<PAGE>
                                  UNITED STATES            
                        SECURITIES AND EXCHANGE COMMISSION 
                              WASHINGTON, D.C. 20549       

                                   -----------

                                    FORM 10-K 

   (MARK ONE)
      [X]    Annual report pursuant to Section 13 or 15(d) of the Securities
             Exchange Act of 1934
             For the fiscal year ended December 28, 1997

      [ ]    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 0-21205

                                 -----------

                       NEW YORK BAGEL ENTERPRISES, INC.            
            (Exact name of registrant as specified in its charter) 

                 KANSAS                               73-1369185
    (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)               Identification No.)

                               300 I.M.A. PLAZA
                            250 NORTH WATER STREET
                          WICHITA, KANSAS 67202-1213
                                 316-267-7373
  (Address, including zip code, and telephone number of Registrant's principal
                              executive offices)

                                 ----------

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
    TITLE OF EACH CLASS          NAME OF EACH EXCHANGE ON WHICH REGISTERED
                                    None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, par value $0.01 per share
                               (Title of class)

                                 ----------

     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 definitive proxy or 
information statements incorporated by reference in Part III of this Form 
10-K or any amendments to this Form 10-K.  ( X ) 

     As of March 1, 1998, the aggregate market value of the voting stock held 
by non-affiliates of the registrant (based upon the last reported sale price 
of the Common Stock of the registrant as quoted on the Nasdaq National Market 
of The Nasdaq Stock Market, Inc.) was $4,465,603. (For purposes of 
calculating the preceding amount only, all directors, executive officers and 
stockholders holding 5% or greater of the registrant's Common Stock are 
assumed to be affiliates). The number of shares of Common Stock of the 
registrant outstanding as of March 1, 1998 was 4,661,500.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant's Proxy Statement for its annual 
meeting of stockholders to be held on May 20, 1998 are incorporated by 
reference into Items 10, 11, 12 and 13 of Part III. The registrant intends to 
file such Proxy Statement no later than 120 days after the end of the fiscal 
year covered by this Form 10-K.

<PAGE>
                        NEW YORK BAGEL ENTERPRISES, INC.      
                      INDEX TO ANNUAL REPORT ON FORM 10-K     
                  FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997 
<TABLE>
 PART I                                                                   PAGE
                                                                          ----
 <S>                                                                      <C>  
 Item 1.  Business                                                          3  

 Item 2.  Properties                                                        9  

 Item 3.  Legal Proceedings                                                12  

 Item 4.  Submission of Matters to a Vote of Security Holders              12  
          Risk Factors                                                     12  

 PART II
 Item 5.  Market for Registrant's Common Equity and Related Stockholder      
          Matters                                                          16

 Item 6.  Selected Financial Data                                          17  

 Item 7.  Management's Discussion and Analysis of Financial Condition and    
          Results of Operation                                             19

 Item 7A. Quantitative and Qualitative Disclosures About Market Risk       24

 Item 8.  Financial Statements and Supplementary Data                      24

 Item 9.  Changes in Disagreements with Accountants on Accounting and        
          Financial Disclosure                                             24

 PART III
 Item 10. Directors and Executive Officers of the Registrant               25  

 Item 11. Executive Compensation                                           25  

 Item 12. Security Ownership of Certain Beneficial Owners and Management   25  

 Item 13. Certain Relationships and Related Transactions                   25  

 PART IV
 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K  25  

  SIGNATURES                                                               26  
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                              F-1
  INDEX TO EXHIBITS                                                       E-1  
</TABLE>

