with Cornett management Co. His prior food
service experience includes the development and successful operation of
restaurants under the Rainbow Cafe (Charlotte, N.C.), T.G. Armadillos
(Harrisonburg, Virginia) and Ball Meade (Harrisonburg, Virginia) concepts
between 1986 and 1995. Mr. Johnson attended James Madison University, where he
majored in Hotel and Restaurant Management.

    Larry Wiese has been with the Company as Director of Design and Equipment
since its formation and, from 1990 until 1993 was employed by the Howberg
Equipment Company, one of the Company's predecessor companies, where he was
responsible for purchasing, shipping, and scheduling for construction and
installation of bagel equipment nationally.


    Tom Lisker has been associated with the Company and its predecessors since
1986 in his capacity as a principal of LGS, Inc., an advertising agency
located in New York City. Mr. Lisker serves as a consultant to the Company on
advertising and promotional campaigns, public relations and the development of
store design and concepts. He has extensive experience in the food service
industry and has provided advertising, public relations and promotional advice
for a number of clients within the industry, including General Foods, General
Mills, Howard Johnson's and Lum's Restaurants.


                                      23


<PAGE>


    Lenord Allen joined All American as Director of Technical Services in
1997. He is responsible for supervising design, layout, equipment, and
construction of all new and existing stores. Prior to joining All American,
Mr. Allen worked out of Ft. Lauderdale, Florida, where he was a consultant for
major bagel equipment supply companies. He is a former bagel store owner, and
his hands-on experience is invaluable to All American's training program,
commissary operation and day-to-day contact with new and existing franchisees.
In January 1998, Mr. Allen became terminally ill and passed away.

    Glenn Addis, former manager of the corporate store in Columbus, Ohio, has
been with the Company since 1995. He is now Regional Director of the New
York/New Jersey Region. Prior to joining All American, Mr. Addis had worked
for ARA Services, where he was general manager of the Fine Dining Division of
the private clubs in Miami International Airport. He also served as Food and
Beverage Director for Doubletree Hotels, Hilton, and Holiday Inn. From 1978 to
1982, Mr. Addis was the owner of four restaurants in LaCrosse, Wisconsin.

    Lloyd Allen, formerly Director of Development, is Regional Director of All
American's Midwest Region. Before joining All American in 1996, Lloyd was VP,
Operations at Alexander the Great Pizza, and prior to that, Corporate VP of
Jagic Wok. From 1969-1975 he was a major league pitcher, having played for
California, Texas, and Chicago. He will continue to operate out of Toledo,
Ohio.

    COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT

            The Company believes that all required Forms 3, 4 and 5 Reports
were filed on a timely basis by its executive officers and directors during
its last fiscal year.

    ITEM 10. EXECUTIVE COMPENSATION

    SUMMARY COMPENSATION TABLE

       Summary Compensation Table

    The following summary compensation table sets forth certain information
regarding compensation paid during each of the indicated fiscal periods to the
person serving as the Company's Chief Executive Officer during the last year.
No executive officers received salary and bonus in an amount exceeding
$100,000 during any of the fiscal periods.

<TABLE>
<CAPTION>
               Name and                                         Fiscal      Annual     Other(1)
          Principal Position                                    Period      Salary
          ------------------                                   ---------    ------     --------
<S>                                                            <C>         <C>        <C>       
Andrew Thorburn, Chief Executive Officer .....................    1997     $153,000          - -
                                                                  1996     $100,663          - -
Chris Decker, Chief Financial and Administrative Officer .....    1997     $120,000

                                                                  1996     $102,500          - -
Anthony Foster, Chief Operating Officer.......................    1997     $126,000   $36,891(1)
                                                                  1996     $101,763   $17,881(1)

</TABLE>

----------



                                      24

<PAGE>

         (1) Consists solely of temporary housing allowance payments.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of October 31, 1997, certain information
as to the beneficial ownership of Common Stock of each of the Company's
directors, all officers and directors as a group, and each person known by the
Company to be the beneficial owner of more than 5% of the Company's Common
Stock.

<TABLE>
<CAPTION>
                                                                                          
                                                          Amount and Nature of          
                                                          Beneficial Ownership     
            Name and Address of                            Immediately Before             Percentage
          Beneficial Stockholder                               Offering(1)              of Common Stock
          ----------------------                               -----------         -------------------------
<S>                                                       <C>                      <C>        
Andrew Thorburn.......................................               470,101                 7.39%   
104 New Era Drive
South Plainfield, NJ 07080
Chris R. Decker.......................................            200,211(2)                 3.07%                
104 New Era Drive
South Plainfield, NJ 07080
John Chitvanni........................................             50,233(3)                  .78%               
910 West Lake Street
Roselle, IL 60172
Anthony G. Foster.....................................             55,000(4)                  .86%           
104 New Era Drive
South Plainfield, NJ 07080
All officers and directors as a group (4 persons).....            775,545(5)                11.74%               
----------
</TABLE>

 *  Less than 1%.

(1)  Except as otherwise indicated, each of the parties listed has sole voting
     and investment power with respect to all shares of Common Stock
     indicated. Beneficial ownership is calculated in accordance with Rule
     13-d-3(d) under the Exchange Act.

(2)  Consists of 50,211 shares of Common Stock and currently exercisable
     options (expiring December 31, 1998 and January 1, 2001) to purchase
     50,000 shares of Common Stock at $3.125 per share, and 100,000 shares of
     Common Stock at $2.00 per share, respectively.

(3)  Consists of 233 shares of Common Stock and currently exercisable options
     (expiring December 31, 1998 and November 1, 2000) to purchase 60,000
     shares of Common Stock at a per share price of $3.125 and 25,000 shares
     of Common Stock at $2.00 per share, respectively, held by Mr. Chitvanni

     and 5,000 shares of Common Stock held jointly by Mr. Chitvanni and his
     spouse.

(4)  Does not include 6,500 shares of Common Stock owned by Mr. Foster's
     mother-in-law, who shares Mr. Foster's residence. Mr. Foster disclaims
     beneficial ownership of these shares. Also includes currently exercisable
     options (expiring December 31, 1998) to purchase 50,000 shares at a per
     share price of $3.125.

(5)  Includes all shares reflected above as beneficially owned by Messrs.
     Thorburn, Decker, Chitvanni and Foster.


                                      25

<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During 1996, the Company redeemed 402,000 shares of Series C Preferred
Stock held by an affiliated entity at a price of $1.00 per share, which was the
price the affiliate paid for the shares.

         It is the Company's policy that all future transactions with affiliated
parties will be approved by a majority of the Company's disinterested directors
or otherwise as permitted by applicable law, and that any such future
transactions shall be on terms no less favorable to the Company than could be
obtained from unaffiliated parties.

    ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K

         (a) The exhibits required to be filed by this report are listed in
the Exhibit Index which commences on page 32 hereof.

         (b)      Reports on Form 8-K:

         On October 7, 1997 the Company filed a report on Form 8-K in respect
of its acquisition effective as of September 23, 1997, pursuant to an
Agreement and Plan of Merger, dated September 19, 1997 (the "Agreement and
Plan of Merger"), by and among the Company, St. Pete Bagels Acquisition Corp,
a wholly owned subsidiary of the Company ("Subsidiary"), Sam & Son, Inc. ("Sam
& Son"), Bagel Man, Inc. ("Bagel Man") and St. Pete Bagel Co., Inc. ("St.
Pete"; St. Pete, Sam & Son and Bagel Man are herein collectively referred to
as "St. Pete's Bagels") the Company acquired St. Pete's Bagels through the
merger of St. Pete's Bagels with and into Subsidiary, in exchange for $200,000
and 479,800 shares of the Company's common stock.

