FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

For the fiscal year ended January 2, 1998

                                       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 0-4485

                               WESTERN BEEF, INC.
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             (Exact name of registrant as specified in its charter)

           Delaware                                    13-3266114
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(State or other jurisdiction of           (I.R.S. employer identification no.)
incorporation or organization)

47-05 Metropolitan Avenue, Ridgewood, New York         11385
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(Address of principal executive offices)             (Zip code)

Registrant's telephone number, including area code: (718) 417-3770


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

Securities registered pursuant to Section 12 (g) of the Act:

             Common Stock par value $.05 per share ("Common Stock")
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|  No |_|

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the $7.565 average of the closing bid and asked prices
reported by NASDAQ/NMS on March 16, 1998 was $11,659,027.

As of March 16, 1998, the registrant had issued and outstanding 5,469,220 shares
of Common Stock.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents or the indicated portions thereof have been incorporated
herein by reference:

      (1)   Specifically identified information in the registrant's definitive
            proxy material for its 1998 Annual Meeting of Stockholders is
            incorporated by reference as Part III hereof, which definitive proxy
            material shall be filed not later than 120 days after January 2,
            1998.

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.

      The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 10-K is forward-looking, such as information relating to
the renovation of the Company's existing stores and the construction or
acquisition of new stores, the recoverability of deferred taxes, the continued
availability of credit lines for capital expansion, the suitability of
facilities, access to suppliers, implementation of technological improvement
programs and year 2000 issues relating to computer applications. Such
forward-looking information involves important risks and uncertainties that
could significantly affect expected or actual results in the future from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic conditions; delays and other hazards inherent
in building and construction; competition in both the retail and wholesale
markets; government and regulatory policies and certifications (in particular
those relating to the United States Department of Agriculture food stamp
program); the pricing and availability of the products the Company sells and
distributes, including Western Beef label brand products; potential delays in
the implementation of the Company's technological improvement programs; and the
effectiveness of such programs upon the implementation of, and the Company's
ability to resolve, any and all year 2000 computer applications.


                                       2
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                                     PART 1

ITEM 1. BUSINESS

General

      Western Beef, Inc. ("Western Beef" or the "Company") consists principally
of a retail food business that currently operates 19 high-volume, warehouse-type
supermarkets, one outlet-type foodstore and a wholesale food business that
primarily deals in beef, pork, poultry, provisions, produce and private label
groceries. The Company's supermarkets serve the New York Metropolitan area,
while the Company's wholesale business operates in the New York, New Jersey and
Eastern Pennsylvania markets. In the fiscal years ended January 2, 1998
("1997"), January 3, 1997 ("1996") (a fifty-three week fiscal year), and
December 29, 1995 ("1995"), the retail supermarket business accounted for
approximately 73%, 70% and 69% respectively, of the Company's total net sales.
See ITEM 7. Management Discussion and Analysis of Financial Condition and
Results of Operations.

      Western Beef's supermarkets are distinguishable from traditional
supermarket formats by their unusually broad selection of meat and produce items
and their limited selection of "non-food" items, such as health and beauty aids.
Western Beef's supermarkets are truly "food stores".

      Key elements in Western Beef's business strategy include:

o     Competitive Prices - Western Beef's objective is to be perceived as the
      "value leader" in its markets by offering the best values to its customers
      on a consistent basis. Western Beef reinforces its image as a value leader
      by offering a large selection of high quality grocery items under the
      "Western Beef" label. These private label items are priced substantially
      below comparable national brand items. Western Beef sets its prices based
      on "everyday low pricing" policies rather than the "high-low" pricing
      strategy, i.e., high regular prices with deep discounts on sale items,
      utilized by many other retailers.

o     Neighborhood/Ethnic Appeal - Western Beef's supermarkets are located in
      densely populated, culturally diverse neighborhoods in the New York
      Metropolitan area. The merchandise offerings in Western Beef's
      supermarkets are tailored to the preferences, i.e., specific items, brand
      names and packaging, of the various ethnic groups represented in each
      store's market area. Some of these products are not generally available in
      supermarkets operated by national chains.

o     Low-Cost Warehouse Format - In order to offer the lowest possible prices
      to its customers, Western Beef uses a low cost, no-frills warehouse store
      format. Management believes it can be successful in providing superior
      value to Western Beef's customers by carefully controlling all operating
      costs on a continuous basis.

      The retail and wholesale food businesses are generally characterized by
low profit margins with earnings primarily dependent on rapid inventory
turnover, careful cost control and the ability to achieve high sales volume.
Since many food products, particularly produce, meat and dairy products, are
subject to spoilage and become unmarketable with the passage of time, it is
important to avoid overstocking and to reduce excess inventories when they
occur. This is usually accomplished by promotional sales at reduced prices. It
is advantageous to combine wholesale and retail businesses under common
ownership because overstocking in the wholesale business can be relieved by
promotional sales in commonly owned retail stores. Commonly owned operations can
also more readily take advantage of opportunities for bargain purchases,
including stocks with shorter than usual shelf life, as they become available in
wholesale markets.


                                       3
<PAGE>

      For a description of certain financial information of the Company relative
to the Company's industry segments, see Note 11. Segments of Business to the
Company's Consolidated Financial Statements attached hereto.

History

      Western Beef, Inc. was incorporated in Delaware on June 3, 1991 under the
name New Southern Blvd. Supermarkets, Inc. The Company is the successor of the
October 30, 1992 combination (the "Combination") of the food businesses of
Quarex Industries, Inc. ("Quarex"), P.S.L. Food Market, Inc. ("PSL") and
Southern Blvd. Supermarkets, Inc. ("Southern"). Certain members of the
Castellana family and their affiliates were controlling stockholders (the
"Principal Stockholders") of each of these entities. Since the consummation of
the Combination, the Principal Stockholders have held in excess of 70% of the
outstanding Common Stock of the Company. In January 1993, the Company's name was
changed to "Western Beef, Inc."

      The Company leases certain retail food stores, office and warehouse
facilities from the Principal Stockholders. Concurrent with the Combination,
independent appraisals were obtained of the rentals under all then existing
Company leases in which the Principal Stockholders had an interest as landlord
or tenant (other than one food store lease which was fixed on a formula basis).
Any necessary revisions to the leases were made so that in the aggregate, such
rentals did not exceed fair market value. The Company and the Principal
Stockholders agreed that any future leases from such affiliates would be based
on fair market value as established by independent appraisal. All Company leases
in which the Principal Stockholders had an interest have been amended
periodically, so that the rentals thereunder do not exceed fair market value

1997 Developments

      The Company did not open any supermarkets in 1997; however, it commenced
construction of two outlet-type food stores. These two stores, to be located on
Rockaway Boulevard in Queens, N.Y. and Myrtle Avenue in Brooklyn, N.Y., will
each be approximately 11,000 square feet in size. The Rockaway Boulevard store
opened for business on March 30, 1998, and the Myrtle Avenue store is expected
to be opened in mid-1998. Through January 2, 1998, the Company has expended a
total of $1,866,000 for these two outlet-type stores out of a total estimated
construction cost of $2,500,000. Unlike conventional supermarkets, these two
stores will sell a limited selection of food staples, most of which will be
Western Beef brand grocery products, as well as prepackaged meats, cheese and
fish. These products will be distributed from the Company's Central Cutting
operation, where they are cut into convenient sizes, custom packed and
distributed to the Company's supermarkets. This operation produces uniform
packaging, saves expensive store butcher labor costs and employs new packaging
concepts which reduce moisture and eliminate bacteria. As a result, product
shelf life is increased from one week to as much as six weeks. Consequently,
spoilage is significantly reduced and customer acceptance is increased.

      Recognizing the importance of maintaining clean, modern stores, the
Company continued its existing store renovation program. In 1997, the Company
completed the renovation of four stores located in East New York, Springfield
Gardens, Elmont and Mineola at an aggregate cost of approximately $1,600,000.
The Company installed new shelving in all four stores, and new light fixtures
and produce and frozen food display cases in three of the stores. Other store
renovations included new front door vestibules in two stores, roof and parking
lot repairs, new ceilings and floors and new cash register check out counters
where needed.

      To improve office efficiency and to reduce overhead costs, the Company
added approximately 2,100 square feet of office space to its executive and
administrative office building at a cost of approximately $190,000. The Company
intends to consolidate all administrative personnel into one building as opposed
to the three buildings currently in use.


                                       4
<PAGE>

      To pay for these and other capital improvements, the Company borrowed the
remaining $647,000 of a $3,000,000 credit facility obtained from Amplicon
Financial in 1995. This borrowing was made at the interest rate of 7.75% per
annum and is payable over a five year period. In December 1997, the Company
entered into a sale/leaseback agreement in the amount of $2,332,000 with General
Electric Capital Corporation ("G.E.C.C."). This agreement is for a six-year term
(including three-one year renewals) with a combined interest rate of 7.48% per
annum and provides for monthly lease payments of $33,659 commencing January 1,
1998. At the end of the initial three-year term and each subsequent anniversary
date, the Company has the option to purchase the leased equipment at a reducing
percentage of the original cost of the equipment leased under this agreement.
G.E.C.C. has committed to provide a total credit line of $5,500,000 under this
agreement. The Company also has a $3,000,000 working capital line of credit from
North Fork Bank, all of which is available to fund future operating and
construction programs.

Technology and Year 2000 Issues

      The Company is committed to improving its operating efficiencies through
computer technology and automation. All of the Company's stores are equipped
with scanning registers, automated time clocks and hand held inventory ordering
equipment. The Company supports all its operating technology through an
integrated data and voice wide area network ("WAN") connecting the headquarters
office to its stores and distribution facilities. The WAN allows the Company to
integrate all its computer applications into a complete accounting and
management reporting system.

      During 1997, the Company greatly expanded its supplier participation in
its electronic data interchange ("EDI") invoicing program. Expanded
implementation of this program has allowed for reduction in clerical
administration and improved price accuracy. During 1997, the Company also
installed electronic article surveillance ("EAS") equipment in all its retail
stores to help control retail theft and improve selling margins.

      The Company has certain existing computer programs that were written using
two digits rather than four to define the applicable year. As a result, those
computer programs have time sensitive software that recognizes a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send orders and
invoices, or engage in similar normal business activities.