                                       2
<PAGE>

                                       PART I

                  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     THIS FORM 10-K INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" 
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED 
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING 
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS 
OR STRATEGIES REGARDING THE FUTURE.  ALL STATEMENTS, OTHER THAN STATEMENTS OF 
HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL 
POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE 
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.  ALL FORWARD-LOOKING STATEMENTS 
INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY 
ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH 
FORWARD-LOOKING STATEMENTS.  ALTHOUGH THE COMPANY BELIEVES THAT THE 
ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE 
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO 
HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY 
PRESENTLY BE PLANNED.  CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL 
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN 
THE "RISK FACTORS" SECTION OF THIS FORM 10-K ANNUAL REPORT, WHICH INCLUDE, 
WITHOUT LIMITATION, THE COMPANY'S ABILITY TO DEVELOP, CONSTRUCT, ACQUIRE OR 
FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE COMPANY'S DEVELOPMENT 
SCHEDULE, CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS, AVAILABILITY AND 
TERMS OF CAPITAL, ACCEPTANCE OF NEW PRODUCT OFFERINGS, COMPETITION, 
MANAGEMENT OF QUARTER TO QUARTER EARNINGS, INCREASES IN OPERATING COSTS AND 
CHANGES IN GOVERNMENT REGULATION.  ALL SUBSEQUENT WRITTEN OR ORAL 
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON 
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.

ITEM 1.  BUSINESS

GENERAL

     As of March 1, 1998, New York Bagel Enterprises, Inc. (the "Company") 
owned and franchised 62 quick-service New York Bagel restaurants and seven 
Lots A' Bagels restaurants in 15 states that serve generous portions of 
fresh, high quality food with fast, friendly service at an attractive 
price-value relationship. Historically, the Company has grown by developing 
Company-owned restaurants, making acquisitions and by selectively adding 
franchisees. As of March 1, 1998, there were 46 Company-owned restaurants 
located in Oklahoma, Kansas, Tennessee, Texas, Colorado, Missouri, Alabama 
and Kentucky and 23 franchised restaurants located in 11 states operated by 
14 franchisees. 

     The Company believes that consumption of bagels has increased in recent 
years, as consumers have discovered that bagels are a healthier, lower fat 
alternative to other quick-service foods and are a suitable substitute for 
sandwich breads. Management believes that the market for retail bagel 
restaurants is fragmented and underserved, and that the Company can 
capitalize on the demand for fresh bagels. 

     The Company opened its first restaurant in 1986, and has developed, as 
of March 1, 1998, 34 of its 46 Company-owned restaurants in Oklahoma, Kansas, 
Tennessee, Texas, Alabama, Kentucky and Missouri. In addition to developing 
new restaurants, as of March 1, 1998 the Company has acquired one bagel 
restaurant in Tennessee, seven Lots A' Bagels restaurants and a bagel 
commissary in Colorado, and four franchised New York Bagel restaurants in 
Texas and Kansas. See Note 11 of the Notes to Consolidated Financial 
Statements. 

     The Company's business was previously operated through six separate 
entities, each of which was owned by one or more stockholders that existed 
prior to the Company's initial public offering (collectively, the "Prior 
Entities"). The Company was incorporated in December 1995 under the laws of 
Kansas, and on December 31, 1995, the Prior Entities were merged into the 
Company (the "Reorganization"). The financial statements and all 
supplementary financial data for 1995 and prior periods herein include the 
results of operations of the Prior Entities on a combined basis. See Note 1 
of the Notes to Consolidated Financial Statements. 

     The Company completed its initial public offering of its Common Stock on 
August 27, 1996. Reference to "New York Bagel" restaurants include the 
Company's Lots A' Bagels restaurants unless otherwise indicated.              
        

                                       3

<PAGE>

THE NEW YORK BAGEL CONCEPT

     PREPARE FRESH, HIGH QUALITY PRODUCTS. New York Bagel restaurants serve 
up to 20 varieties of bagels that are made from scratch, boiled and baked 
throughout the day in the traditional "New York style." The Company believes 
its five-ounce bagel is larger than those served by many of its competitors. 
Menu items are prepared in accordance with the Company's specifications using 
high quality ingredients such as Philadelphia-Registered Trademark- Brand 
cream cheese, Kraft-Registered Trademark- cheeses and premium deli meats. 
Generous portions of cream cheese are applied on its breakfast bagel and four 
ounces of meat are served on each of its deli sandwiches. The Company 
believes that the quality and portion size of its menu items generally equals 
or exceeds those of its competitors. Because its menu pricing is competitive, 
the Company believes that it offers customers an attractive price-value 
relationship. 