         In connection therewith the Company filed the following financial
statements:

         o        Report of John Ralph & Associates, PA;

         o        Balance Sheets of St. Pete's Bagels as of September 22, 1997
                  and October 31, 1996;

         o        Statement of Operations of St. Pete's Bagels for the period
                  November 1, 1996 through September 22, 1997 and for the year
                  ended October 31, 1996;

         o        Statement of Cash Flows of St. Pete's Bagels for the period
                  November 1, 1996 through September 22, 1997 and for the year
                  ended October 31,1996.

         o        Proforma Balance Sheet at July 31, 1997;

         o        Proforma Statement of Operations for the nine months ended
                  July 31, 1997.

                                      26

<PAGE>


                                  SIGNATURES

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

                                         ALL AMERICAN FOOD GROUP, INC.

                                         /s/ Andrew Thorburn
                                         -------------------------------------
                                         Andrew Thorburn
                                         Chairman of the Board of Directors,
                                         President and Chief Executive Officer

    In accordance with the requirements of the Exchange Act, this report is
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.

    Name and Capacity                                              Date
    -----------------                                              ----


    /s/ Andrew Thorburn                                      February 13, 1998
    ------------------------------------------
    Name: Andrew Thorburn
    Title: Chairman of the Board of Directors,
    President and Chief Executive Officer
    (Principal Executive Officer)


    /s/ Chris Decker                                         February 13, 1998
    ------------------------------------------
    Name: Chris Decker
    Title: Director, Executive Vice President
    and Chief Financial Officer (Principal
    Financial and Accounting Officer)


    /s/ John Chitvanni                                       February 13, 1998
    ------------------------------------------
    Name: John Chitvanni
    Title: Director


                                      27

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS

                          Audited Financial Statements

                                                                       Page No.
                                                                       --------
Report of Independent Certified Public Accountants                          F-2

Consolidated Balance Sheet at October 31, 1997 and 1996                     F-3

Consolidated Statement of Operations for the Years Ended October
   31, 1997 and 1996                                                        F-4

Consolidated Statement of Cash Flows for the Years Ended October
   31, 1997 and 1996                                                        F-5

Consolidated Statement of Stockholders' Equity (Deficit) for the
   Years ended October 31, 1997 and 1996                                    F-6

Notes to Consolidated Financial Statements                                  F-7

                                       F-1

<PAGE>

                   

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors
All American Food Group, Inc.
South Plainfield, New Jersey


We have audited the accompanying consolidated balance sheets of All American
Food Group, Inc. and Subsidiaries as of October 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and stockholders'
deficit for the years ended October 31, 1997 and 1996.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our 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 the audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of All American Food
Group, Inc. and Subsidiaries as of October 31, 1997 and 1996, and their
consolidated results of operations and cash flows for the years ended October
31, 1997 and 1996, in conformity with generally accepted accounting principles.

The accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern.  As discussed at Note 1 to the
Consolidated Financial Statements, the Company has suffered recurring losses
from operations that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1.  These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



DelSanto and DeFreitas
Closter, New Jersey



February 7, 1998



                                     F-2

<PAGE>


                ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>


                                                                                             October 31,           October 31,
                                                                                         --------------------    ----------------
                                                                                                1997                  1996
                                                                                         --------------------    ----------------

                                    ASSETS
<S>                                                                                      <C>                     <C>    
Current Assets:
   Cash                                                                                             $326,603             $84,302
   Accounts receivable, net of allowances for possible losses of $12,000
      and $12,000 respectively                                                                       284,645             127,490
   Notes receivable, current portion                                                                  20,441              97,115
   Notes receivable - officer                                                                        127,000               --
   Inventories                                                                                       133,810              66,580
   Prepaid expenses                                                                                  918,775             407,516
                                                                                         --------------------    ----------------
   Total Current Assets                                                                            1,811,274             783,003

Property, Plant and Equipment, at cost less accumulated depreciation
   and amortization of $377,765 and $249,533 respectively                                          2,025,387             920,570
Intangible Assets, net of accumulated amortization of $583,096 and $418,460                        1,261,146             293,319
   respectively
Security Deposits                                                                                     90,028              31,148
Notes receivable - long-term                                                                          55,099             160,434
                                                                                         --------------------    ----------------

   Total Assets                                                                                   $5,242,934          $2,188,474
                                                                                         ====================    ================


                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
   Notes payable                                                                                     $80,693            $194,899
   Accounts payable and accrued expenses                                                           1,532,659           1,345,372
   Capitalized lease obligations - current maturities                                                 62,710              75,517
   Loans from stockholders - current maturities                                                        4,757              14,727
   Current maturities of long-term debt                                                               58,378               1,932
   Deferred franchising revenue, current portion                                                      33,505             189,615
                                                                                         --------------------    ----------------
      Total Current Liabilities                                                                    1,772,702           1,822,062

Capitalized Lease Obligations                                                                         69,478              25,300
Loans from stockholders                                                                                1,398               5,454
Convertible debentures                                                                             1,300,000               --

Long-term debt                                                                                       299,908               --
Deferred franchising revenue                                                                          26,290             160,434
                                                                                         --------------------    ----------------
      Total Liabilities                                                                            3,469,776           2,013,250
                                                                                         --------------------    ----------------

Commitments and contingencies
Redeemable preferred stock, no par value, Series A, 0 and 115,000 shares
   issued and outstanding respectively, Series B, 60,000 and 120,000 shares
   issued and outstanding respectively, Redemption value of $300,000 at 
   October 31, 1997                                                                                   268,033             562,678
                                                                                         --------------------    ----------------


Stockholders' Equity (Deficit):
   Non-redeemable convertible preferred stock, no par value, Series A, 190,000
      shares authorized, 10,000 and 75,000 shares issued and outstanding
      respectively, Series B, 180,000 shares authorized, 60,000 shares issued
      and outstanding, Series C, 1,600,000 shares authorized, 832,934 and
      982,503 shares issued and outstanding respectively                                              322,470             537,905
   Common stock, no par value, 20,000,000 shares authorized,
       5,924,397 and 1,867,661 shares issued and outstanding respectively                          11,130,669           3,360,136
   Accumulated deficit                                                                             (9,984,014)         (4,285,495)
                                                                                         --------------------    ----------------
                                                                                                   1,469,125            (387,454)
                                                                                         --------------------    ----------------

   Total Liabilities and Stockholders' Equity (Deficit)                                           $5,242,934          $2,188,474
                                                                                         ====================    ================
</TABLE>



         The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.

                                      F-3


<PAGE>

                ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                             Year Ended October 31,
                                                                              -----------------------------------------------------
                                                                                       1997                       1996
                                                                              -----------------------  ----------------------------

<S>                                                                           <C>                      <C>       
Revenues:
   Store sales                                                                            $1,777,274                    $1,401,266
   Franchising revenue                                                                       284,829                       277,854
   Equipment and product sales                                                               747,782                       561,067
                                                                              -----------------------  ----------------------------
                                                                                           2,809,885                     2,240,187
                                                                              -----------------------  ----------------------------


Operating expenses:
   Cost of Sales - equipment and product costs and
     store operations, exclusive of depreciation and amortization                          2,094,008                     1,572,185
   Selling, general and administrative expenses                                            4,974,666                     2,132,072
   Loss on disposal of equipment                                                              72,397                        --
   Depreciation and amortization                                                             336,430                       251,741
   Settlement Costs - Employment Contracts                                                    47,010                       224,341
                                                                              -----------------------  ----------------------------
                                                                                           7,524,511                     4,180,339
                                                                              -----------------------  ----------------------------

Operating loss                                                                            (4,714,626)                   (1,940,152)

Interest expense                                                                             983,893                        33,440
                                                                              -----------------------  ----------------------------

Net loss                                                                                 ($5,698,519)                  ($1,973,592)
                                                                              =======================  ============================


Adjusted net loss for net loss per common share calculation:
Net loss                                                                                 ($5,698,519)                  ($1,973,592)
Increase in carrying amount of redeemable preferred stock                                    (48,385)                     (562,678)
                                                                              -----------------------  ----------------------------
Net loss attributable to common stock                                                    ($5,746,904)                  ($2,536,270)
                                                                              =======================  ============================


Shares outstanding:
   Weighted average number of common shares outstanding                                    3,634,442                       943,150

   Additional shares                                                                      --                               430,558
                                                                              -----------------------  ----------------------------
Adjusted shares outstanding                                                                3,634,442                     1,373,708
                                                                              =======================  ============================

Net loss per common share                                                                     ($1.58)                       ($1.85)
                                                                              =======================  ============================


</TABLE>

         The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.