      The Company has completed the identification of its "legacy" applications
that are not year 2000 compliant and has commenced modification or replacements
of such systems, as necessary. In addition, the Company has received
representations from all vendors from whom it has purchased software in the last
three years that such software is year 2000 compliant. Given the information
known at this time about the Company's systems that are non-compliant and the
Company's ongoing efforts to upgrade or replace critical systems, Management
does not expect the year 2000 compliance of the Company's systems to have a
material adverse effect on either the retail or wholesale segments of the
Company's business. No assurance can be given, however, that all of the
Company's systems will be year 2000 compliant or that compliance costs or the
impact of a failure by the Company to achieve substantial year 2000 compliance
will not have a material adverse effect on either the retail or wholesale
segments of the Company's business.

      The Company has initiated communications with its significant suppliers
and customers to determine the extent to which the Company is vulnerable to the
failure of such parties to remediate their year 2000 compliance issues. In
addition, the Company has undertaken a project to create a software "patch"
which would convert any data sent to the Company which was not year 2000
compliant into a format that is compliant. No assurance can be given, however,
that the systems of these outside parties will be made year 2000 compliant in a
timely manner or that the noncompliance of the systems of any of these parties
would not have a material adverse effect on either the retail or wholesale
segments of the Company's business.


                                       5
<PAGE>

Retail Operations

      Western Beef operates nineteen retail supermarkets in the New York
Metropolitan area under the trade name "Western Beef" and one outlet-type food
store that operates under the trade name "Junior's Food Outlet" ("Junior's").
Its first two stores were opened in 1973 and 1979. In the late 1980's,
management decided to pursue a more aggressive growth and expansion program
consisting of new store acquisitions and remodeling and/or closing of smaller
stores. Since that time, the Company has continued to search for suitable
locations in the New York Metropolitan area to open new stores. In 1996 and 1995
the Company opened two and three stores, respectively. No new stores were opened
in 1997.

      During 1997, 1996 and 1995, the Company's capital expenditures for its
retail business were $7,085,000, $12,933,000 and $9,027,000, respectively.

      All stores are owned or leased by separate subsidiaries of the Company,
with the exception of two subsidiaries, which each have two stores. Most stores
are free standing. All stores are open seven days a week, including evenings,
and are high-volume operations. Most stores are refrigerated, warehouse-type
facilities which are divided into separate areas kept at different temperatures.
Non-perishable items are displayed in an area maintained at normal room
temperatures. In most of the Company's stores, meat is displayed in large
refrigerated rooms where the Company sells both bulk meat, which is custom cut
by store butchers, as well as a full variety of pre-packaged meats. In seventeen
of its stores, the Company sells produce which is displayed in refrigerated
cases maintained at 37 degrees Fahrenheit and where moisture content is
regulated by automatic misting equipment. Dairy and deli products are sold in
separate areas of the Company's stores, maintained at 30-40 degrees Fahrenheit.
Most of the Company's stores also contain stand-alone freezers, which maintain
temperatures suitable for storage of frozen foods, such as ice cream, vegetables
and dinner entrees. The Company's stores also sell a complete line of dry
groceries and some non-food products such as paper products and household
utensils.

      Four of the Company's stores operate scratch brick oven bakeries, which
bake a large variety of old world bread and rolls from basic ingredients. One of
these stores supplies three other Company stores with fresh baked goods. It is
anticipated that as capacity permits these baked goods will be introduced into
all of the Company's stores. Thirteen stores also operate full service
delicatessen departments, which cut-to-order the various cheese and processed
meats displayed. The Company's other stores have self-service delicatessen
departments.

      The Company promotes its "Western Beef" retail food stores in full color
store circulars and local newspapers, generally at least once a week. In
addition, advertisements are also placed on local radio stations and smaller
cable television networks in both the English and Spanish languages. The Company
distributes its weekly circulars door-to-door in selected neighborhoods and
through insertions in local newspapers. Advertising expenditures for 1997 were
$2,066,000, covering ad promotion, preparation, placement and distribution.

      The Company's nineteen retail supermarkets range in size from 9,000 square
feet to 83,000 square feet, with an average of 30,000 square feet per store.
They are supported by the Company's wholesale division warehouses totaling
117,000 square feet. In 1997, approximately 47% of the Company's retail
purchases were derived from the Company's warehouses; the remaining purchases
being delivered directly to the stores from manufacturers or outside
wholesalers.

      Junior's was designed and constructed using a "non-frills" approach from
initial construction to daily operation. The building structure is of
pre-fabricated material which reduced the cost of construction and is designed
to be energy efficient. Refrigerated dairy, meat and frozen food products are
merchandised in rear-fed door display units. Dry grocery products are displayed
on floor pallet stacks and "warehouse" type racking utilizing "cut case" display
techniques. This merchandising format is unlike conventional supermarket formats
in that it features a limited selection of high turnover food staples with a
heavy emphasis on the Company's own Western Beef label brand products. In
addition, Junior's sells a wide selection of pre-packaged meat and cheese
products which are distributed from the Company's Central Cutting food
processing facility thereby eliminating the need for expensive store butcher
labor costs.

      In 1997, the Company made an evaluation of its warehouse operations
including, the costs of acquiring and maintaining inventories and supplying the
Company's stores. Based on this evaluation, the Company decided not to renew a
grocery warehouse lease and decided instead to increase its purchases from White
Rose Foods ("White Rose") currently, the Company's largest outside supplier. As
a result, the Company has reduced certain overhead costs and reduced its
inventory by approximately $2,600,000, thereby improving the Company's cash flow
from operations. The Company does not have a formal supply agreement with White
Rose. From time-to-time, the Company meets with other wholesale suppliers to
ascertain if the service and prices charged by White Rose are as favorable as
could be received from other sources. Based on these meetings, the Company has
determined that purchasing from White Rose continues to be competitive with
other supply sources and in the best interest of the Company.


                                       6
<PAGE>

      In 1997, White Rose accounted for approximately 16% of the Company's
retail purchases. In 1997, no other supplier accounted for more than 10% of the
Company's purchases. Management believes that the loss of White Rose as a
supplier would not have a long-term adverse effect on the Company's performance
since the Company has access to several other similar suppliers.

      During 1997, the Company increased both the number and diversity of the
products marketed under the Western Beef brand label. These products are
purchased from national and local food manufacturers. Western Beef brand
products are generally well accepted by the Company's retail customers and more
Western Beef brand products are expected to be introduced. In general, Western
Beef brand products, which are priced 20% to 50% lower than the comparable
national brand products, generate higher gross profit margins for the Company
than brand name merchandise.

Wholesale Operations

      The Company also conducts a wholesale food business. It purchases beef,
pork, poultry and provisions directly from major slaughterhouses, meat and
poultry processors and other suppliers on a daily basis to ensure a supply of
fresh products and to be responsive to customer needs. The Company does not have
formal supply agreements with any of these entities. It purchases merchandise
for its wholesale business by purchase orders, the terms of which are subject to
normal market conditions such as pricing and availability at the time of
purchase. None of these suppliers are material to the Company. Additionally, the
Company's wholesale business warehouses and distributes grocery, produce, dairy
and frozen food products to the Company's own retail food stores.

      The Company distributes products from its warehouses in Ridgewood, New
York, which operate 24 hours a day. On average, the perishable inventory is
turned over approximately once a week. Not withstanding such turnover, the
wholesale business requires large amounts of working capital for financing
inventory and accounts receivable.

      To facilitate its wholesale business and retail distribution, the Company
(through a subsidiary) owns and operates a fleet of tractors, trailers and
trucks, most of which are refrigerated. At various times since 1989, the Company
has transported food products for others on a limited basis; however,
substantially all trucking operations now are conducted for the Company's own
distribution facilities. In addition, to enhance profitability, the Company
"back hauls" merchandise inventory to achieve reduced product cost.

Competition

      The wholesale and retail segments of the food industry are competitive
throughout the market areas served by the Company. These businesses are
generally characterized by low profit margins, with earnings primarily dependent
on rapid inventory turnover, careful cost control and the ability to achieve
high sales volume.

      Competition manifests itself in virtually every aspect of the retail food
business, including pricing, advertising and promotion, store size, location and
attractiveness, hours of operation, product selection and quality, employee
friendliness, service and parking facilities. Although Management believes the
Company's retail stores price their products competitively, such pricing has
been made possible principally because of the low overhead costs incurred by
presenting the food in no-frills, warehouse type, bulk display settings without
the typical shelving, lighting, decor and other amenities offered by most
suburban supermarkets. In the past, the Company's retail food business has grown
by opening food stores in locations in Metropolitan New York City areas where
its stores were larger than existing independent supermarkets and convenience
food stores and where there had been a limited presence of national or regional
chain supermarkets. In recent years, however, the Company has experienced
competition from larger supermarket chains, some of which have greater resources
than the Company, as well as with other independent operators. Such competitors
have expanded and are likely to continue expanding, by opening retail food
stores within the Company's markets. Although Management believes it will be
able to continue to compete on the basis of quality, price and reputation, there
can be no assurance that the Company will be able to maintain or improve its
current competitive position.


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<PAGE>

      Wholesale competition is based principally on price, quality and service,
including the extension of favorable credit terms. Financially stronger
wholesale competitors may be better suited to take advantage of distressed,
"bargain" price opportunities, which arise during periods of over-supply, and to
finance the cost of carrying large inventories and receivables during periods of
market weakness. The wholesale division competes with several other companies on
the wholesale level, some of which are larger than the Company and may have
greater resources. Currently, there are adequate suppliers and multiple sources
of the products which the Company distributes and sells. However, there is a
trend toward consolidation in the food industry with many smaller suppliers
being acquired by larger concerns.

Government Regulation

      The food business is subject to, and affected by, substantial and complex
federal, state and local laws and regulations that apply to the sale of food at
both the wholesale and retail level, and it is required to obtain certain
federal, state and local permits and/or licenses for accepting United States
Department of Agriculture ("USDA") food stamps and WIC (Women, Infants and
Children) checks (assistance checks which can only be used to purchase certain
dairy and grocery items), operating a bakery, processing meat, selling produce,
beer and wine coolers, and otherwise in order to conduct business. In addition,
such regulation includes unannounced inspections by government officials
investigating sanitary conditions, weights, measures and other matters. The
Company believes it currently holds all licenses and permits required to conduct
its business and is in compliance in all-material respects with applicable
regulations. For fiscal 1997, 1996 and 1995, respectively, food stamp
redemptions accounted for approximately 20%, 24% and 25% of the Company's retail
sales. There would be a material adverse effect on the Company if it were to
suffer the loss of its USDA permits to accept food stamps or if the Government
was to reduce or eliminate the food stamp program. Management believes that the
decline in 1997 food stamp redemptions resulted from modifications made by the
USDA regarding eligibility requirements for obtaining food stamps.