     MAXIMIZE TRAFFIC THROUGHOUT THE DAY.  Management has recognized the 
versatility of the bagel and has developed a menu to attract customers 
throughout the day. The breakfast menu at New York Bagel restaurants includes 
a variety of bagels and custom-blended cream cheeses, breakfast sandwiches on 
bagels, gourmet coffees, muffins and croissants. Lunch and dinner items 
include a wide range of delicatessen sandwiches made on bagels or other 
breads, salads, cookies and soft drinks. The Company also has been able to 
successfully operate drive-through windows at certain New York Bagel 
restaurants. 

     COMMITMENT TO TIMELY SERVICE.  The Company believes that timely service 
is essential in the quick-service restaurant business.  Service time is 
minimized through the division of employee functions, efficient store layout 
and design and queuing mechanisms.

     FOCUS ON TRAINING.  The Company believes that comprehensive training is 
essential to the efficiency and consistency of its operations.  The Company 
conducts a 28-day training program for its restaurant managers and 
franchisees that places an emphasis on these areas while maintaining the 
operational systems of an actual New York Bagel restaurant.  In addition, the 
Company provides on-site assistance during the initial ten days of operation 
at each Company-owned restaurant and at a franchisee's initial franchised 
restaurant.

COMPANY STRATEGY

     FOCUS ON OPERATIONS; LIMITED DEVELOPMENT.  The Company completed its 
initial public offering in August 1996 in which it raised $14.7 million that 
enabled the Company to grow and expand.  From August 1996 through February 
1998, the Company utilized such proceeds to develop 15 new restaurants and to 
acquire eleven additional restaurants.  Consequently, Company-owned 
restaurants have increased from 20 restaurants just prior to the initial 
public offering to 46 Company-owned restaurants as of March 1, 1998.  During 
1998, the Company anticipates shifting its strategy from that of aggressive 
growth to that of limited growth with an enhanced focus on operations.  The 
strategy includes new product initiatives that are anticipated to stimulate 
sales growth from existing restaurants.  It also includes a focus on cost 
controls, primarily cost of sales and restaurant operating expenses.  The 
Company anticipates that its limited development and enhanced focus on 
operations will position the Company to renew restaurant development and 
growth.

     EMPHASIZE MID-SIZED AND SMALLER METROPOLITAN MARKETS. Historically, the 
Company has targeted its expansion efforts in mid-sized and smaller 
metropolitan markets. Management believes that these markets are attractive 
because they typically have fewer competing bagel restaurants and more 
favorable lease and labor environments than larger metropolitan markets. 

     ESTABLISH STRONG MARKET PRESENCE.  Since the bagel industry is highly 
fragmented and increasingly competitive, the Company seeks to establish a 
strong market presence in its targeted markets. To develop a strong market 
presence rapidly and efficiently, the Company employs a multiple store 
strategy involving a bakery restaurant which produces bagels for itself and 
one or more nearby satellite restaurants. By entering underserved markets and 
opening multiple restaurants, the Company seeks to maximize market share and 
establish brand awareness. The Company and its franchisees have implemented 
this bakery/satellite restaurant combination 25 times. 

     FOCUS ON UNIT AND MARKET ECONOMICS.  Consistent with its market share 
objective, the Company focuses not only on generating attractive unit level 
economics, but also on the economic returns of a particular target market. 
The Company believes that bakery restaurants can be opened for an initial 
investment, including leasehold improvements, furniture, fixtures, 

                                       4

<PAGE>

equipment, initial working capital and pre-opening expenses, excluding real 
estate, of approximately $275,000, with satellite restaurants requiring 
approximately $175,000. By averaging these initial investment amounts within 
markets, the Company hopes to achieve attractive returns on investment. 
 
     MAKE SELECTIVE ACQUISITIONS.  During 1997, the Company acquired a total 
of three franchised restaurants in Austin, Texas, and San Antonio, Texas.  
The Company intends to pursue other acquisitions of local and regional bagel 
operations with an established market presence. 

CURRENT YEAR DEVELOPMENT/COMPANY-OWNED RESTAURANTS

     During 1997 and through March 1, 1998, the Company developed 15 new 
restaurants located in Oklahoma (2), Kansas (3), Texas (5), Alabama (2), 
Kentucky (1), Missouri (1) and New Mexico (1).  Additionally, the Company 
acquired three franchised restaurants in Texas.  The Company also initiated 
restaurant closures for the first time with a total of five restaurants 
located in Texas (2), Tennessee (1) and New Mexico (2) being closed.  As a 
result of the above activity, Company-owned restaurants have increased from 
33 as of the beginning of fiscal 1997 to 46 as of March 1, 1998.  There are 
currently two New York Bagel restaurants under development in Alabama and 
one Lots A' Bagels restaurant under development in Colorado. 