                                      F-4


<PAGE>

                ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF CASH FLOWS



<TABLE>
<CAPTION>


                                                                                                Year Ended October 31,
                                                                                      --------------------------------------------
                                                                                            1997                   1996
                                                                                      -----------------   ------------------------

<S>                                                                                   <C>                 <C>         
Cash Flows from Operating Activities:
      Net loss                                                                             ($5,698,519)               ($1,973,592)
      Adjustments to reconcile net loss to net cash (used in) provided by
           operating activities:
        Depreciation and amortization                                                          336,430                    251,741
        Common stock issued for services                                                       748,022                       --
        Loss on disposal of equipment                                                           72,397                       --
        Amortization of discount on issuance of convertible debentures                         667,677                       --
        Decrease (increase) in:
           Accounts receivable                                                                (131,132)                   (19,849)
           Inventories                                                                         (35,412)                    57,069
           Prepaid expenses                                                                    374,781                   (362,265)
           Security deposits                                                                   (51,936)                      (914)
        Increase (decrease) in:
           Accounts payable and accrued expenses                                               (91,306)                   290,651
           Deferred franchising revenue                                                        (71,952)                    30,000
                                                                                      -----------------   ------------------------
              Total adjustments                                                              1,817,569                    246,433
                                                                                      -----------------   ------------------------
              Net cash (used in) operating activities                                       (4,007,950)                (1,727,159)
                                                                                      -----------------   ------------------------


Cash Flows from Investing Activities:
      Capital expenditures                                                                    (347,477)                   (96,612)
      Acquisition of intangible assets                                                          --                        (33,572)
      Business acquired, net of cash received                                                 (281,776)                      --
      Notes receivable - officer                                                              (127,000)                      --
                                                                                      -----------------   ------------------------
        Net cash (used in) investing activities                                               (756,253)                  (130,184)
                                                                                      -----------------   ------------------------

Cash Flows from Financing Activities:
      Proceeds from issuance of common stock                                                 3,235,337                  2,003,986
      Proceeds from issuance of convertible debentures                                       2,250,000                       --
      Proceeds from issuance of preferred stock                                                 --                        200,000
      Redemption of preferred stock                                                           (343,029)                  (416,997)

      Proceeds from issuance of notes payable                                                   --                        194,899
      Payments of notes payable                                                               (195,729)                      --
      Proceeds from capitalized lease obligations                                               --                         10,900
      Payments of capitalized lease obligations                                                (80,442)                   (70,238)
      Payments of loans from stockholders                                                      (14,026)                   (28,909)
      Proceeds from long-term debt                                                              51,818                       --
      Payments of current maturities of long-term debt                                         (24,425)                    (5,699)
                                                                                      -----------------   ------------------------
        Net cash provided by financing activities                                            4,879,504                  1,887,942
                                                                                      -----------------   ------------------------

Net increase in cash                                                                           242,301                     30,599

Cash - beginning of period                                                                      84,302                     53,703
                                                                                      -----------------   ------------------------

Cash - end of period                                                                          $326,603                    $84,302
                                                                                      =================   ========================

</TABLE>


         The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.

                                      F-5


<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE YEAR ENDED OCTOBER 31, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                                                      Non-Redeemable
                                                                    Common Stock                      Preferred Stock            
                                                         -----------------------------------  ---------------------------------
                                                             Shares            Amount             Shares           Amount        
                                                         ---------------  ------------------  ---------------  ----------------  
<S>                                                      <C>              <C>                 <C>              <C>          
Balance at October 31, 1995                                     945,650            $876,150        1,639,500        $1,022,580   

Year Ended October 31, 1996:
Conversion of preferred stock to
   common stock                                                  35,000              70,000          (70,000)          (70,000)  
Common stock issuance                                           887,011           2,413,986           --               --        
Preferred stock issuance                                             --              --              200,000           200,000   
Preferred stock redemption                                           --              --             (416,997)         (416,997)  
Increase in carrying amount of redeemable
   preferred stock                                                   --              --             (235,000)         (197,678)  
Net Loss                                                             --              --                 --             --        
                                                         ---------------  ------------------  ---------------  ----------------  

Balance at October 31, 1996                                   1,867,661           3,360,136        1,117,503           537,905   


Year Ended October 31, 1997:
Common stock issuance - Initial public
   offering                                                   1,265,000           3,235,337           --                  -- 
Common stock issuance - acquisition
   of businesses                                                504,800           1,103,906           --                  -- 
Conversion of preferred stock to common
   stock                                                        214,569             167,050         (214,569)         (167,050)  
Increase in carrying amount of redeemable
   preferred stock                                               --                   --                               (48,385)  
Common stock issuance for services                            1,010,000           1,634,063           --                  -- 
Common stock issued for property                                 10,000              12,500           --                  -- 
Convertible debenture discount                                   --                 667,677           --                  -- 
Conversion of Convertible debentures to
   common stock                                               1,052,367             950,000           --                  -- 
Net Loss                                                         --                   --              --                  -- 
                                                         ---------------  ------------------  ---------------  ----------------  

Balance at October 31, 1997                                   5,924,397         $11,130,669          902,934          $322,470   
                                                         ===============  ==================  ===============  ================  

<CAPTION>


                                                                                            

                                                Additional
                                                  Paid-In         Accumulated                         
                                                  Capital           Deficit             Total         
                                               --------------  -------------------  ---------------   
                                                                                                      
<S>                                            <C>             <C>                  <C>         
Balance at October 31, 1995                         $365,000          ($2,311,903)        ($48,173)   
                                                                                                      
Year Ended October 31, 1996:                                                                          
Conversion of preferred stock to                                                                      
   common stock                                            --              --                    0    
Common stock issuance                                      --              --            2,413,986    
Preferred stock issuance                                   --              --              200,000    
Preferred stock redemption                                 --              --             (416,997)   
Increase in carrying amount of redeemable                                                             
   preferred stock                                  (365,000)              --             (562,678)   
Net Loss                                                   --          (1,973,592)      (1,973,592)   
                                               --------------  -------------------  ---------------   
                                                                                                      
Balance at October 31, 1996                                0           (4,285,495)        (387,454)   
                                                                                                      
                                                                                                      
Year Ended October 31, 1997:                                                                          
Common stock issuance - Initial public                                                                
   offering                                             --                --             3,235,337    
Common stock issuance - acquisition                                                                   
   of business's                                        --                --             1,103,906    
Conversion of preferred stock to common                                                               
   stock                                                --                --                 --       
Increase in carrying amount of redeemable                                                             
   preferred stock                                      --                --               (48,385)   
Common stock issuance for services                      --                --             1,634,063    
Common stock issued for property                        --                --                12,500    
Convertible debenture discount                          --                --               667,677    
Conversion of Convertible debentures to                                                               
   common stock                                         --                --               950,000    
Net Loss                                                --             (5,698,519)      (5,698,519)   
                                               --------------  ------------------------------------   
                                                                                                      
Balance at October 31, 1997                               $0          ($9,984,014)      $1,469,125    
                                               ==============  ===================  ===============   
</TABLE>

         The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.