Employees

      As of March 18, 1998, the Company's retail business employed approximately
1,800 people and its wholesale business employed approximately 100 people.
During the year, an attempt was made to unionize the Company's store and
warehouse employees under a collective bargaining agreement. In November 1997,
this unionization effort was defeated in a vote by the Company's employees.

Seasonality

      No material portion of the Company's business is affected by seasonal
fluctuations, except that sales are generally strongest around holidays,
particularly the Fourth of July and Easter.


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<PAGE>

Environmental Laws

      The Company is subject to various applicable federal, state and local laws
and regulations relating to environmental matters. Under such laws, the Company
is exposed to liability primarily as an owner or operator or real property and,
as such, the Company may be responsible for the proper management or remediation
of hazardous substances. Such substances for which the Company may be liable
could include historic contamination of real property, asbestos-containing
material in improvements and hazardous substances and oil used in the course of
regular business operations. Remediation requirements may be imposed whether or
not the owner or operator knew of, or was responsible for, the presence of
contamination by hazardous substances. Also, the presence of contamination may
hinder the owner or operator's ability to lease or sell property or to use the
property as loan collateral.

      The Company believes that it does not have any material environmental
liability and that compliance with environmental laws and regulations will not,
individually or in the aggregate, have a material adverse effect on the
Company's operations or its financial condition. There can be no assurance,
however, that new or amended environmental laws or regulations or the future
discovery of environmental conditions will not require additional expenditures
by the Company.

Dependence on Major Customers

      The business of the Company is not dependent on a single or a few
customers.

Order Backlog

      The Company does not have any backlog of orders.

Research and Development Activity

      The Company has not expended material amounts on research and development
activities.

Government Contracts

      Other than licenses to accept USDA food stamps and WIC checks, the Company
does not have any material contracts or sub-contracts with any governmental
agency. See "Government Regulation".

ITEM 2. PROPERTIES-GENERAL

      The buildings utilized by the Company were constructed at various dates
between 1918 and 1998. The Company considers its warehouse facilities to be in
good condition. All of the Company's retail facilities have been opened or
modernized in recent years and the Company considers these facilities to be in
good condition. The Company believes, to the best of its knowledge, that all its
physical facilities, both owned and leased, are suitable and adequate for their
intended uses and purposes.

Property-Retail

      The Company's nineteen retail supermarkets range in size from 9,000 square
feet to 83,000 square feet, with an average of 30,000 square feet per store.
They are supported by Company warehouses totaling 117,000 square feet.

      As of January 2, 1998, the Company owned four and leased fifteen of its
stores currently in operation. Nine of the leased stores are rented from
non-affiliated real estate developers and the other six are leased from entities
owned by the Principal Stockholders. See "Item 1. Business-History".


                                       9
<PAGE>

      In January 1997, the Company signed a lease with the Principal
Stockholders for a building located on Rockaway Boulevard in Queens, New York.
The Company renovated this building converting it into its first outlet-type
store of approximately 11,000 square feet. This store opened for business on
March 30, 1998.

      In 1996 and 1997 the Company purchased several adjoining parcels of land
for $366,000 on Myrtle Avenue in Brooklyn, N.Y. The Company is building its
second outlet-type store on this site. This store will be approximately 11,000
square feet in size and is expected to open in mid-1998.

      The Company has made a deposit on a piece of property in the Bronx.
Subject to meeting certain zoning requirements, the Company intends to construct
a retail supermarket with satellite rental units. The estimated cost of this
project for the purchase of the land and the renovation of this existing
building is estimated to be $5,000,000.

      The Company's supermarkets are leased for terms, including options, of up
to 40 years under leases which generally require the Company to pay for all real
estate taxes, repairs and insurance. The average remaining life, including
renewal options, on supermarkets leased from non-affiliates and from the
Principal Stockholders is 24 and 11 years, respectively.

Property-Wholesale

      Under a lease purchase agreement, the Company occupies a two-story
warehouse building located in Ridgewood, New York, of approximately 178,000
square feet with an adjacent parking area, requiring annual base rental payments
of approximately $251,000 per year plus taxes, utilities and all other operating
costs with the final payment scheduled for August 2004. The Company utilizes
approximately half of the building for its wholesale operations and the
remainder for its retail operations.

ITEM 3. LEGAL PROCEEDINGS

      The Company has various outstanding litigation matters which it considers
to be in the ordinary course of business. In the opinion of Management, the
outcome of these litigation matters will not materially, adversely affect the
Company's financial position.

      The Company was a party to a lawsuit commenced in April 1991 in New York
Supreme Court, Putnam County wherein the plaintiffs sought to prevent a
scheduled auction of property held as collateral for a loan to one of the
plaintiffs and brought three actions against the Company seeking compensatory
and exemplary damages for fraud and abuse of process allegedly committed by the
Company. In February 1998 these matters were settled for an amount, not
considered by the Company to be material.

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

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.


                                       10
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                                     PART II

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

The Company's Common Stock is traded over-the-counter in the NASDAQ National
Market System ("NASDAQ") under the symbol "BEEF".

The range of the high and low bid prices per share of the Common Stock during
the last two years, listed under the name Western Beef, Inc. as reported by
NASDAQ, is set forth below:

         1997                               HIGH                LOW
         ----                               ----                ---

     1st  Quarter                            14                 10 3/8
     2nd  Quarter                            12 1/4              8
     3rd  Quarter                            10 3/4              7 3/4
     4th  Quarter                             9 1/2              6

         1996                               HIGH                LOW
         ----                               ----                ---

     1st  Quarter                             8 1/8              5 1/8
     2nd  Quarter                             9 3/4              8 1/8
     3rd  Quarter                            11 1/8              9 1/8
     4th  Quarter                            11 1/8             10 1/4

      As of March 16, 1998, there were 313 holders of record of the Company's
Common Stock whose closing bid price on NASDAQ was $7 3/8 per share.

      The Company has never paid cash dividends on its Common Stock. Payment of
dividends if any, will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Company's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance
the development of its business.

ITEM 6. SELECTED FINANCIAL DATA

      The selected financial data set forth below is derived from the Company's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this
Annual Report. See ITEM 7. Management Discussion and Analysis of Financial
Condition and Results of Operations.


                                       11
<PAGE>

                               WESTERN BEEF, INC.
                             SELECTED FINANCIAL DATA
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                          January 2,   January 3,   December 29,    December 30,   December 31,
                             1998       1997 (2)       1995             1994           1993
------------------------------------------------------------------------------------------------
<S>                       <C>          <C>          <C>             <C>            <C>       
Net sales                 $ 317,079    $ 340,873    $  301,387      $  291,886     $  274,107

Net income                $   3,203    $   5,989    $    4,934      $    4,773     $    4,422

Net income per
share of common
stock-basic(1)            $     .59    $    1.10    $      .90      $      .87     $      .81

Net income per
share of common
stock-diluted (1)         $     .58    $    1.09    $      .90      $      .87     $      .81

Total assets              $  76,254    $  74,499    $   63,313      $   54,731     $   48,530

Long-term obligations     $   8,837    $  11,011    $    7,691      $    7,224     $    5,614
------------------------------------------------------------------------------------------------
</TABLE>

(1)   Adjusted to reflect a 1.1 for 1 stock split in January 1993.
(2)   Fifty-three week fiscal year. The other fiscal years presented have
      fifty-two weeks.

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

      The following should be read in conjunction with the Company's financial
statements and the related notes included herein.

OVERVIEW

      The Company expects competition in the retail segment from major chains as
the Company expands and continues to open new retail supermarkets. Several of
the Company's retail stores have been impacted by this competition; however, the
Company believes that its ability to serve its customers with quality
merchandise at the lowest price should allow it to stay profitable and maintain
a significant part of its market share.

General

      In March 1998, the Company opened one outlettype supermarket and is
constructing a second outlet-type store which is expected to open in mid-1998.
The first store was constructed on property leased from the Principal
Stockholders and the second store is being constructed on several adjoining
parcels of land purchased by the Company in 1996 and 1997. Through January 2,
1998, the Company has expended a total of $1,866,000 for the two outlettype
stores. When completed these stores are expected to cost a combined total of
$2,500,000. The Company is actively seeking more sites for possible openings of
new stores in 1998.

      The Company has made a deposit on a piece of property in the Bronx.
Subject to meeting certain zoning requirements, the Company intends to construct
a retail supermarket with satellite rental units. The estimated cost of this
project for the purchase of the land and the renovation of this existing
building is estimated to be $5,000,000.

      The cost of opening a new supermarket is dependent upon the size of the
supermarket and the amount of building renovations necessary to convert the
property into a supermarket. Other factors involved would be the amount of
equipment to be installed along with the number of product departments in the
store. There can be no assurance that the Company can implement this strategy in
a timely manner or at the costs stated above or that such strategy, when
implemented, will be successful. The Company's growth and expansion program is
susceptible to the hazards inherent in building and construction, including
delays, cost overruns and zoning issues. While in the past such issues have not
materially affected the Company's growth and expansion program, there can be no
assurance that in the future such issues will not delay the implementation of
this program or have a material effect on this program and the Company.


                                       12
<PAGE>

      For 1998, the Company plans on improving its inventory management system
in both the distribution facilities and stores. The wholesale division warehouse
will be equipped with hand held terminals to allow for scanning of product bar
codes in billing and inventory management applications. To allow for this and
future software enhancements the Company has completed an upgrade of its host
client server hardware.

Year 2000 Issues

      The Company has completed the identification of its "legacy" applications
that are not year 2000 compliant and has commenced modification or replacements
of such systems, as necessary. In addition, the Company has received
representations from all vendors from whom it has purchased software in the last
three years that such software is year 2000 compliant. Given the information
known at this time about the Company's systems that are non-compliant and the
Company's ongoing efforts to upgrade or replace critical systems, Management
does not expect the year 2000 compliance of the Company's systems to have a
material adverse effect on the Company's liquidity or results of operations.
No assurance can be given, however, that all of the Company's systems will be
year 2000 compliant or that compliance costs or the impact of a failure by the
Company to achieve substantial year 2000 compliance will not have a material
adverse effect on the Company's future liquidity or results of operations.