ACQUISITIONS

     On December 6, 1996 the Company acquired substantially all of the 
operating assets, business operations and facilities of Lots A' Bagels, Inc. 
("Lots A' Bagels"), including seven restaurants and a bagel commissary 
located in Colorado Springs and Monument, Colorado for cash payments of 
$2,615,000 and the assumption of certain liabilities of Lots A' Bagels.

Also in 1997, the Company acquired two franchised restaurants located in 
Austin, Texas and one franchised restaurant located in San Antonio, Texas.  
Total cash purchase price for the three franchised restaurants was $738,000.

     The Company's source of cash for the above acquisitions was a portion of 
the net proceeds from the Company's initial public offering of Common Stock 
completed in August 1996. See "Management's Discussion and Analysis of 
Financial Condition and Results of Operations." 

RESTAURANT DESIGN AND SITE SELECTION

     The Company's prototypical New York Bagel restaurant is decorated in 
rich colors and dark woods and contains a mixture of booth, table and 
barstool seating and, where available, outdoor seating. Exposed ceilings with 
drop lighting and a combination of tile and carpeted flooring are used to 
enhance its comfortable ambiance. Walls are covered with black and white 
photographs depicting classic New York scenes. The Company's restaurants are 
configured to facilitate a smooth flow of dine-in and carry-out traffic while 
retaining a casual, cafe atmosphere. Bagels and other baked products are 
displayed prominently behind a glass counter while other items such as 
salads, packaged cream cheese for take-out and specialty sodas and drinks are 
located in an open, self-serve refrigerated area next to the cash register. 
Restaurant staff prepare sandwich and other menu items behind the counter for 
dine-in and take-out customers. Dine-in customers' food is delivered directly 
to the table. The restaurants serve cappuccino and espresso, and a fountain 
drink and gourmet coffee station are placed in the dining area for customer 
convenience. Retail merchandise, including logo clothing, coffee mugs and 
gift items, are displayed throughout the restaurant. 

     The Company believes that the layout and design of each restaurant 
contributes to the success of its operations. The Company continually reviews 
the restaurant design package for its restaurants and remodels as required. 
Pursuant to the franchise agreement, franchised restaurants' decor must be 
updated every five years or upon renewal of each particular franchise 
agreement. Remodeling typically requires closing the restaurant for one to 
four weeks. Although restaurants may vary in size, layout and design are 
generally consistent. 

     The Company considers the location of a restaurant to be important, and, 
therefore, devotes significant resources to the investigation and evaluation 
of potential sites. The site selection process focuses on area demographics, 
including population density, traffic patterns, income levels and competitive 
factors. The Company generally targets locations that possess a 

                                       5

<PAGE>

population density of at least 50,000 residents within a three mile radius 
and are situated on the morning side of commuter traffic. The Company's 
restaurants are typically located in strip shopping centers or free-standing 
buildings that provide visibility, curb appeal and accessibility. Certain 
limited hour satellite restaurants are located in office buildings and are 
open during business hours Monday through Friday. The Company's restaurant 
design may be configured to fit a wide variety of building shapes and sizes, 
thereby increasing the number of suitable sites for new locations. 

UNIT ECONOMICS

     In targeted markets, the Company employs a multiple store strategy 
involving a bakery restaurant which produces bagels for itself and one or 
more nearby satellite restaurants. The Company's approach to opening new 
restaurants has been to minimize its required investment by leasing 
substantially all of its locations. The Company believes that bakery 
restaurants can be opened for an initial investment, including leasehold 
improvements, furniture, fixtures, equipment, initial working capital and 
pre-opening expenses, excluding real estate, of approximately $275,000, with 
satellite restaurants requiring approximately $175,000. By averaging these 
initial investment amounts within a particular market, the Company believes 
it achieves attractive returns on investment within markets. 