                                      F-6


<PAGE>


                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

1. Organization and Summary of Significant Accounting Policies:

(a) Organization --

The Company was incorporated under the name Jutland Food Group, Inc. on
September 27, 1993 under the laws of the State of New Jersey. On October 20,
1993, the Company acquired substantially all of the assets of Howberg Bakery
Equipment Co., Inc., Bagels of New Milford, Inc. and Goldberg's Famous Bagels of
Orangeburg, Inc., hereinafter referred to as the "Goldberg acquisition." The
assets acquired consisted of a bagel equipment business and two retail bagel
stores. On September 29, 1994, the Company acquired all of the outstanding stock
of four interrelated corporations all conducting business under the tradename
"Sammy's New York Bagels," hereinafter referred to as the "Sammy's acquisition."
The acquisition consisted of three certified kosher retail bagel stores and a
bagel production facility, all operating under rabbinical supervision. On March
17, 1997, the Company completed the acquisition of substantially all of the
assets of Bagel Connection, Inc., a private company consisting of one
company-owned and three franchised bagel stores operating under the name Bagel
Connection in New Haven, Ct. The operations at Bagel Connection, Inc. for the
period March 17, 1997, the Acquisition Date, through October 31, 1997 are
included within these financial statements. The purchase price was approximately
$390,000, consisting of the assumption of net liabilities of approximately
$340,000 and the issuance of 25,000 shares of common stock. On September 23,
1997, the Company acquired all of the outstanding stock of three interrelated
corporations all conducting business under the tradename "St. Pete Bagels,"
hereinafter referred to as the "St. Pete acquisition." The acquisition consisted
of a six store bagel chain located in St. Petersburg, FL. Four of the stores are
Company-owned and two are franchised units. The acquisition also included a
bagel production facility. The purchase price was approximately $1,220,000,
consisting of cash in the amount of $220,000 and the issuance of 479,800 shares
of common stock. The operations of St. Pete Bagels for the period of September
23, 1997, the acquisition date, through October 31, 1997 are included within
these financial statements. All of these acquisitions have been accounted for
under the purchase method of accounting in accordance with Accounting Principle
Board Opinion No. 16. Effective October 31, 1995 the Company changed its fiscal
year to October 31st. The Company changed its name to All American Food Group,
Inc. on October 24, 1995.

The unaudited consolidated results of operations on a pro forma basis as though
St. Pete Bagels had been acquired as of the beginning of the Company's fiscal
year 1996 are as follows (Bagel Connection, Inc. excluded effect is
insignificant):

                                                 1997             1996
                                                 ----             ----

Revenues and other income                     $4,299,000       $3,942,000
                                              ==========       ==========
Net income (loss)                             (5,734,000)      (2,612,000)
                                              ==========       ==========
Earnings (loss) per  common share                  (1.61)           (1.41)
                                                   =====            =====


(b) Business --

The Company is principally engaged in the development of a retail chain of
franchised bagel stores, including the operation of a certain number of
Company-owned stores for training and marketing and promotional activities, and
the distribution of bagel bakery equipment and related products to the franchise
system. The Company markets both single unit and market development franchise
agreements. The Company, in the normal course of business, also markets stores
it acquires to individuals who operate as franchisees. The Company franchises
its concepts under the names "Goldberg's New York Bagels & Deli " and "Goldbergs
New York Bagels."

(c) Going Concern --

As shown in the Accompanying Consolidated Financial Statements, the Company
incurred a net loss of $5,698,519 for the year ended October 31, 1997 and has an
accumulated deficit of $9,984,014 as of such date. During fiscal year 
October 31, 1997 the Company used cash in operating activities of $4,007,950. 
This creates an uncertainty about the Company's ability to continue as a going
concern. Management of the Company is developing a plan to reduce its operating
loss and to raise capital through the issuance of additional stock (or debt). 
The ability of the Company to continue as a going concern is dependent on the
plan's success and there can be no assurance that the Company will be
successful. See Note 20 of the Consolidated Financial Statements regarding
certain subsequent events. The Consolidated Financial Statements do not include
any adjustment that might be necessary if the Company is unable to continue as a
going concern.

(d) Principles of Consolidation --

The consolidated financial statements include the accounts of All American Food
Group, Inc. and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.

(e) Cash and Cash Equivalents --

At October 31, 1997 and 1996 cash represented monies on deposit in financial
institutions.


                                       F-7

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

1. Organization and Summary of Significant Accounting Policies -- (continued)

(f) Concentration of Credit Risk --

The Company maintains cash and cash equivalents with various financial
institutions. Company policy is designed to limit exposure with any one
institution. Credit risk with respect to trade accounts and notes receivable is
minimal, due to the terms under which the Company transacts its business.

(g) Fair Value of Financial Instruments --

The Company estimates that the fair value of all financial instruments at
October 31, 1997 and 1996 does not differ materially from the aggregate carrying
values of its financial instruments recorded in the accompanying balance sheet
based upon currently available information.

(h) Inventories --

Inventories are stated at the lower of cost (first-in, first-out ("FIFO")) or
market.

(i) Property, Plant and Equipment --

Equipment, fixtures and leasehold improvements are recorded at cost. Equipment
under capital leases is recorded at the net present value of the associated
lease payments. Major replacements or improvements are capitalized. Maintenance
and repairs are charged to earnings as incurred. For financial statement
purposes, depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets which range from three to
ten years.

(j) Intangible Assets --

The values assigned to intangible assets result from the business combinations
described in Note 1(a) and are based on an independent appraisals and
management's estimates, and are being amortized on a straight-line basis over
their estimated useful lives, which range from three and one-half to five years.

(k) Franchise Revenue Recognition --

Franchise revenue includes the sale of single unit franchises, the sale of
Company-owned stores to franchisees, the sale of market development franchises
and ongoing royalty and advertising fees.

Single unit franchise agreements ("Single Unit Agreements") provide for payment
of a non-refundable initial franchise fee (an "Initial Franchise Fee"), a weekly

royalty on gross sales, and a weekly cooperative advertising fund contribution.
The Company's material obligations under the terms of all Single Unit Agreements
are assisting in site selection and franchisee training. Initial Franchise Fees
under Single Unit Agreements are recognized as revenues when the Company has no
further material obligations in respect of the establishment of such franchise,
which occurs upon the opening of the store.


                                       F-8

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

1. Organization and Summary of Significant Accounting Policies (continued)

(k) Franchise Revenue Recognition --(continued)

Market Development Agreements provide for the payment, by the Market Developer,
of a non-refundable initial fee (a "Market Development Fee") based on the size,
population and overall market potential of the territory subject to the Market
Development Agreement (the

Market Development Agreements provide for the payment, by the Market Developer,
of a non-refundable initial fee (a "Market Development Fee") based on the size,
population and overall market potential of the territory subject to the Market
Development Agreement (the "Market Area"). The Market Developer assumes
substantially all of the responsibilities that otherwise would be assumed by the
Company, as franchiser within the Market Area. In exchange, the Market Developer
receives (i) the exclusive right to build stores for the Market Developer's own
account or to seek third party franchisees within the

Market Area and (ii) the right to share with the Company, on a 50/50 basis,
initial and the ongoing single store fees within the Market Area. Under Market
Development Agreements, Company's obligations in respect of the development of
single unit franchises within the Market Area are limited to (i) approval of
franchisees presented by the Market Developer and (ii) approval of store sites.
The Company has no further material obligations in respect of a Market
Development Agreement at the time of execution of the Agreement. Market
Development Fees paid in cash or by promissory notes fully collateralized by
liquid assets or as to which the Company has obtained an independent third-
party valuation, are recognized as revenues by the Company upon execution of the
Market Development Agreement and payment of the fee. In the absence of such
collateral or valuation, the Company recognizes Market Development Fees on a
cash basis as payments on such notes are received. The Company records
non-interest bearing notes with a term in excess of one year at a discount for
imputed interest thereon. As of October 31, 1997 and 1996, the Company had
deferred the recognition of $39,795 and $257,549 respectively, of revenues
relating to notes from Market Developers. See notes 3 and 8.