      The Company has initiated communications with its significant suppliers
and customers to determine the extent to which the Company is vulnerable to the
failure of such parties to remediate their year 2000 compliance issues. In
addition, the Company has undertaken a project to create a software "patch"
which would convert any data sent to the Company which was not year 2000
compliant into a format that is compliant. No assurance can be given, however,
that the systems of these outside parties will be made year 2000 compliant in a
timely manner or that the noncompliance of the systems of any of these parties
would not have a material adverse effect on the Company's liquidity or results
of operations.

RESULTS OF OPERATIONS

1997 Compared to 1996

      For 1997, the Company achieved net income of $3,203,000, or $.58 per
share, on net sales of $317,079,000 as compared to 1996 net income of
$5,989,000, or $1.09 per share, on net sales of $340,873,000.

      The 7.0% decrease in net sales in 1997 compared to 1996 resulted from (i)
1996 being a 53-week fiscal year, whereas 1997 was a 52-week fiscal year; (ii) a
decline in retail and wholesale net sales as a result of lower food stamp
redemptions, which the Company believes resulted from modifications made by the
USDA to food stamp eligibility requirements; (iii) a decline of 16.3% in
wholesale net sales as a result of a tighter credit policy adopted by the
Company; (iv) low food price inflation; (v) increased competition; and was
partially offset by the full year's sales in 1997 of the two stores that opened
in 1996. The retail segment provided 73.3% of total net sales in 1997, as
compared with 70.3% of total net sales in 1996.

      Gross profits, as a percentage of net sales, for 1997 and 1996 were 25.0%
and 24.2%, respectively. The increase in the gross profit percentage for 1997
resulted primarily from the increased ratio of retail to wholesale sales in 1997
as compared with 1996. For the years 1997 and 1996, the retail segment
contributed 90.9% and 89.0% of the gross profit, respectively.

      Selling, general and administrative expenses expressed as a percentage of
sales increased to 23.5% in 1997 from 21.3% in 1996 primarily as a result of (i)
the inclusion of the full year's cost in 1997 of the two stores that opened in
1996; (ii) certain occupancy costs, such as utilities, rent and depreciation
which do not vary directly with sales declines thereby increasing the expense
ratio; and (iii) wage and related benefit costs which were unfavorably impacted
by increases in the federal minimum wage.


                                       13
<PAGE>

      Income from operations decreased 51.3% to $4,732,000 in 1997 from
$9,717,000 in 1996. This decrease was principally the result of (i) decreased
sales partially offset by an increase in the gross profit percentage; and (ii)
higher selling, general and administrative expenses.

      Income Taxes

      The effective tax rate of the Company decreased to 40.0% for 1997 from
43.3% for 1996 as a result of the utilization of low income housing tax credits
and lower state and local income taxes resulting from investment tax credits.

      The Company's deferred tax asset resulted from temporary differences of
this asset in reporting depreciation expense for income tax and financial
reporting purposes which accelerated the reporting of taxable income for income
tax purposes. These temporary differences are expected to reverse themselves in
future periods and Management believes the Company will recover the entire
amount of this asset.

      The Company's investment in low income housing credits reduced the
Company's effective tax rate approximately 4.3% in 1997 and 2.1% in 1996. In
addition to the low income housing credits, the Company participated in the
federally sponsored Work Opportunity Tax Credit ("WOTC") program which helped to
reduce the 1997 effective tax rate by 1.3%.

      Retail Segment

      Net sales in the retail segment decreased 3.0% in 1997 compared to 1996 as
a result of (i) 1996 being a 53-week fiscal year, whereas 1997 was a 52-week
fiscal year; (ii) a decline in food stamp redemptions, which the Company
believes resulted from modifications made by the USDA to food stamp eligibility
requirements; (iii) low food price inflation; and (iv) increased competition.
These declines were partly offset by the inclusion in 1997 net sales of full
year net sales for the two stores opened by the Company in 1996. Same stores
sales decreased 4.01% in 1997 as compared to 1996 due to 1997 being a shorter
fiscal year and decreased food stamp redemptions.

      Retail gross profits as a percentage of sales increased to 31.0% in 1997
from 30.6% in 1996, principally as a result of the increased ratio of retail to
wholesale sales, as well as the capital expansion program, which increased the
selling square footage dedicated to the higher gross profit dairy, frozen and
bakery merchandise categories. Retail income from operations decreased 46.2% to
$4,727,000 in 1997 from $8,793,000 in 1996. This decrease was principally the
result of (i) decreased net sales; and (ii) higher selling, general and
administrative expenses.

      Wholesale Segment

      Wholesale net sales decreased 16.3% to $84,679,000 from $101,162,000 in
1996. This decrease in wholesale net sales resulted primarily from (i) an
adjustment of the Company's credit policy to sell only to customers who have the
requisite credit worthiness; (ii) low food price inflation; and (iii) reduced
food stamp redemptions at wholesale customers of the Company. Wholesale gross
profit for 1997 and 1996 was 8.6% and 8.9%, respectively. Wholesale income from
operations decreased 99.5% to $5,000 in 1997 as compared with $924,000 in 1996
due principally to increased write offs of uncollectable receivables.

      Wholesale gross profits as a percentage of sales decreased to 8.6% in 1997
from 8.9% in 1996, principally as a result of (i) higher purchase costs; and
(ii) increased competition.


                                       14
<PAGE>

Recent Accounting Standards

      In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components within financial statements.
Comprehensive income consists of all changes in equity during a period except
those resulting from investments by and distributions to owners. SFAS No. 130
also requires that all components of comprehensive income be disclosed in a
separate financial statement or on the face of the income statement. This
statement is effective for the Company beginning in 1998 and requires
reclassification of prior period information for comparative purposes.

      In 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprises and Related Information"
("SFAS No. 131"). SFAS No. 131 replaces the products and services approach of
SFAS No. 14's to reporting business segments with the management approach. Under
the provision of SFAS No. 131, business segments are based on the way that the
chief operating decision maker organizes the segments within the enterprises,
for deciding how to allocate resources and in assessing performance. SFAS No.
131 is effective for the Company in 1998, and segment information that is
reported with corresponding information for the initial year must be restated
unless it is impractical to do so.

      In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Post-retirement Benefits" ("SFAS No. 132"), an amendment of FASB
Statements No. 87, 88 and 106. SFAS No. 132 revises employers' disclosure about
pension and other post-retirement benefit plans. SFAS No. 132 is effective for
the Company in 1998.

      The adoption of these statements is not expected to have a material effect
on the consolidated financial statements of the Company.

1996 Compared to 1995

      For 1996, the Company achieved net income of $5,989,000, or $1.09 per
share, on net sales of $340,873,000, as compared to 1995 net income of
$4,934,000, or $.90 per share, on net sales of $301,387,000.

      The 13.0% increase in net sales in 1996 compared with 1995 net sales
resulted from (i) inclusion of the full year sales for the three stores that
were opened in mid-1995; (ii) inclusion of sales of the two stores that were
opened in 1996; (iii) a 8.8% increase in wholesale sales; and (iv) 1996 being a
53-week fiscal year, whereas 1995 was a 52- week fiscal year. Net sales from the
new retail stores raised net sales of the retail segment to 70.3% of total net
sales in 1996, as compared with 69.2% of total net sales in 1996.

      Gross profits as a percentage of net sales for 1996 and 1995 were 24.2%
and 24.0%, respectively. This increase was principally the result of the
increased ratio of retail to wholesale sales in 1996 as compared to 1995. The
retail segment contributed 89% of the gross profit for both years.

      Selling, general and administrative expenses expressed as a percentage of
net sales increased to 21.3% in 1996 from 21.17% in 1995 principally as a result
of (i) the costs of the two new stores that opened in 1996; and (ii) the full
year costs in 1996 of the stores that opened in 1995. Income from operations
increased 9.3% to $9,717,000 in 1996 from $8,889,000 in 1995. This increase
income from operatons was


                                       15
<PAGE>

principally the result of the total of (i) increased net sales; and (ii) higher
gross profit percentage; which was partially offset by increased selling,
general and administrative expense.

      Retail Segment

      Net sales in the retail segment increased 15.0% in 1996 compared to 1995
as a result of (i) 1996 being a 53-week fiscal year, whereas 1995 was a 52-week
fiscal year; and (ii) inclusion of sales of the two stores that were opened in
1996. Same store sales increased 1.1% in 1996 as compared to 1995 due to 1996
being a longer fiscal year. Gross profits for 1996 and 1995 were 30.6% and
30.8%, respectively. Income from operations for the retail segment increased
13.0% to $8,793,000 in 1996 from $7,781,000 in 1995.

      In 1996, the Company incurred competition in the retail segment from major
chains as the Company expanded and continued to open new retail supermarkets.
Several of the Company's retail stores were impacted by this competition;
however, the Company was able to stay profitable and believes that it has
retained a significant part of its market share.

      Wholesale Segment

      Wholesale net sales increased 8.8% to $101,162,000 in 1996 from
$92,961,000 in 1995. This increase was the result of higher net sales to an
existing supermarket chain customer and expanded sales in Philadelphia, PA. The
Company believes this increase in sales also arose as a result of the closure of
a competitor of the Company. Wholesale gross profit for 1996 and 1995 remained
constant at the 1995 level of 8.9%. Wholesale income from operations decreased
16.6% to $924,000 from $1,108,000 in fiscal 1995 due to higher delivery, general
and administrative expenses. The wholesale division continued to have
competition in its market segment in 1996 compared with 1995.

      Income Taxes

      The effective tax rate of the Company decreased to 43.3% for 1996 from
45.5% for 1995, primarily as a result of the utilization of low income housing
tax credits and lower state and local income taxes.

      The Company's deferred tax asset resulted from temporary differences of
this asset in reporting depreciation expense for income tax and financial
reporting purposes which accelerated the reporting of taxable income for income
tax purposes. These temporary differences are expected to reverse themselves in
future periods and Management believes the Company will recover the entire
amount of this asset.

      The Company's investment in low income housing credits reduced the
Company's effective tax rate approximately 2.1% in 1996 and 1.6% in 1995.

Liquidity and Capital Resources

      Net cash flow from operations was $12,046,000 for 1997. The Company had
capital expenditures of $7,322,000 in 1997, primarily on (i) equipment
purchases and improvements at the two outlet-type food stores under
construction; (ii) the renovation of four older stores; and (iii) the expanded
office space at the Company's executive and administrative office building. The
Company also repaid long-term debt of $3,006,000 in 1997. As of January 2, 1998,
the Company had $7,527,000 in cash and cash equivalents available for
acquisitions and expansion.