OPERATIONS

     RESTAURANT PERSONNEL. A typical New York Bagel restaurant employs a 
restaurant manager, an assistant manager and approximately 25 to 30 hourly 
employees for a bakery restaurant and 15 to 20 hourly employees for a 
satellite restaurant, most of whom work part-time. The restaurant manager is 
responsible for the day-to-day operation of the restaurant and for compliance 
with Company-established operating standards. The Company also employs eleven 
area managers, each of whom has responsibility for overseeing two to seven 
Company-owned restaurants. The Company seeks to hire experienced restaurant 
managers and staff, and to motivate and retain them by providing 
opportunities for advancement and performance-based, financial incentives. 
Training and compensation programs are intended to instill restaurant 
managers and area managers with a sense of ownership in their restaurants. 
The Company believes the issuance of stock awards under the New York Bagel 
Enterprises, Inc. 1996 Incentive Plan and the restaurant management bonus 
program will enhance its ability to attract and retain restaurant and area 
managers. 

     REPORTING.  The Company's restaurant managers prepare daily and weekly 
reports of sales, cash deposits and operating costs. Physical inventories of 
all food and beverage items are taken biweekly. The Company conducts monthly 
meetings with area managers to discuss restaurant sales, profitability and 
operations, personnel needs and product quality. 

     HOURS OF OPERATIONS.  The restaurants are generally open Monday through 
Saturday from 6:30 a.m. to 8:00 p.m. and on Sunday from 8:00 a.m. to 5:00 
p.m. Although the majority of restaurants are open seven days a week, certain 
satellite restaurants are located in downtown business districts and are open 
during business hours Monday through Friday. 

TRAINING

     The Company believes that comprehensive training is essential to the 
efficiency and consistency of its restaurants. The Company conducts a 28-day 
training program for its restaurant managers and franchisees that places an 
emphasis on these areas while maintaining the operational systems of an 
actual New York Bagel restaurant.  In addition, the Company provides on-site 
assistant during the initial ten days of operation at each Company-owned 
restaurant and at a franchisee's initial franchised restaurant.

PURCHASING AND DISTRIBUTION

     The Company establishes quality standards and specifications for food 
products and equipment used in New York Bagel restaurants and designates 
primary and secondary suppliers for all food items and restaurant supplies. 
In order to ensure product quality and consistency, franchisees purchase 
certain products from the Company's approved distributors. To obtain 
competitive prices, the Company contracts centrally for certain food products 
and supplies and negotiates volume discounts for the benefit of Company-owned 
and franchised restaurants. Most Company-owned and franchised restaurants 
purchase the majority of their 

                                       6
<PAGE>

food and non-food items from a nationally recognized distributor. The Company 
believes that the loss of this distributor would not materially affect the 
Company's results of operations.

MARKETING AND ADVERTISING

     The Company and its franchisees advertise primarily through newspapers, 
direct mail and radio. All advertising materials must be produced or 
pre-approved by the Company.  The Company provides restaurants with 
pre-opening, grand opening and ongoing advertising and in-store promotional 
material. In April 1996, the Company and its franchisees commenced payments 
of 0.5% of gross sales to the Company's advertising fund. However, the 
advertising fund was discontinued in October 1997.  In 1998, the remaining 
balance of the advertising fund will be allocated back to the Company and 
franchisees in proportion to amounts originally paid.  Franchisees maintain 
sole discretion over the placement of advertisements in their market. 

FRANCHISE PROGRAM

     The Company commenced franchising its restaurant concept in 1993 and, as 
of March 1, 1998, has 14 franchisees operating 23 New York Bagel restaurants 
in eleven states. During 1997 and through March 1, 1998, activity within the 
franchise program included the following: seven new restaurants were 
developed in Colorado (1), Alabama (1), Texas (1), Arkansas (2), California 
(1) and Florida (1); three franchised restaurants in Texas were acquired by 
the Company; and 13 restaurants were closed and/or disenfranchised in 
Nebraska (1), Texas (4), Arkansas (3), Arizona (2), Florida (1), North Dakota 
(1) and Colorado (1). As a result, the total number of franchised restaurants 
has decreased from 32 as of March 1, 1997 to 23 as of March 1, 1998.  There 
are currently two franchised restaurants under development, one located in 
Tennessee and one located in Florida.  