The Company's portion of the Initial Franchise Fee on single unit franchises
sold within a Market Developer's Market Area is recognized as revenues when the
Company has no further material obligations in respect of the establishment of
such franchise, which occurs upon opening of the store. As of October 31, 1997,
the Company had no deferred revenue relating to stores in Market Developers'
Market Areas.

The Company recognizes revenues from the sale of Company-owned stores to
franchisees upon consummation of the sale transaction.

The Company recognizes franchise royalty revenue when it is earned.

Franchise revenue for the year ended October 31, 1997 of $284,829 consists of
initial non-recurring franchise and market development fees of $62,500 and
$101,884, respectively, and ongoing royalties of $120,445. Franchise revenue for
the year ended October 31, 1996 of $277,854 consists of initial non-recurring
franchise and market development fees of $37,500 and $177,878, respectively, and
ongoing royalties of $62,476.

(l) Net Loss per Share --

Net loss per common share was determined by dividing net loss, as adjusted, by
the weighted average number of common shares outstanding, as adjusted. The net
loss for the year ended


                                       F-9

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

1. Organization and Summary of Significant Accounting Policies -- (continued)

(l) Net Loss per Share --(continued)

October 31, 1997 and 1996 was adjusted by an increase of $48,385 and $562,678
respectively, representing the increase in the carrying amount of redeemable
preferred stock. (See Note 13). The weighted average number of common shares
outstanding was adjusted by an increase of 430,558 shares for the year ended
October 31, 1996. These additional shares represent the number of shares and
options issued within the twelve months prior to May 3, 1996, when the Company
filed a registration statement for an initial public offering (IPO), that were
issued for consideration per share or at an exercise per share less than the
anticipated IPO price of $3.50 per share. The treasury stock method has been
used to determine the net increase in the number of shares outstanding. As such
the computation of fully diluted net loss per share was anti-dilutive in each of
the periods presented; therefore, the amounts reported for primary and fully
diluted loss per share are the same.




(m) Stock Options --

The Company accounted for stock option grants for the fiscal period ended
October 31, 1996 in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and, accordingly, recognizes no compensation or other
expense for the stock option grants.

During fiscal year ended October 31, 1997 the Company accounted for stock
options granted to employees under APB Opinion No. 25, and accounted for stock
options granted to non-employees under Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation."

(n)  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 and disclosure of
contingent 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.


                                      F-10

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997


2. Inventories:

Inventories at October 31, consist of the following:

                                               1997                1996
                                           -----------          ----------

            Food and paper products        $   105,800          $   37,774
            Equipment and parts                 28,010              28,806
                                           -----------          ----------
            Total inventories
                                           $   133,810          $   66,580
                                           ===========          ==========

3. Notes Receivable:

Notes receivable at October 31, represent the present value of the unpaid
portion of the Market Development Fees due in connection with the sales of
Market Areas and other franchise revenues.


The market developer notes, which are non-interest bearing have been discounted
based on an imputed interest rate of 9%:

                                                     1997               1996
                                                ------------        -----------
 Notes receivable (market developer), paid
    by the application of 50% of compensation 
    due to Market Developer                        $  39,795         $ 48,230
 Notes receivable (market developer), due in 
    quarterly installments of $20,000                  --             209,319
 Notes receivable, due in monthly
    installments of $850, 10% per annum,
    60 months (note secured by equipment)             35,745             --
                                                ------------        -----------
                                                      75,540          257,549
         Less current portion                         20,441           97,115
                                                ------------        -----------
                                                   $  55,099         $160,434
                                                ============        ===========


4. Notes Receivable-Officer:

Notes receivable officer of $127,000 are due on demand and bear interest at the
rate of 7% per annum.

5. Fixed Assets:

Fixed assets and accumulated depreciation at October 31, consist of the
following:


<TABLE>
<CAPTION>

                                                                                                    Estimated
                                                                            1997         1996       Useful Lives
                                                                      ------------     ---------    -------------

<S>                                                                    <C>             <C>         <C>    
          Machinery and equipment - retail stores                      $ 1,062,318     $ 495,182          7 years
          Office furniture and warehouse equipment                         200,851       172,200          7 years
          Trucks and delivery vehicle                                      145,559        31,370     3 to 5 years
          Leasehold improvements - retail stores                           791,436       243,155    Term of lease
          Construction in progress                                         202,988       228,196
                                                                      ------------     ---------
                                                                         2,403,152     1,140,103
          Accumulated depreciation                                        (377,765)     (249,533)
                                                                      ------------     ---------
          Fixed assets, net of accumulated
             depreciation                                             $  2,025,387    $  902,570
                                                                      ============    ==========
</TABLE>



                                      F-11

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

5. Fixed Assets--(continued)

Depreciation expense aggregated $171,794 and $103,944 for the year ended October
31, 1997 and, 1996, respectively. At October 31, 1997 certain debt is secured by
approximately $569,000 of fixed assets.

6. Intangible Assets:

Intangible assets and accumulated amortization at October 31, are as following:

<TABLE>
<CAPTION>

                                                                                                    Estimated
                                                                            1997         1996       Useful Lives
                                                                    ------------       ---------    -------------
<S>                                                                    <C>             <C>               <C>    
          Kosher certification                                         $ 165,771       $ 165,771         5 years
          Non-compete agreements                                         266,789         216,789         4 years
          Lease acquisition costs                                         33,572          33,572        10 years
          Favorable lease agreement                                        7,891           7,891     3 1/2 years
          Customer lists                                                  93,970          93,970         4 years
          Proprietary formula                                            135,513         135,513         5 years
          Drawings and blueprints                                         58,273          58,273         5 years
          Trademark                                                       75,000             --         10 years
          Goodwill                                                     1,007,463             --         10 years
                                                                    ------------       ---------
                                                                       1,844,242         711,779
          Accumulated amortization                                      (583,096)       (418,460)
                                                                    ------------       ---------
          Intangible assets, net of accumulated
             amortization                                           $  1,261,146       $ 293,319
                                                                    ============       =========
</TABLE>


Amortization expense aggregated $164,636 and $147,797 for the year ended October
31, 1997 and 1996, respectively.

7. Notes Payable:

Notes payable at October 31, 1997 bear interest at the rates ranging from 10% to

13% and are due on demand. Notes payable at October 31, 1996 consisted of
$147,899 due to an officer and $46,900 due to three unrelated individuals. The
notes are due on demand and bear interest at rates ranging from 6% to 10%.