      These additions and improvements were funded by cash flow from operations,
the drawdown of $647,000 under a loan obtained from Amplicon Financial and
$2,232,000 received from General Electric Capital Corporation pursuant to a
sale/leaseback agreement. The Amplicon Financial loan drawdown, the 


                                       16
<PAGE>

final drawdown under a $3,000,000 facility, was at the interest rate of 7.75%
per annum and is payable over a five year period. The General Electric Capital
Corporation sale/leaseback agreement was at a rate of 7.48% per annum payable
over a three year period, with three-one year renewals, and a declining balloon
payment option at the end of each rental term.

      The Company has available a $3,000,000 working capital line of credit from
North Fork Bank expiring on July 1, 1998, which the Company expects will be
renewed for another year on similar terms. At January 2, 1998, the entire
balance was available for use by the Company. The Company also has several
financial institutions that it believes would be available to finance new store
equipment, usually over a five to ten year period.

      The Company plans to utilize most of its available cash flow to fund
capital expenditures for renovating existing stores and for opening new retail
outlets. There are no restrictions on the transfer of assets between segments,
though the Company intends to let each segment develop its own growth. The
Company expects that available cash flow from the wholesale segment will be used
to expand its customer base, which should result in higher levels of inventory
and accounts receivable. Although Management believes that these expenditures
will enable the Company to expand its customer base, there can be no assurance
that this strategy will be successful.

      The Company believes that its cash flow from operations will be sufficient
to meets its current obligations and commitments for the next twelve months. In
addition to the two outlet-type stores currently under construction and the
property being developed in the Bronx, the Company has no other material capital
commitments. The Company expects the aggregate 1998 capital commitments for
these projects to be approximately $6,000,000. See "Overview" for a description
of the factors that may effect the costs of opening a new supermarket, and the
risks inherent in the Company's growth and expansion plan.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      See ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.

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

      Pursuant to a resolution of the Company's Board of Directors and the Audit
Committee thereof, dated September 15, 1997, the Company discontinued the
engagement of BDO Seidman, LLP ("BDO") and engaged Price Waterhouse LLP as the
Company's independent accountants for the Company's 1997 fiscal year.

      During the 1995 and 1996 fiscal years and the subsequent interim period
preceding the termination of BDO, the Company had no disagreements with BDO on
any matter of accounting principles or practices, financial statement disclosure
or auditory scope or procedure, which disagreements, if not resolved to the
satisfaction of BDO, would have caused it to make reference to the subject
matter of the disagreements in connection with its reports.

                                    PART III

      All items under this section are incorporated by reference to the
Company's proxy statement that will be filed no later than 120 days after
January 2, 1998.


                                       17
<PAGE>

                                     PART IV

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

The following documents are being filed as a part of this report:

(a)   1.    Financial Statements
      2.    Financial Statement Schedule

All other schedules are omitted since the required information is either not
required or not present.

      3.     Exhibits

                 3.1    Certificate of Incorporation of the Company, as amended
                        (1)

                 3.2    Certificate of Amendment to the Certificate of
                        Incorporation of the Company, dated January 13, 1993 (3)

                 3.3    By-Laws of the Company (2)

                 10.1   Agreement of Combination (2)

                 10.2   Agreement of Merger (1)

                 10.3   Certificate of Merger (1)

                 10.4   Master Lease Agreement dated December 29, 1997 between
                        the Company and General Electric Capital Corporation (4)

                 10.5   $3,000,000 Line of Credit Agreement expiring July 1,
                        1998 between the Company and North Fork Bank in the form
                        of a Promissory Note dated September 17, 1997 from the
                        Company to North Fork Bank (4)

                 10.6   Lease Agreement dated November 1, 1991 between P.M.C.
                        Supermarket, Inc. d/b/a/ Western Beef Forest Avenue Inc.
                        and Forest Associates, an affiliate of the Principal
                        Stockholders for the rental of the Company's Forest
                        Avenue store. (4)

                 10.7   Store Lease dated February 6, 1990 between the Company
                        and 130-35 Merrick Boulevard Associates, L.P., an
                        affiliate of the Principal Stockholders, for the rental
                        of the Company's Merrick Boulevard Store. (4)

                 10.8   Parking Lot Lease dated February 6, 1990 between the
                        Company and CM Boulevard Associates, L.P., an affiliate
                        of the Principal Stockholders, for the rental of the
                        parking lot at the Company's Merrick Boulevard Store. 
                        (4)

                 10.9   Agreement of Lease dated July 6, 1989 between Quarex,
                        Inc. and Elmont Q. Properties, an affiliate of the
                        Principal Stockholders, for the rental of the Company's
                        Elmont Store. (4)


                                       18
<PAGE>

                 10.10  Lease Agreement dated November 1, 1992 between Western
                        Beef - 173rd Street Inc. and Peter Castellana, Jr. and
                        Marie Castellana for the rental of the Company's 173rd
                        Street Store. (4)

                 10.11  Lease Agreement dated March 1, 1990 between western Beef
                        East New York Inc. and Elmont Q. Properties, Inc., an
                        affiliate of the Principal Stockholders, for the rental
                        of the Company's East New York Store. (4)

                 10.12  Store Lease dated January 30, 1997 between the Company
                        and ANT Realty Corp., an affiliate of the Principal
                        Stockholders, for the lease of the Company's Rockaway
                        Boulevard Store. (4)

                 10.13  Lease Agreement dated January 23, 1992 between Quarex
                        Inc. and 61 2nd Street Associates, an affiliate of the
                        Principal Stockholders for the lease of the Company's
                        Mineola Store. (4)

                 10.14  Agreement dated September 18, 1995 between the Company
                        and Amplicon Financial Corp. (4)

                 10.15  Assignment dated March 19, 1996 between Western
                        Beef-Steinway Street, Inc. and Metlife Capital Financial
                        Corporation (4)

                 10.16  Amended and Restated Mortgage dated March 19, 1996
                        between Western Beef - Steinway Street, Inc. and Metlife
                        Capital Financial Corporation (4)

                 10.17  Amended and Restated Promissory Noted dated March 19,
                        1996 between Western Beef-Steinway Street, Inc. and
                        Metlife Capital Financial Corporation (4)

                 10.18  Indenture dated September 17, 1993 between Ranbar
                        Packing, Inc. and Astoria Federal Savings and Loan
                        Association (4)

                 10.19  Note dated September 17, 1993 between Ranbar Packing,
                        Inc. and Astoria Federal Savings and Loan Association
                        (4)

                 10.20  Contract of Sale dated June 29, 1993 between Ranbar
                        packing, Inc. and Astoria Federal Savings and Loan
                        Association (4)

                 21     Subsidiaries (4)

                 23.1   Consent of Price Waterhouse LLP (4)

                 23.2   Consent of BDO Seidman, LLP (4)

                 27     Financial Data Schedule (4)

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

                (1)     Incorporated by reference to the Form 8-K Current Report
                        filed November 13, 1992 (the "8-K")

                (2)     Incorporated by reference to Form S-4 File No. 33-44494.

                (3)     Filed with the Annual Report on Form 10-K for the fiscal
                        year 1992.


                                       19
<PAGE>

                (4)     Filed herewith.

(b)   No reports on Form 8-K have been filed during the last quarter of the
      fiscal year covered by this report on Form 10-K.

(c)   See Item 14(a)3, above

(d)   Not applicable


                                       20
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of section 13 or 15 (d) of the securities
exchange act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                  WESTERN BEEF, INC.


                                  By: /s/Peter Castellana, Jr.,
                                  Peter Castellana, Jr.,
                                  President, Chief Executive Officer
                                  and Director



Date: March 30, 1998


        SIGNATURE                        TITLE                      DATE
        ---------                        -----                      ----

/s/Peter Castellana, Jr.     President, Chief Executive        March 30, 1998
--------------------------   Officer and Director
Peter Castellana, Jr.                     

/s/Chris Darrow              Principal Financial               March 30, 1998
--------------------------   and Accounting Officer
Chris Darrow

/s/Joseph Castellana         Director                          March 30, 1998
--------------------------
Joseph Castellana

/s/Stephen R.Bokser          Director                          March 30, 1998
--------------------------
Stephen R. Bokser

/s/Arnold B. Becker          Director                          March 30, 1998
--------------------------
Arnold B. Becker
<PAGE>

Western Beef, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended January 2, 1998,
January 3, 1997 and December 29, 1995
<PAGE>

                       Western Beef, Inc. and Subsidiaries
                                    Contents

Reports of Independent Accountants                                       F - 1-2

Consolidated financial statements:

Consolidated balance sheets                                                F - 3

Consolidated statements of income                                          F - 4

Consolidated statements of stockholders' equity                            F - 5

Consolidated statements of cash flows                                      F - 6

Notes to consolidated financial statements                              F - 7-24

Report of Independent Accountants on consolidated
 financial statement schedule                                             F - 25

Schedule II - Valuation and Qualifying Accounts                           F - 26
<PAGE>

                        Report of Independent Accountants

To the Board of Directors and
Stockholders of Western Beef, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Western Beef, Inc.
and Subsidiaries at January 2, 1998 and the results of their operations and
their cash flows for the fifty-two week period then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

New York, New York
March 5, 1998


                                      F-1
<PAGE>

Report of Independent Certified Public Accountants

To the Stockholders and Directors of Western Beef, Inc.:

We have audited the accompanying consolidated balance sheet of Western Beef,
Inc. and Subsidiaries as of January 3, 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended January 3, 1997. We have also audited the schedule
listed in the accompanying index. These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements and
schedule are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements and
schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Western Beef, Inc.
and Subsidiaries as of January 3, 1997, and the results of their operations and
their cash flows for each of the two years in the period ended January 3, 1997,
in conformity with generally accepted accounting principles.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein for each of the two years in the period ended
January 3, 1997.