     The Company primarily seeks franchisees that have restaurant experience 
and that will enter into development agreements for multiple restaurants. 
Franchisees are approved on the basis of operational experience and financial 
resources. If the franchisee is not an owner-operator, the Company encourages 
the franchisee to provide the full-time operator an equity interest in the 
franchise operation. 

     DEVELOPMENT AGREEMENT.  The Company enters into a development agreement 
with each franchisee (a "Development Agreement") for the exclusive 
development of a predetermined number of New York Bagel restaurants within a 
designated market area (the "Area of Exclusivity"). The Area of Exclusivity 
is negotiated prior to the signing of a Development Agreement and varies by 
agreement as to size, number of New York Bagel restaurants required and the 
schedule for restaurant development and opening. A Development Agreement 
generally requires a franchisee to develop the first restaurant within 12 
months of signing the Development Agreement and the second restaurant within 
18 months. Subsequent restaurants are generally required to be opened in 
six-month intervals thereafter. Development schedules vary based upon the 
size of the territory and the number of restaurants to be developed. 
Development Agreements contain cross-default provisions, and failure to 
develop the restaurants on schedule may result in a loss of exclusivity 
within the Area of Exclusivity. Under the Company's Development Agreement, 
the franchisee is required to pay, at the time of signing, a non-refundable 
fee equal to one-third of the initial franchise fee per restaurant covered by 
the Development Agreement. The amount is credited against the Company's 
standard franchisee fee, the remainder of which is payable to the Company 
upon signing the franchise agreement for a specific location. 

     FRANCHISE AGREEMENT.  After signing a Development Agreement, the Company 
enters into a franchise agreement (a "Franchise Agreement") generally when a 
franchisee secures a location. The Franchise Agreement provides for a term of 
ten years with one ten-year renewal option and contains cross-default 
provisions. The Company has the right to terminate any Franchise Agreement 
under certain specified circumstances, including a franchisee's failure to 
make payments when due or failure to adhere to the Company's standards or 
procedures. Many state franchise laws limit the ability of a franchisor to 
terminate or refuse to renew a franchise. The current Franchise Agreement 
contains a right of first refusal for the Company to purchase an interest in 
the franchise and the franchisee. The current Franchise Agreement provides 
for an initial franchise fee of $21,000 for each bakery restaurant and 
$12,000 for each satellite restaurant. During 1995, the initial franchise 
fees for a bakery restaurant and a satellite restaurant were $18,000 and 
$9,000, respectively. Under the current Franchise Agreement, the franchisee 
pays the Company a monthly royalty fee of 4% of gross sales. Upon renewal of 
the Franchise Agreement, the 

                                       7

<PAGE>

monthly royalty fee cannot be increased to an amount greater than the monthly 
royalty fee then in effect for new franchisees. See "Business-Government 
Regulation." 

     SERVICES.  The Company assists each franchisee in the site selection and 
development of restaurants and provides the physical specifications and plans 
for each franchised location. Each franchisee is responsible for recommending 
the location for its restaurants, but must obtain Company approval of each 
restaurant design and each location based on Company requirements. Company 
personnel also visit each site in connection with the site approval process. 
The Company provides standard design plans and equipment layout and 
specifications for most franchisees. In addition, Company personnel provide 
telephone support with respect to operations issues, as well as ongoing 
assistance with advertising and promotion. 

     QUALITY CONTROL.  All franchisees are required to operate their New York 
Bagel restaurants in compliance with the Company's policies, standards and 
specifications, including matters such as menu items, ingredients, materials, 
supplies, fixtures, furnishings, decor and signage. Each franchisee has full 
discretion, however, to determine the prices to charge its customers. The 
Company collects sales and other operating information from its franchisees 
on a monthly, quarterly and annual basis. The Company monitors each 
franchisee's operations through periodic field visits and review of 
information provided by the franchisees. These overview mechanisms allow the 
Company to quickly identify potential problems and provide operational, 
marketing or accounting assistance. 