8. Deferred Franchising Revenue:

Deferred franchising revenue at October 31, represents Initial Franchise Fees
received in connection with single store franchises where the stores have not
yet opened and the present value of the portion of the Market Development Fee
paid by means of non-interest bearing notes as to which the Company has not as
yet recognized revenue, and are as follows:


                                      F-12


<PAGE>


                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

8. Deferred Franchising Revenue--(continued)

<TABLE>
<CAPTION>

                                                                     1997                   1996
                                                                  --------             ---------

<S>                                                              <C>                   <C> 

          Single store, Initial Franchise Fees received,
               stores not yet open                                $ 20,000             $  92,500
          Market development fees                                   39,795               257,549
                                                                  --------             ---------
                                                                    59,795               350,049
          Less current portion                                      33,505               189,615
                                                                  --------             ---------
          Deferred franchising revenue, long-term                 $ 26,290             $ 160,434
                                                                  ========             =========
</TABLE>

9. Equipment Lease Obligations:

The Company and its subsidiaries are obligated under various equipment lease
arrangements which have been capitalized in the accompanying financial
statements. Property, plant, and equipment presented on the consolidated balance
sheet includes approximately $569,000 of assets capitalized under these leasing
arrangements. Accumulated depreciation recorded on these assets approximated
$61,000 at October 31, 1997. These lease obligations are due in monthly

installments including interest expense at annual interest rates ranging from
8.3% to 24.5%. The lease obligations are payable at various dates through May
2001. The future minimum payments required under the lease arrangements with
their present value at October 31, 1997 are as follows:

                                         Present      Interest       Minimum
          Year Ended October 31,           Value       Expense       Payments
          ----------------------         --------      -------       --------

                1998                      $62,710      $12,277       $ 74,987
                1999                       40,910        4,488         45,398
                2000                       26,215        1,789         28,004
                2001                        2,353          125          2,478
                                         --------      -------       --------
                                         $132,188      $18,679       $150,867
                                         ========      =======       ========


10. Loans From Stockholders:

Loans from stockholders primarily consist of obligations assumed in the Sammy's
acquisition. These loans are due in monthly installments including interest
expense at annual rates ranging from 5.0% to 16.76%. The loans are payable
through dates ranging from November 1997 through February 1999.

The future minimum payments required under the loans, with their present value
at October 31, 1997, are as follows:

                                         Present      Interest       Minimum   
          Year Ended October 31,           Value       Expense       Payments  
          ----------------------         --------      -------       --------  

                1998                     $  4,757        $ 207       $ 4,964
                1999                        1,398           14         1,412
                                         --------      -------       --------
                                         $  6,155        $ 221       $ 6,376


                                      F-13

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

11. Long-term Debt:

Long-term debt at October 31, is summarized as follows:

<TABLE>
<CAPTION>


                                                                                    1997        1996
                                                                                  -------      ------
<S>                                                                               <C>          <C>

          Notes payable to bank in monthly installments of $1,234 including
            interest at the rate of 10% per annum through July 2001 secured
            by a vehicle                                                          $ 48,970         --

          Notes payable to bank in monthly installments consisting of $300
            of principal plus interest at 10% per annum, maturing at
            December 1998 secured by equipment and leasehold improvements          122,614         --

          Notes payable to bank in monthly installments of $3,000
            including interest at the rate of 10% per annum, maturing at
            December 2003 secured by equipment and leasehold improvements          148,566         --

          Notes payable to bank in monthly installments of $408 including
            interest at the rate of 10.08% per annum through June 2000,
            secured by a vehicle                                                    11,715         --

          Notes payable to bank in monthly installments of $650 including
            interest at the rate of 15% per annum through October 2000              26,421         -- 

          Note payable to bank in monthly installments of $405 plus
            interest at 1.5% above the prime rate, through February 1997,
            secured by equipment                                                     --        $1,042

          Note payable to individual in monthly installments of $153 including
           interest at the rate of 12.5% per annum, payable through April 1997
                                                                                     --           890
                                                                                ---------      ------
                                                                                 358,286        1,932
          Less current portion                                                    58,378        1,932
                                                                                ---------      ------
          Long-term debt                                                        $299,908       $   --
                                                                                =========      ======
</TABLE>

See Note 18 for the discussion of Convertible Debentures which mature on
September 30, 1999.

12. Income Taxes:

The Company has adopted SFAS No. 109 and is a C Corporation subject to federal
and state income taxes with a fiscal year ended October 31

At October 31, the cumulative temporary differences resulted in net deferred
assets or liabilities consisting primarily of:

                                                    1997          1996
                                                  --------      ---------
Deferred tax assets


     Accounts receivable and other reserves      $  159,000    $   12,000
     Net operating loss carryovers                8,551,000     2,400,000
                                                  --------      ---------
                                                  8,710,000     2,412,000
     Less valuation allowance                     7,338,000     2,021,000
                                                  --------      ---------
Deferred tax asset, net                           1,372,000       391,000

Deferred tax liabilities:

     Difference between assigned value and the tax basis
assets and liabilities resulting from the Goldberg's, St. Pete and

Sammy's acquisitions                              1,372,000       391,000
                                                 ----------      -------- 

Net deferred tax assets (liabilities)            $       --      $     --
                                                 ==========      ========


For income tax reporting, the Company has net operating loss carryfowards
available to reduce future federal and state income taxes of approximately
$8,551,000. These loss carryfowards will expire in the years 2004 and 2012,
respectively, for state and federal tax purposes.


                                      F-14

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

13. Redeemable and Non-redeemable Preferred Convertible Preferred
Stock

The Company issued 190,000 shares of Series A (180,000 shares issued to Mr.
Goldberg and 10,000 shares to a third party) and 180,000 shares of Series B
Convertible Preferred Stock in connection with the Goldberg's and Sammy's
acquisitions, respectively.

Series A Shares:

Upon the completion of the Company's initial public offering the Company reached
a settlement with Mr. Goldberg, under which the Company redeemed 115,000 of the
Series A Preferred stock for $25,000, and Mr. Goldberg converted the remainder
of the Preferred stock into 65,000 shares of common stock, and consequently,
there are no Series A Preferred shares outstanding at this time.

Series B Shares:


Upon the completion of the Company's initial public offering, in accordance with
its obligations to the holders of the Series B Preferred Stock during the year
ended December 31, 1997, the Company redeemed 60,000 shares at $5.30 per share,
for a total redemption cost of $318,029.


Twenty four months after completion of the Company's initial public offering,
which date would be December 12, 1998, the Company has the further obligation to
offer to redeem an additional 60,000 shares of the Series B Preferred stock at a
redemption price of $5.00 per share. Upon the receipt of such offer the holders
of the Series B Preferred stock can accept the offer or convert the shares into
an equal number of shares of the common stock of the Company.

At October 31, 1997 the present value of the amount necessary to redeem the
maximum number of shares of Series B Preferred Stock has been reflected in the
accompanying consolidated financial statements as "Redeemable Preferred Stock,
Series B.

                                      F-15

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

13. Redeemable and Non-redeemable Preferred Convertible Preferred
Stock--(continued)

The following presents the previous carrying amounts of the Series A and Series
B Preferred Stock and the accretion (increase in the carrying amount) for the
year ended October 31, 1997, and the redemption amounts for the preferred
shares.

                                     Series A                 Series B
                                 -----------------       ------------------
                                 Shares     Amount       Shares      Amount
                                 ------     ------       ------      ------

Carrying amount at October       115,000    $24,439      120,000    $538,239
  31, 1996 and accretion
  for the year then ended

Accretion for year ended
  October 31, 1997                              561                   47,824
Redemption Amount               (115,000)   (25,000)     (60,000)   (318,030)

Carrying amount at October       ------     ------       ------      ------
  31, 1997                          --         --         60,000    $268,033
                                --------    -------      -------    --------


The maturity schedule of the redemptions is as follows:

         Year Ended October 31,                     Amount
         ----------------------                     ------

                  1999                             $ 300,000
                                                   ---------
                                                     300,000
            Less unrecognized accretion               31,967
                                                   ---------
   Carrying amount at October 31, 1997             $ 268,033
                                                   =========

The unrecognized accretion will be recorded over the period to anticipated
redemption using the interest method.

Series C Preferred Stock:

The Company also has outstanding 832,934 shares of Series C Non-redeemable
Convertible Preferred stock. The Certificate of Designation for this series
provides that the Company may, at its sole option, redeem all or part of the
stock for $5.00 a share, subject to the holder's election to convert the shares
into an equal number of common shares of the Company. The shares have no
conditions under which the Company must redeem all or portion of theses shares.