BDO Seidman, LLP

New York, New York
March 5, 1997


                                      F-2
<PAGE>

Western Beef, Inc. and Subsidiaries

Consolidated Balance Sheets
(In Thousands, Except Par Value)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    January 2,  January 3,
                                                                       1998        1997
<S>                                                                  <C>         <C>     
Assets

Current:
   Cash and cash equivalents                                         $  7,527    $  2,634
   Accounts receivable, net of allowance for
      doubtful accounts of $552 and $386                                6,275       8,434
   Inventories                                                         14,113      17,668
   Prepaid expenses and other current assets                            2,933       1,461
   Deferred income taxes                                                1,235       1,253
                                                                     --------    --------

        Total current assets                                           32,083      31,450

Property, plant and equipment, net                                     42,258      41,276
Other assets                                                            1,913       1,773
                                                                     --------    --------

        Total assets                                                 $ 76,254    $ 74,499
                                                                     ========    ========

Liabilities and Stockholders' Equity

Current:
   Current portion of long-term debt                                 $  1,571    $  1,505
   Current portion of obligations under capital leases                  1,090       1,341
   Accounts payable                                                     8,903      10,617
   Accrued expenses and other current liabilities                       4,834       4,720
   Accounts payable-related party                                       1,997         797
                                                                     --------    --------

        Total current liabilities                                      18,395      18,980

Long-term debt, net of current portion                                  5,707       7,310
Obligations under capital leases, net of current portion                3,130       3,701
Deferred income taxes payable                                           2,059       1,484
Other non-current liabilities                                           1,834       1,142
                                                                     --------    --------

        Total liabilities                                              31,125      32,617
                                                                     --------    --------
Commitments and contingencies (Note 7)

Stockholders' equity:
   Preferred stock, $.05 par value - 2,000 shares
      authorized; none issued                                              --          --
   Common stock, $.05 par value - 15,000 shares authorized;
      5,466 and 5,463 shares, respectively, issued and outstanding        273         273
   Capital in excess of par value                                      11,390      11,379
   Retained earnings                                                   33,563      30,360
   Deferred compensation                                                  (97)       (130)
                                                                     --------    --------

        Total stockholders' equity                                     45,129      41,882
                                                                     --------    --------

                                                                     $ 76,254    $ 74,499
                                                                     ========    ========
</TABLE>


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


                                      F-3
<PAGE>

Western Beef, Inc. and Subsidiaries

Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     1997       1996       1995
<S>                                                <C>        <C>        <C>     
Net sales                                          $317,079   $340,873   $301,387
Cost of sales                                       237,808    258,402    228,923
                                                   --------   --------   --------

        Gross profit                                 79,271     82,471     72,464

Selling, general and administrative expenses         74,539     72,754     63,575
                                                   --------   --------   --------

        Income from operations                        4,732      9,717      8,889

Other income, net                                       603        837        162
                                                   --------   --------   --------

        Income before provision for income taxes      5,335     10,554      9,051

Provision for income taxes                            2,132      4,565      4,117
                                                   --------   --------   --------

        Net income                                 $  3,203   $  5,989   $  4,934
                                                   ========   ========   ========

Net income per share of common stock-basic         $    .59   $   1.10   $    .90
                                                   ========   ========   ========

Net income per share of common
   stock - diluted                                 $    .58   $   1.09   $    .90
                                                   ========   ========   ========

Weighted average shares outstanding - basic           5,465      5,463      5,463
                                                   ========   ========   ========

Weighted average shares outstanding - diluted         5,503      5,497      5,477
                                                   ========   ========   ========
</TABLE>

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


                                      F-4
<PAGE>

Western Beef, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity
(In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                     Common Stock     Capital in
                                 --------------------  excess of   Retained   Deferred
                                   Shares   Par value  par value   Earnings Compensation
<S>                                 <C>     <C>        <C>         <C>        <C>     
Balance, December 30, 1994          5,463   $    273   $ 11,516    $ 19,437   $     --
Net income for 1995                    --         --         --       4,934         --
Other                                  --         --       (305)         --         --
Granting of below-market stock
   options                             --         --        168          --       (168)
Amortization of deferred
   compensation                        --         --         --          --          4
                                 --------   --------   --------    --------   --------

Balance, December 29, 1995          5,463        273     11,379      24,371       (164)
Net income for 1996                    --         --         --       5,989         --
Amortization of deferred
   compensation                        --         --         --          --         34
                                 --------   --------   --------    --------   --------

Balance, January 3, 1997            5,463        273     11,379      30,360       (130)
Net income for 1997                    --         --         --       3,203         --
Amortization of deferred
   compensation                        --         --         --          --         33
Stock options exercised                 3         --         11          --         --
                                 --------   --------   --------    --------   --------

Balance, January 2, 1998            5,466   $    273   $ 11,390    $ 33,563   $    (97)
                                 ========   ========   ========    ========   ========
</TABLE>

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


                                      F-5
<PAGE>

Western Beef, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                   1997        1996        1995
<S>                                                              <C>         <C>         <C>     
Cash flows from operating activities:
   Net income                                                    $  3,203    $  5,989    $  4,934
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation and amortization                                 4,172       3,395       2,747
      Provision for losses on accounts receivable                     955         611         539
      Deferred income taxes                                           593        (316)        916
      (Gain) loss on disposal of property, plant and equipment        (80)        (20)         19
      (Increase) decrease in current assets:
        Accounts receivable                                         1,204        (291)     (2,386)
        Inventories                                                 3,555      (1,709)     (2,620)
        Prepaid expenses and other current assets                  (1,472)        559         780
        Other assets                                                 (140)        (59)        240
      (Decrease) increase in current liabilities:
        Accounts payable and accounts payable - related party        (514)     (1,720)        537
        Accrued expenses and other current liabilities                114       1,530       1,711
      Increase in non-current liabilities                             456       1,142          --
                                                                 --------    --------    --------

        Net cash provided by operating activities                  12,046       9,111       7,417
                                                                 --------    --------    --------

Cash flows from investing activities:
   Capital expenditures                                            (7,322)    (13,121)     (9,304)
   Investment in low-income housing credits                            --          --      (1,067)
                                                                 --------    --------    --------

        Net cash (used in) investing activities                    (7,322)    (13,121)    (10,371)
                                                                 --------    --------    --------

Cash flows from financing activities:
   Proceeds from sale of property, plant and equipment              2,517         112         228
   Proceeds on issuance of long-term debt                             647       6,377       2,777
   Payments on long-term debt                                      (3,006)     (2,276)     (1,931)
   Issuance of common stock                                            11          --          --
                                                                 --------    --------    --------

        Net cash provided by financing activities                     169       4,213       1,074
                                                                 --------    --------    --------

Net increase (decrease) in cash and cash equivalents                4,893         203      (1,880)

Cash and cash equivalents, beginning of year                        2,634       2,431       4,311
                                                                 --------    --------    --------

Cash and cash equivalents, end of year                           $  7,527    $  2,634    $  2,431
                                                                 ========    ========    ========

Cash paid during the year for:
   Interest                                                      $  1,086    $  1,071    $    775
   Income taxes                                                  $  2,569    $  4,442    $  2,741
</TABLE>

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


                                      F-6
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1. Summary of Significant Accounting Policies

      Description of Business

      Western Beef, Inc. and Subsidiaries, all of which are wholly-owned,
      (the "Company") operate high-volume, warehouse-type, retail food stores
      and a wholesale meat and poultry business. During 1997 and 1996, the
      Company operated nineteen retail food stores. During 1995, the Company
      operated seventeen retail stores. The Company also sells poultry, beef,
      pork and provisions through its wholesale operations to supermarket
      chains, retailers and other distributors. The retail stores serve the New
      York/New Jersey metropolitan area and the wholesale business operates
      principally in the New York, New Jersey and Eastern Pennsylvania markets.

      Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
      and its subsidiaries. All significant intercompany balances and
      transactions have been eliminated in consolidation.

      Fiscal Year

      The Company uses a 52-53 week fiscal year, with the year ending on the
      Friday closest to December 31. The fiscal years ended January 2, 1998,
      January 3, 1997 and December 29, 1995 are referred to as 1997, 1996 and
      1995, respectively, throughout the financial statements. Fiscal years 1997
      and 1995 include 52 weeks and fiscal year 1996 includes 53 weeks.

      Revenue Recognition

      Retail revenues are recorded at the time of sale. Wholesale revenues are
      recorded at the time the products are shipped.

      Inventories

      Inventories consisting of meats, poultry, groceries and other food
      products held for resale, are stated at the lower of cost (first-in,
      first-out retail method) or market.

      Property, Plant and Equipment

      Property, plant and equipment are recorded at cost. Depreciation and
      amortization are computed on the straight-line method over the estimated
      useful lives of the assets. The buildings under capital lease and
      leasehold improvements are being amortized over their useful lives.
      Repairs and maintenance are charged to operations. Renewals and
      improvements are capitalized.


                                      F-7
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      121"), "Accounting for the Impairment of Long-Lived Assets and for
      Long-Lived Assets to be Disposed Of" requires that long-lived assets held
      and used by the Company be reviewed for impairment whenever events or
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. An impairment is recognized, to the extent that the sum of
      undiscounted estimated future cash flows expected to result from the
      asset's use is less than its carrying value. The Company has evaluated its
      asset base under the guidelines established by SFAS No. 121 and determined
      that no impairment is present.

      Estimated Fair Value of Financial Instruments

      Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
      "Disclosure about Fair Value of Financial Instruments", requires
      disclosures of fair value information about financial instruments for
      which it is practicable to estimate the value, whether or not recognized
      on the balance sheet. The fair value of financial instruments, including
      cash, accounts receivable, accounts payable and accrued expenses,
      approximate carrying value. The carrying amounts of long-term debt and
      obligations under capital leases approximate fair value because the
      interest rates approximate current market rates.

      Income Taxes

      Deferred income taxes are recognized for temporary differences between the
      basis of assets and liabilities for financial statement and income tax
      purposes. Deferred income taxes represent the future tax return
      consequences of those differences which will either be taxable or
      deductible when the assets and liabilities are recovered or settled.

      Other Assets

      Included in other assets are investments of approximately $901,000 and
      $974,000 at January 2, 1998 and January 3, 1997, respectively, which the
      Company made in two limited partnerships during 1995. These investments
      have generated low income housing tax credits to be used to offset future
      federal income taxes. In accordance with Emerging Issues Task Force Issue
      No. 94-1, "Accounting for Tax Benefits Resulting from Investments in
      Affordable Housing Projects", these investments are accounted for under
      the effective yield method. The credits are guaranteed by an
      indemnification agreement in the partnership contract.

      Net Income Per Share

      Effective January 1997, the Company accounts for its net income per share
      in accordance with Statement of Financial 


                                      F-8
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). Under
      SFAS No. 128, the Company is required to report both basic net income per
      share based on the weighted average number of common shares outstanding
      and diluted net income per share based on the weighted average number of
      common shares outstanding plus all potentially dilutive common shares
      issuable. In accordance with SFAS No. 128, all prior period net income per
      share data have been restated. Net income per share calculations for 1997,
      1996 and 1995 are presented in Note 5.

      Cash Equivalents

      Cash equivalents include all highly liquid debt instruments with an
      original maturity of three months or less. Cash equivalents consist
      primarily of money market accounts.