     FRANCHISE TRAINING AND SUPPORT.  Each franchisee is required to have a 
restaurant manager, approved by the Company, who satisfactorily completes the 
Company's training program and who devotes his or her full business time and 
efforts to the operation of the franchisee's restaurant. In addition to this 
program, the Company also provides an on-site training crew for ten days 
during the opening of the franchisee's initial restaurant and ongoing 
supervision thereafter. Multi-unit franchisees are encouraged to hire a 
full-time training coordinator to train new employees for their restaurants. 
The Company regularly communicates with its franchisees, and encourages 
active communication among its franchisees, through telephone communications 
and periodic meetings. 

GOVERNMENT REGULATION

     The Company is subject to various federal, state and local laws 
affecting its business. Each of the Company's restaurants is subject to 
licensing and regulation by a number of governmental authorities, which 
include health, safety, sanitation, building and fire agencies in the state 
or municipality in which the restaurant is located. Difficulties in obtaining 
or failures to obtain required licenses or approvals could delay or prevent 
the opening of a new restaurant in a particular area. 

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

     The Company's operations are also subject to federal and state laws 
governing such matters as wages, working conditions, citizenship requirements 
and overtime. The Company is also subject to the Americans with Disabilities 
Act of 1990, which, among other things, could require certain renovations to 
its restaurants to meet federal mandates. If such renovations are required, 
the Company believes the cost thereof will not materially affect the 
Company's results of operations. The Company believes it is in substantial 
compliance with all material laws. 

COMPETITION

     The quick-service restaurant industry is intensely competitive and 
generally characterized by low barriers to entry. There are a growing number 
of significant national, regional and local bagel restaurant chains, 
operating both owned and 

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franchised bagel restaurants including Einstein/Noah Bagel Corp., Brueggers 
Bagel Bakery, Manhattan Bagel Company, Inc. and BAB Holdings, Inc., many of 
which have greater financial resources than the Company. New York Bagel 
restaurants also compete with other well established quick-service 
restaurants that have greater product and name recognition, larger financial 
and other resources than the Company and longer operating histories, as well 
as numerous local food establishments, supermarkets and convenience stores 
that offer similar products. The Company believes that New York Bagel 
restaurants compete favorably in terms of taste, food quality, portions, 
service, convenience and value, which the Company believes are important 
factors to its targeted customers. 

     The Company competes for qualified franchisees with a wide variety of 
investment opportunities both in the restaurant business and in other 
industries. The Company's continued success is dependent to a substantial 
extent on its reputation for providing high quality and value with respect to 
its service, products and franchises, and this reputation may be affected not 
only by the performance of Company-owned restaurants, but also by the 
performance of its franchised restaurants over which the Company has limited 
operational control. 

TRADEMARKS AND SERVICE MARKS

     The Company operates and franchises bagel restaurants under the names 
"New York Bagel Shop & Delicatessen," "New York Bagel Shop & Deli," "NY Bagel 
Cafe," "New York Bagel Cafe & Deli," "NYB New York Bagel" and "the New York 
Bagel Shop." The Company's trademark "New York Bagel Shop & Delicatessen" and 
service mark "Like Bread With An Attitude" are registered under applicable 
federal trademark law. Under federal trademark law, the Company is required 
to renew these marks every 20 years. The Company's trademark "Lots A' Bagels, 
Inc." is registered in the State of Colorado. The Company claims common-law 
rights to the marks "New York Bagel Shop & Delicatessen," "NYB," "The City's 
Best Bagel," and "Where Yeast Meets West," but there have been no judicial 
determinations of the existence, validity, or extent of the Company's rights. 
Certain of the marks are licensed by the Company to franchisees pursuant to 
franchise agreements. 

     The Company is aware of the use by other persons and entities in certain 
geographic areas of names and marks which are the same or similar to the 
Company's marks. Some of these persons or entities may have prior rights to 
those names or marks in their respective localities. Therefore, there is no 
assurance that the "New York Bagel Shop & Delicatessen" mark or any other 
marks are available in all locations. 

EMPLOYEES

     As of March 1, 1998, the Company employed 592 persons, 386 of which are 
employed part-time. None of the Company's employees is subject to any 
collective bargaining agreements, and management considers its relations with 
its employees to be good. 