As discussed in Note 14, Related Party Transactions, the Company agreed to 
redeem 416,997 shares of this stock during the fiscal year ended October 31,
1996. The Company does not intend to redeem any additional shares of
non-redeemable preferred stock.


                                      F-16

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

14. Related Party Transactions:

As described above, during the year ended October 31, 1996 the Company
voluntarily redeemed 416,997 shares of Series C Preferred Stock. Of this total
401,997 shares were redeemed from an affiliate, Blue Chip Computerware, Inc.,
for consideration of $1.00 per share, equivalent to the price Blue Chip paid to
acquire the shares. This was done in connection with the financial
reorganization of Blue Chip. As of October 31, 1997, the Company had loaned
$127,000 to an officer of the Company.


15. Stock Options and Warrants;

         The Company accounts for stock options and warrants granted to
employees in accordance with APB #25 and for non-employees in accordance with
FASB #123. As of October 31, 1997, the Company has granted, at the market price
on date of grant, options and warrants to purchase 985,000 shares of the
Company's common stock, consisting of 90,000  options granted to vendors, 35,000
options granted to a Director, 5,000 options granted to a customer, 175,000
options granted to 2 key officers of the Company and 680,000 options/warrants
granted to various consultants and investment bankers.

         The options/warrants are exercisable at any time during the period
they are outstanding, the following summarizes the activity during the periods
presented:
                                    Employees              Non-employees
                             -------------------------- --------------------
                                            Weighted                Weighted
                                            Average                 Average
                                            Exercise                Exercise
                               Shares       Price        Shares     Price
                              ------------- ------------ ---------- --------


Outstanding at October 31,    
1995                            -0-           -0-         $40,000    $1.00

Granted during Fiscal Year
Ended 1996                     50,000        $2.00         30,000     2.00
                              ------------- ------------ ---------- --------

Outstanding at October 31,     50,000         2.00         70,000    $1.43
1996

Granted during Fiscal Year
Ended 1997                    125,000        3.125        740,000     2.16
                              ------------- ------------ ---------- --------

Outstanding at October 31,    
1997                          175,000        $2.80        810,000    $2.10
                              ------------- ------------ ---------- --------

          At October 31, 1997 none of the above option/warrants have been
exercised, forfeited or expired. Pro forma information, pursuant to FAS #123,
giving effect to the fair value of employee and non-employee options/warrants
granted during the fiscal year ended 1997 is not presented as such information
is not materially different from the historical information presented.




16.  Supplemental Cash Flow Information:

                                                Year Ended       Year Ended
                                             October 31, 1997  October 31, 1996


Interest paid                                       $44,616        $32,648
Income taxes paid                                        --             --

Non-cash investing and financing activities:
   Exchange of common stock for capital
      assets                                      1,001,534        410,000
   Sale of market area for note                         --         209,289

Exchange of common stock for consulting
  services                                        1,614,062            --


                                      F-17

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

17. Commitments and Contingencies 

(a) Leases --

The Company rents real and personal property under various non-cancelable leases
expiring at various dates through 2004. Certain of the leases include renewal
options and provisions for additional rental payments based on various formulas
such as cost of living adjustments, real estate tax and operating expense
escalations and escalations based on gross revenues. Total rent expense charged
to operations approximated $511,000 and $277,000 for the years ended October 31,
1997 and 1996, respectively. These amounts included contingent rental expense of
approximately $7,000 and $21,000, respectively.

Minimum annual rental commitments under leases in effect at October 31, 1997 are
summarized as follows:

                                                                   Equipment
         Year Ended October 31,        Real Estate                  & Other
         ----------------------        ------------                 ---------

                  1998                    $ 466,000                  $ 26,000
                  1999                      437,000                     1,000
                  2000                      388,000                        --
                  2001                      370,000                        --
                  2002                      374,000                        --
                  Later years             1,031,000                        --
                                        ------------                ---------
Total minimum lease payments             $3,066,000                   $27,000
                                        ============                =========




(b) Employment Agreements --

The Company entered into employment contracts with the three principal former
shareholders of Sammy's as part of the acquisition. The employment contracts
provided for annual salaries through December 31, 1996 and include non-compete
covenants through December 31, 1998. Additionally the former shareholders are
entitled to receive monthly payments equal to 10% of the single unit franchising
fees paid to the Company for the period through September, 1999.

The total compensation expense under these "Sammy's" agreements for the years
ended October 31, 1997 and 1996 was $47,010 and $224,341, respectively, and such
amounts have been reflected as Settlement Costs - Employment Contracts on the
accompanying Statement of Operations.

The Company entered into an employment contract with the former president and
principal shareholder of St. Pete Bagels as part of the Acquisition. Effective
September 19, 1997, the employment contract provides for a first year salary of
$75,000, and $85,000, annually, for the next four years.  Additionally, it
provides for compensation of 10% of the franchise fees paid for franchises sold
or renewed within a specified territory and 20% royalties received from
franchised stores.


                                      F-18

<PAGE>

                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

17. Commitments and Contingencies (continued)

(c)  Contingencies --

From time to time the Company is involved in litigation arising in the ordinary
course of its business. The Company is not currently engaged in any legal
proceedings which are expected, individually or in the aggregate, to have a
material adverse effect on the accompanying financial statements.

18. Common Stock:

Initial Public Offering:

As of December 5, 1996, the Company effected a one-for-two reverse split of the
Company's Common Stock, completion of which was a condition to the closing of 
the Offering.  These financial statements, including the notes thereto, give
effect to this reverse stock split.

On December 17, 1996, the Company completed a public offering of 1,100,000
shares of the Company's common stock for a public offering price of $3.50 per

share yeilding the Company net proceeds of $2,752,000. In January of 1997, the
underwriters of the initial public offering exercised their over-allotment
option by purchasing an additional 165,000 shares at a price yielding net
proceeds to the Company of $483,000.

The Company also sold to the Underwriter, for nominal consideration, warrants to
purchase 110,000 shares of the Company's common stock at an aggregate price.
These warrants have not been exercised and expire in 2001.

Non-cash Stock Issuance:

The Company exchanged common stock for capital assets of $1,001,584 and
consulting services of $1,614,062 during fiscal year ended October 31, 1997. 
These transactions resulted in the issuance of 514,800 and 950,000 shares
respectively valued at the current market price at date of issuance.  The
accompanying Consolidated Statement of Operations includes approximately
$728,000 of consulting expenses.  The remaining $886,000 is included in Prepaid
Expenses on the Consolidated Balance Sheet.

Licensing Arrangement:

In November, 1997, the Company entered into a settlement agreement with a
licensee whereby the company repurchased a retail bagel store for $250,000,
payable in cash or in common stock of the Company. Subsequent to October 31,
1997 the Company has issued 75,000 shares of common stock representing
approximately $50,000 of the consideration. This settlement agreement has been
reflected in the accompanying financial statements at October 31, 1997.

Other:

During the year ended October 31, 1996, the Company completed private placements
(the "Private Placements") of its common stock pursuant to which it received an
aggregate of $2,413,986, net of expenses of $48,514. Included in the proceeds
was property consisting of two retail bagel stores in the final stages of
construction, valued at $410,000.

19. Convertible Debentures:

During July and August 1997, the Company completed the sale of $950,000 of 5%
Convertible Debentures to "Non-U.S. Persons" as defined in Regulation S under
the Securities Act of 1933. The debentures are convertible into shares of the
Company's common stock at a price which is the lesser of a 15% discount of the
five day average closing price of the Company's common stock prior to the date
of funding or a 30% discount of the five day average closing price of the
Company's common stock prior to the date of conversion. The discount for the
beneficial conversion feature has been computed as of the funding dates and is
credited to paid in capital and is charged to operations as interest expense
using the interest method over the 41 day period which represents the first
dates the debentures are convertible. Interest expense in the accompanying
Consolidated Statement of Operations includes $410,143 of discount amortization
for fiscal year ended October 31, 1997. As of October 31, 1997 the $950,000
Debentures have been converted to 1,052,367 shares of common stock.