      Concentration of Credit Risk

      Financial instruments which potentially expose the Company to
      concentrations of credit risk consist primarily of cash and trade accounts
      receivable. The Company maintains some of its cash balances in accounts
      which exceed federally insured limits, but has not experienced any losses
      to date resulting from this policy. The Company sells primarily to retail
      customers and wholesale food businesses located in the New York
      metropolitan area. Although the Company is directly affected by the
      well-being of the food industry, management does not believe significant
      credit risk exists.

      Store Opening Costs

      Costs associated with the opening of new stores are expensed as incurred.

      Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires the Company 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, costs and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      Recent Accounting Standards

      In 1997, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards No. 130, "Reporting
      Comprehensive Income" ("SFAS No. 130"). SFAS No.130 establishes standards
      for reporting and display of comprehensive income and its components
      within financial 


                                      F-9
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      statements. Comprehensive income consists of all changes in equity during
      a period except those resulting from investments by and distributions to
      owners. SFAS No. 130 also requires that all components of comprehensive
      income be disclosed in a separate financial statement or on the face of
      the income statement. This statement is effective for the Company
      beginning in 1998 and requires reclassification of prior period
      information for comparative purposes.

      In 1997, the FASB also issued Statement of Financial Accounting Standards
      No. 131, "Disclosures about Segments of an Enterprise and Related
      Information" ("SFAS No. 131"). SFAS No. 131 replaces the products and
      services approach of SFAS No. 14 to reporting business segments with the
      management approach. Under the provisions of SFAS No. 131, business
      segments are based on the way that the chief operating decision maker
      organizes the segments within the enterprise for deciding on how to
      allocate resources and in assessing performance. SFAS No. 131 is effective
      for the Company in 1998, and segment information that is reported with
      corresponding information for the initial year must be restated, unless it
      is impractical to do so.

      In 1998, the FASB issued Statement of Financial Accounting Standards No.
      132, "Employers' Disclosures about Pensions and Other Post Retirement
      Benefits" ("SFAS No. 132"), an amendment of FASB Statements Nos. 87, 88
      and 106. SFAS No. 132 is effective for the Company in 1998.

      The adoption of these statements is not expected to have a material effect
      on the consolidated financial statements.

      Reclassifications

      Certain reclassifications have been made to the prior year amounts to
      conform to the fiscal 1997 presentation.


                                      F-10
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

2. Property, Plant and Equipment

      Property, plant and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           Depreciable   
                                               life      January 2,   January 3,
                                             in years       1998         1997
      <S>                                    <C>           <C>          <C>    
      Land                                                 $ 2,723      $ 2,703
      Land under capital leases                                650          650
      Buildings                              35 to 39        4,053        4,053
      Buildings under capital leases         35 to 39        1,950        1,950
      Improvements                           10 to 30       30,811       26,599
      Machinery and equipment                 6 to 20       12,253       12,462
      Equipment under capital leases         10 to 30        7,341        6,382
      Furniture and fixtures                  5 to 7         2,814        2,692
      Transportation equipment                   5             189          720
                                                           -------      -------
                                                                       
                                                            62,784       58,211
                                                                       
      Less: accumulated depreciation and amortization       20,526       16,935
                                                           -------      -------
                                                                       
                                                           $42,258      $41,276
                                                           =======      =======
</TABLE>


                                      F-11
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

3. Debt

      Installment Notes

                                                          January 2,  January 3,
                                                             1998        1997
      Long-term debt consists of the following                          
         (in thousands):                                                
                                                                        
      Installment notes payable in monthly                              
         installments of $133 including                                 
         interest at rates ranging from 7.55%                           
         to 10.0%, expiring at various dates                            
         through 2001 and collateralized by                             
         certain accounts receivable,                                   
         inventory and equipment                            $3,407      $4,731
                                                                        
      Installment notes payable in monthly                              
         installments of $44 including                                  
         interest at rates ranging from 8.25%                           
         to 9.38%, expiring at various date                             
         through 2006 and collateralized by                             
         land and buildings                                  3,711       3,924
                                                                        
      Installment note payable in annual                                
         principal payments of $16, plus                                
         interest at 8%; payments commence                              
         in 2001 through 2010                                  160         160
                                                            ------      ------
                                                                        
                                                             7,278       8,815
                                                                        
      Less:  Current maturities                              1,571       1,505
                                                            ------      ------
                                                                        
                                                            $5,707      $7,310
                                                            ======      ======

      As of January 2, 1998, debt matures as follows (in thousands):

      1998                                                          $1,571
      1999                                                           1,523
      2000                                                             943
      2001                                                             358
      2002                                                             195
      Thereafter                                                     2,688
                                                                    ------

                                                                    $7,278
                                                                    ======

      At January 2, 1998, land, property and equipment with a net book value of
      $9,061,000 was pledged as collateral for the debt.

      For fiscal years 1997, 1996 and 1995, interest expense (net of interest
      income of $106,000, $164,000 and $142,000, respectively) was $965,000,
      $907,000 and $633,000, respectively.


                                      F-12
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      Bank Facility

      During 1997, the Company renewed its agreement for a credit facility that
      permits borrowings of up to $3,000,000, expiring July 1, 1998. The
      facility is available for working capital purposes and is secured by all
      monies possessed by the bank that are at any time credited by or due from
      the bank to the Company. Borrowings under the facility bear interest at
      the bank's prime rate. The facility provides for an additional fee payable
      (at the bank's prime rate plus 4%) if and to the extent that the aggregate
      average monthly balance in non-interest bearing deposit accounts is less
      than $1,000,000. During 1997, the Company had no borrowings under this
      facility.

      Capital Lease Obligations

      The Company utilizes certain land, buildings and equipment in its
      operations pursuant to lease agreements which are accounted for as capital
      leases. Future minimum lease payments under capital lease obligations,
      together with the present value of the net minimum lease payments at
      January 2, 1998, were as follows (in thousands):

      Fiscal Year

      1998                                                          $1,396
      1999                                                             932
      2000                                                             932
      2001                                                             932
      2002                                                             553
      Thereafter                                                       418
                                                                    ------

                                                                     5,163

      Less: Amounts representing interest                              943
                                                                    ------

      Present value of net minimum lease payments                    4,220

      Less: Current portion                                          1,090
                                                                    ------

                                                                    $3,130
                                                                    ======


                                      F-13
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

4. Income Taxes

      The provision for income taxes consists of the following (dollars in
      thousands):

                                          1997         1996          1995

      Federal:
         Current                        $   704      $ 2,744       $ 1,474
         Deferred                           467         (183)          515
                                        -------      -------       -------

                                          1,171        2,561         1,989
                                        -------      -------       -------

      State and local:
         Current                            837        2,137         1,727
         Deferred                           124         (133)          401
                                        -------      -------       -------

                                            961        2,004         2,128
                                        -------      -------       -------

                                        $ 2,132      $ 4,565       $ 4,117
                                        =======      =======       =======

      The deferred income tax provision (benefit) results primarily from the
      annual change in temporary differences between the basis of assets and
      liabilities for financial reporting purposes and such amounts as measured
      by income tax laws.

      A reconciliation of income taxes at the 34% federal statutory income tax
      rate for 1997, 1996 and 1995 to income taxes as reported is as follows:

                                                     1997     1996     1995

      Statutory federal income tax rate              34.0%    34.0%    34.0%
      State and local income taxes, net of federal
         income tax benefit                          12.2     12.1     13.1
      Low income housing tax credits                 (4.3)    (2.1)    (1.6)
      Work opportunity tax credit                    (1.3)      --       --
      Other                                           (.6)     (.7)      --
                                                     ----     ----     ----

      Effective income tax rate                      40.0%    43.3%    45.5%
                                                     ====     ====     ====

      The Company has qualified low income housing tax credits of $1,464,000
      which are available to reduce future regular federal income taxes.


                                      F-14
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      Thecomponents of net deferred tax assets (liabilities) are as follows
      (dollars in thousands):

                                                      January 2,  January 3,
                                                         1998       1997

      Deferred tax assets:
         Capitalized costs for income tax purposes     $   877    $ 1,078
         Accounts receivable allowance                     280        175
         Lease obligations                                  78         --
                                                       -------    -------

              Deferred income taxes included
                in current assets                      $ 1,235    $ 1,253
                                                       =======    =======

      Non-current assets:
         Investment in low-income housing credit       $    37    $    42

      Non-current liabilities:
         Depreciation and amortization                  (2,096)    (1,526)
                                                       -------    -------

              Deferred income taxes payable            $(2,059)   $(1,484)
                                                       =======    =======


                                      F-15
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

5. Reconciliation of Basic and Diluted Net Income per Share (in thousands,
   except per share amounts)

                                                          Weighted
                                                          Average
                                                 Net       Shares     Per Share
                                               Income   Outstanding    Amount
      1997
      Basic net income per share               $3,203       5,465      $    .59
      Effect of dilutive securities:                                 
         Stock options                             --          38          (.01)
                                               ------      ------      --------
                                                                     
      Diluted net income per share             $3,203       5,503      $    .58
                                               ======      ======      ========
                                                                     
      1996
      Basic net income per share               $5,989       5,463      $   1.10
      Effect of dilutive securities:                                 
         Stock options                             --          34          (.01)
                                               ------      ------      --------
                                                                     
      Diluted net income per share             $5,989       5,497      $   1.09
                                               ======      ======      ========
                                                                     
      1995
      Basic net income per share               $4,934       5,463      $    .90
      Effect of dilutive securities:                                 
         Stock options                             --          14            --
                                               ------      ------      --------
                                                                     
      Diluted net income per share             $4,934       5,477      $    .90
                                               ======      ======      ========

      A total of 27,700 options were not included in the 1997 effect of diluted
      securities due to the anti-dilutive nature of the options.

6. Stock Options

      At January 2, 1998, the Company has two stock option plans which are
      described below. The Company applies APB Opinion No. 25, "Accounting for
      Stock Issued to Employees," and related interpretations in accounting for
      the plans. Under APB Opinion No. 25, when the exercise price of the stock
      option equals the market price of the underlying stock on the date of
      grant, no compensation cost is recognized. In 1997 and 1996, no options
      were granted with exercise prices below market. Certain options were
      granted in 1995 at below-market exercise prices. Related compensation
      expense, totaling $168,000, was deferred and is being amortized over five
      years.

      Pursuant to the 1995 Stock Option Plan (the "Plan"), options to purchase
      an aggregate of not more than 1,300,000 shares of 


                                      F-16
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      common stock may be granted from time to time to key employees, officers,
      directors, advisors and independent consultants to the Company or to any
      of its subsidiaries. The total number of shares of common stock for which
      options may be granted under the Plan shall not exceed 2% cumulatively of
      the number of shares issued as of January 1 of each year. The Plan is
      administered by a committee of the Board of Directors. The per share
      exercise price for incentive stock options ("ISO's") will not be less than
      100% of the fair market value of a share of common stock on the date the
      option is granted (ISO's may not be granted if the optionee owns more than
      10% of the Company's common stock and nonqualified stock options will not
      be less than 25% of the fair market value on the date the option is
      granted. Options may be granted for a term, to be determined by the
      committee, of not more than ten years from the date of grant.

      Pursuant to the 1995 Nonemployee Director Stock Option Plan (the
      "Directors' Plan"), options to purchase an aggregate of not more than
      200,000 shares of common stock may be granted from time to time to
      directors who are neither employees nor officers of the Company. The
      Directors' Plan is administered by a committee of the Board of Directors.
      Each option granted prior to December 31, 1996 shall vest one year from
      the date granted and will expire at a term, determined by the committee,
      not to exceed ten years. Options granted after January 1, 1997 will vest
      over a five year period, at equal percentages, and will expire at a term,
      determined by the committee, not to exceed ten years.

      Statement of Financial Accounting Standards No. 123, "Accounting for
      Stock-Based Compensation" ("SFAS No. 123"), requires the Company, if
      material, to provide pro forma information regarding net income and net
      income per share as if compensation cost for the Company's stock option
      plans had been determined in accordance with the fair value based method
      prescribed in SFAS No. 123. The compensation costs associated with the
      Company's stock option plan determined in accordance with SFAS No. 123
      would have been $77,000, $70,000 and $0 for 1997, 1996 and 1995,
      respectively.

      The following table contains information regarding the 1995 Stock Option
      Plan and the 1995 Nonemployee Director Stock Option Plan:


                                      F-17
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                                      Exercise     Weighted
                                        Option      price range    average
                                        shares       per share      price

      Balance, December 31, 1994            --                --        --
      Granted during 1995               81,949    $1.50 to $6.00    $ 3.93
                                       -------

      Balance, December 29, 1995        81,949    $1.50 to $6.00      3.93
      Granted during 1996               15,000        $9.31           9.31
      Canceled during 1996              (7,000)   $5.88 to $6.00      5.91
                                       -------

      Balance, January 3, 1997          89,949    $1.50 to $9.31      4.67
      Granted during 1997               32,300        $11.50         11.50
      Exercised during 1997             (2,833)   $1.50 to $6.00      3.88
      Canceled during 1997             (16,600)   $6.00 to $11.50     8.52
                                       -------

      Balance, January 2, 1998         102,816    $1.50 to $11.50   $ 6.22
                                       =======

      As of January 2, 1998, approximately 43,000 of the options granted were
      exercisable and approximately 355,000 options were available for future
      grants.


                                      F-18
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

7. Commitments and Contingencies

      Operating Leases

      The Company has commitments for various noncancellable operating leases
      which expire at various dates through January 2017. Certain of the leases
      are with related parties (see Note 9). Many of the leases have renewal
      options and most contain provisions for passing through incremental costs.
      Future minimum rental payments required under noncancellable operating
      leases at January 2, 1998 are as follows (in thousands):

      Fiscal Year

      1998                                                         $ 5,143
      1999                                                           4,952
      2000                                                           4,426
      2001                                                           4,327
      2002                                                           3,322
      Thereafter                                                    15,739
                                                                   -------

      Total future minimum rentals                                 $37,909
                                                                   =======

      For fiscal years 1997, 1996 and 1995, rent expense was $5,225,000,
      $4,838,000 and $4,195,000, respectively.

      The Company has entered into sublease agreements for certain space located
      within its various retail facilities. For fiscal years 1997, 1996 and 1995
      rental income from subleases was $997,000, $906,000 and $681,000,
      respectively. The Company retains the right to sublease the additional
      unoccupied space. The subleases currently in effect provide for future
      rental income as follows (in thousands):

      Fiscal Year

      1998                                                          $1,015
      1999                                                             967
      2000                                                             957
      2001                                                             786
      2002                                                             689
      Thereafter                                                       867
                                                                    ------

                                                                    $5,281
                                                                    ======

      Litigation

      The Company is engaged in various outstanding litigation 


                                      F-19
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      matters which arose in the ordinary course of business. In the opinion of
      management, the outcome of such matters will not have a material adverse
      effect on the Company's financial position or operating results.


                                      F-20
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      Standby Letter of Credit

      The Company has outstanding letters of credit totaling $3,558,000 to
      collateralize incurred but unpaid insurance claims.

8.  Profit Sharing Plans

      The Company has a profit sharing plan which covers all eligible employees.
      The plan allows for salary deferral arrangements under the provisions of
      Section 401(k) of the Internal Revenue Code. The Company does not
      contribute to this plan.

      Additionally, the Company has a noncontributory profit sharing plan for
      its employees. Funding requirements for the plan are nonobligatory. For
      fiscal years 1997, 1996 and 1995, the noncontributory profit sharing plan
      expense was $750,000, $625,000 and $602,000, respectively.

9. Related Party Transactions

      The Company leases land, various retail food stores and warehouse storage
      and office space from affiliates of the principal stockholders under
      various leases which expire through January 2017. For fiscal years 1997,
      1996 and 1995 rent expense relating to these leases was $2,829,000,
      $2,737,000 and $2,772,000, respectively (see Note 7). The Company made
      capital expenditures of approximately $2,022,000, $725,000 and $374,000
      during 1997, 1996 and 1995, respectively, at leaseholds owned by
      affiliates of the principal stockholders.

      For fiscal years 1997, 1996 and 1995, the Company purchased various food
      products in the amounts of $37,111,000, $27,423,000 and $21,954,000
      respectively, from a company in which an officer is also a director of the
      Company. As of January 2, 1998 and January 3, 1997, the Company had
      accounts payable of $1,997,000 and $797,000, respectively, due to such
      company.

      For fiscal years 1997, 1996 and 1995, the Company had sales to related
      parties of $894,000, $335,000 and $528,000, respectively.

      The Company does its banking at a bank which has an officer who was a
      member of the Company's Board of Directors until April 1, 1996. The credit
      facility described in Note 3 is 


                                      F-21
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

      with the same bank.


                                      F-22
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

10. Segments of Business

      The Company operates in two industry segments. The wholesale segment
      primarily sells poultry, beef, pork and provisions to retailers,
      restaurants and institutions. The retail segment sells various meat and
      grocery items to the general public. A summary of certain aspects of such
      segments is as follows (in thousands):

                                              1997       1996       1995

      Net sales:
         Retail                             $232,400   $239,711   $208,426
         Wholesale                            84,679    101,162     92,961
                                            --------   --------   --------

                                            $317,079   $340,873   $301,387
                                            ========   ========   ========

      Intersegment sales:
         Wholesale                          $ 53,931   $ 60,775   $ 28,790
                                            ========   ========   ========

      Income from operations:
         Retail                             $  4,727   $  8,793   $  7,781
         Wholesale                                 5        924      1,108
                                            --------   --------   --------

                                            $  4,732   $  9,717   $  8,889
                                            ========   ========   ========

      Identifiable assets:
         Retail                             $ 63,738   $ 60,475   $ 49,124
         Wholesale                            12,516     14,024     14,189
                                            --------   --------   --------

                                            $ 76,254   $ 74,499   $ 63,313
                                            ========   ========   ========

      Depreciation and amortization:
         Retail                             $  4,034   $  3,214   $  2,541
         Wholesale                               138        181        206
                                            --------   --------   --------

                                            $  4,172   $  3,395   $  2,747
                                            ========   ========   ========

      Capital expenditures:
         Retail                             $  7,085   $ 12,933   $  9,027
         Wholesale                               237        188        424
                                            --------   --------   --------

                                            $  7,322   $ 13,121   $  9,451
                                            ========   ========   ========


                                      F-23
<PAGE>

Western Beef, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

11. Quarterly Information (Unaudited)

      The summarized quarterly financial data presented below (in thousands
      except per share amounts) reflects all adjustments which, in the opinion
      of management, are of a normal and recurring nature necessary to present
      fairly the results of operations for the periods presented.

<TABLE>
<CAPTION>
                                           1st Quarter  2nd Quarter  3rd Quarter  4th Quarter
      <S>                                    <C>          <C>          <C>          <C>    
      Fiscal year ended January 2, 1998
      Sales                                  $72,795      $81,881      $86,372      $76,031
      Gross profit                            18,142       19,939       21,605       19,585
      Net income                                 813          779          867          744
      Net income per share
         of common stock - basic                 .15          .14          .16          .14
                                             ==============================================

      Sales                                  $79,349      $84,180      $85,167      $92,177
      Gross profit on sales                   19,589       20,014       20,680       22,188
      Net income                               1,262        1,520        1,522        1,685
      Net income per share
         of common stock - basic                 .23          .28          .28          .31
                                             ==============================================

      Fiscal year ended December 29, 1995
      Sales                                  $67,574      $73,058      $78,407      $82,348
      Gross profit                            15,526       17,705       19,209       20,024
      Net income                                 797        1,154        1,360        1,623
      Net income per share
         of common stock - basic                 .15          .21          .25          .29
                                             ==============================================
</TABLE>


                                      F-24
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS
                  ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and
Stockholders of Western Beef, Inc.

Our audit of the consolidated financial statements referred to in our report
dated March 5, 1998 appearing on page F-1 of this 1997 Annual Report on Form
10-K also included an audit of the financial statement schedule listed on page
F-26 of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statement.

PRICE WATERHOUSE LLP

New York, New York
March 5, 1998


                                      F-25
<PAGE>

Western Beef, Inc. and Subsidiaries

Schedule II - Valuation and Qualifying Accounts
(In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                           Additions
                                                    -------------------------
                                     Balance at     Charged to                              Balance at
                                     beginning of     cost and   Charge to                    end of
                                        year         expenses  other accounts  Deductions      year
<S>                                      <C>           <C>          <C>           <C>          <C> 
Year ended January 2, 1998:
   Allowance for doubtful accounts       $386          $955         $  --         $(789)       $552
                                                                                
Year ended January 3, 1997:                                                     
   Allowance for doubtful accounts       $326          $611         $  --         $(551)       $386
                                                                                
</TABLE>


                                      F-26