On September 16, 1997, the Company completed a private placement issue of 6%

Convertible Debentures aggregating $2,600,000 under Regulation D under the
Securities Act of 1933. The Debentures were payable in two tranches. The first
tranche was paid on September 16, 1997. The Debentures are convertible into
shares of the Company's common stock at the option of the Holder at a discount
ranging from 18% to 25% of the market price at the conversion date. The
Debentures provide for an annual interest rate of 6% payable quarterly and
require the Company to file a Form SB-2 Registration Statement for the shares
underlying the Convertible Debenture. Such Registration Statement became
effective on December 12, 1997. The discount for the beneficial conversion
feature that represents an amount that would be incurred if the Debentures were
converted on the date they were funded has been credited to paid in capital and
is charged to operations as Interest Expense. Interest Expense in the
accompanying Consolidated Statement of Operations includes $260,534 for
discounts for fiscal year ended October 31, 1997.  The Convertible Debenture
matures on September 30, 1999.

Under the terms of the Debenture, the market price of the Company's common stock
must have exceeded $1.25 per share for 20 out of 30 trading days during a
specified period as a requisite to the funding of the second $1,300,000 tranche.
The Company's common stock did not trade at those levels during the specified
period, and the Company's right to require funding of the second tranche has
thus expired.


                                      F-19

<PAGE>


                 ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)

                                OCTOBER 31, 1997

20. Subsequent Events:

Acquisition:
         In December, 1997, the Company purchased four previously operating 
retail bagel stores in Toledo, Ohio which the Company intends to reopen as
Company owned stores. The consideration was approximately 300,000 shares of the
Company's common stock. On December 9, 1997 the Company issued 147,971 shares
and on January 30, 1998 the Company authorized the issuance of the remaining
shares.

Capital Transactions:
         In December, 1997, the Company sold $300,000 of Series D 8% Convertible
Preferred Stock and 300 Warrants. Each warrant entitles the holder to purchase
350 shares of the Company's common stock. The Debentures are convertible into
shares of the Company's common stock at the option of the holder at a 20%
discount of the average market price for five days prior to the conversion date.
The holder of the Series D Convertible Preferred Stock subsequently elected to
convert $100,000 of this Preferred Stock into 410,810 shares of the Company's
common stock.

         In January 1998, the Company sold $275,000 of Series E 12% Convertible
Preferred Stock. The Debentures are convertible into shares of the Company's
common stock at the option of the holder at a 30% discount of the average market

price for five days prior to the conversion date.

         In January, 1998 the Company issued 805,753 shares of its common
stock to the holders of the 6% Convertible Debentures, discussed at Note 19,
for conversion of $120,000 of said Note.

         In connection with the addition of a gourmet soup business, the Company
issued a total of 375,000 shares of common stock to two unrelated entities in 
November, 1997.

         In February 1998 the Company issued 320,000 restricted shares of
its common stock to two of its officers for services rendered.


Impairment of assets

         Subsequent to October 31, 1997 the Sub-lessor of premises from whom
the Company sub-leased two retail bagel store facilities filed for protection
under Federal Bankruptcy Laws. The Company has subsequently vacated these
premises and anticipates recognizing losses approximating $320,000 in the
first quarter of fiscal year ended October 31, 1998.

NASDAQ maintenance requirements

         The Company's stock is currently quoted on the NASDAQ Small Capital
Stock Market. NASDAQ trading criteria require the per share price of a company's
common stock be above $1 per share. Subsequent to October 31, 1997 the price per
share of the Company's common stock has been trading below $1. Presently, the
Company does not meet the $2 million minimum tangible net worth criteria for
continued listing on the NASDAQ. Management of the Company is developing plans
to meet the NASDAQ criteria for continued listing. In the event of a delisting,
the Company will be in default of certain debenture provisions.





                                      F-20

<PAGE>

                   CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS

     We hereby consent to the reference to our firm under the captions 
"Experts" and to the use of our report dated February 7, 1998 covering the 
financial statements for the fiscal years ended October 31, 1997 and 1996, in 
the Annual Report on Form 10KSB of All American Food Group, Inc. for the 
fiscal year ended October 31, 1997 filed with the Securities and Exchange 
Commission on February 13, 1998.


                                               /s/ DelSanto and DeFreitas
                                             _______________________________
                                                   DelSanto and DeFreitas


Closter, New Jersey
February 13, 1998



<PAGE>


                                 EXHIBIT INDEX

    Exhibit
    Number                 Document
    ------                 --------

        3.1       Second Restated Certificate of Incorporation of the Company
                  (incorporated herein by reference to Exhibit 3.3 of the
                  Company's Registration Statement on Form SB-2 (File No.
                  333-4490), as amended (the "Registration Statement")).

        3.2       Second Amended and Restated By-Laws of the Company
                  (incorporated herein by reference to Exhibit 3.3 of the
                  Company's Annual Report on Form 10-KSB for the fiscal year
                  ended October 31, 1996 (the "Form 10-KSB Report").

        4.1       Form of Specimen of Common Stock Certificate (incorporated
                  herein by reference to Exhibit 4.1 of the Registration
                  Statement).

       10.1       Form of Goldberg's Franchise Agreement (incorporated herein
                  by reference to Exhibit 10.1 of the Registration Statement).

       10.2       Form of Sammy's Franchise Agreement (incorporated herein by
                  reference to Exhibit 10.2 of the Registration Statement).

       10.3       Agreement dated January 12, 1993 with Kof-K Kosher
                  Supervision (incorporated herein by reference to Exhibit
                  10.3 of the Registration Statement).

       10.4       All American Food Group, Inc. Amended and Restated Omnibus
                  Stock Plan (incorporated herein by reference to Exhibit 10.4
                  of the Registration Statement).

       10.5       Market Development Agreement covering the State of Arizona
                  (incorporated herein by reference to Exhibit 10.5 of the
                  Registration Statement).

       10.6       Market Development Agreement covering the State of Ohio
                  (incorporated herein by reference to Exhibit 10.6 of the
                  Registration Statement).

       10.7       Market Development Agreement, as amended, covering portions
                  of the State of New York (incorporated herein by reference
                  to Exhibit 10.7 of the Registration Statement).

       10.8       Form of Market Development Agreement (incorporated herein by
                  reference to Exhibit 10.8 of the Registration Statement).

       10.9       Modification and Settlement Agreement between the Company

                  and Howard Goldberg (incorporated herein by reference to
                  Exhibit 10.9 of the Registration Statement).

       10.10      Form of Development Agreement (incorporated herein by
                  reference to Exhibit 10.10 of the Company's Form 10-KSB
                  Report).

       10.11      Abstract of lease entered into by the Company in December
                  1996 (incorporated herein by reference to Exhibit 10.11 of
                  the Company's Form 10-KSB Report).

       10.12      Securities Purchase Agreement, dated September 16, 1997,
                  between the Registrant and South Seas Import-Export Corp.
                  (incorporated herein by reference to Exhibit 4.4 of the
                  Company 's Registration Statement on Form SB-2 (File No.
                  333-40163), as amended).

       10.13      Agreement and Plan of Merger, dated September 19, 1997,
                  between All American Food Group, Inc,. St. Pete Bagels
                  Acquisition Corp., Sam & Son, Inc., Bagel Man, Inc. and St.
                  Pete Bagel Co., Inc. (incorporated herein by reference to
                  Exhibit 2.1 of the Company's Current Report on Form 8-K
                  dated October 7, 1997).

       21.1       Subsidiaries of the Company.

       27.1       Financial Data Schedule.