ITEM 2.  PROPERTIES

     The average New York Bagel bakery restaurant contains approximately 
2,750 square feet, and the average satellite restaurant contains 
approximately 2,000 square feet. Approximately 1,200 square feet of a bakery 
restaurant is used for dough production, baking and food preparation while 
approximately 500 square feet of a satellite restaurant is used for food 
preparation. The Lots A' Bagel restaurants are approximately 2,000 square 
feet, 500 square feet of which is used for food preparation. The restaurants 
have an average seating capacity of approximately 60 persons.  As of March 1, 
1998, the Company leases approximately 1,200 to 4,000 square feet of space 
for 45 of its Company-owned restaurant sites.  The Company also leases a 
19,479 square foot bagel commissary located at 4325 Northpark Drive, Colorado 
Springs, Colorado 80915 that provides all of the dough production, baking and 
food preparation for the seven Lots A' Bagels restaurants and a 5,800 square 
foot bagel commissary located at 238 Cleveland, Wichita, Kansas 67214 that 
provides all the dough production and bakery preparation for the five New 
York Bagel restaurants in Wichita. Such leases expire during June 2004 and 
April 2000, respectively.  Through March 1, 1998, the Company has also 
entered into agreements whereby the Company sold and leased back five 
restaurant facilities (land and buildings) to an entity owned by an officer 
of the Company and a significant stockholder, both of whom are members of the 
Board of Directors of the Company.  The Company believes the terms and 
conditions of both the real estate sales and the related leasebacks are fair 
and reasonable and were on terms at least as favorable as would be available 
from non-affiliated parties.  The Company owns two restaurant sites that are 
currently under development 

                                       9

<PAGE>

and one restaurant building located on leased real estate.  Although the 
terms of its leases for Company-owned restaurants vary, the Company typically 
seeks to obtain an initial five-year term lease with two or three five-year 
option terms. The following table sets forth certain information as of March 
1, 1998 with respect to Company-owned and franchised restaurants currently in 
operation, under development or closed during 1997. Restaurants under 
development include locations for which leases have been signed, a real 
estate purchase agreement has been executed, or construction has commenced, 
but are not currently in operation. 

                              COMPANY-OWNED RESTAURANTS
<TABLE>
                                                    DATE                TYPE OF 
 LOCATION                                           OPENED/ACQUIRED    RESTAURANT
 --------                                           ---------------   -----------
 <S>                                                <C>                <C>
 NEW YORK BAGEL RESTAURANTS
 Stillwater, OK        Elm Street                   January 1986       Bakery
 Stillwater, OK        Downtown                     August 1986        Satellite
 Oklahoma City, OK     Casady Square                August 1988        Bakery
 Oklahoma City, OK     Leadership Square            October 1989       Satellite
 Tulsa, OK             Yale and 71st Street         January 1990       Bakery
 Edmond, OK            Broadway Extension           September 1991     Satellite
 Wichita, KS           East Central Avenue          July 1992          Bakery
 Wichita, KS           Downtown                     April 1993         Satellite
 Oklahoma City, OK     Brixton Square               July 1993          Satellite
 Tulsa, OK             Cherry Street                January 1994       Satellite
 Norman, OK            Lindsey Avenue               August 1994        Bakery
 Norman, OK            Campus                       September 1994     Satellite
 Tulsa, OK             Peoria Avenue                September 1995     Bakery
 Nashville, TN         West End Avenue              December 1995      Bakery
 Wichita, KS           Rock Road                    December 1995      Satellite
 Nashville, TN         Hillsboro Village            March 1996         Satellite
 Tulsa, OK             Downtown                     March 1996         Satellite
 Waco, TX              West Waco Drive              April 1996         Bakery
 Nashville, TN         White Bridge Road            April 1996         Satellite
 Springfield, MO       Campbell Avenue              August 1996        Bakery
 Stillwater, OK        Perkins Road                 September 1996     Satellite
 Lubbock, TX           Quaker Avenue                November 1996      Bakery
 Tulsa, OK             51st Street                  December 1996      Satellite
 Oklahoma City, OK     Walnut Square                December 1996      Bakery
 Austin, TX            Research Boulevard           February 1997      Bakery
 Austin, TX            Research Boulevard           February 1997      Satellite
 San Antonio, TX       Embassy Oaks                 May 1997           Bakery
 Wichita, KS           21st Street and Rock Road    June 1997          Satellite
 Wichita, KS           21st Street and Tyler Road   July 1997          Satellite
 Tulsa, OK             East 61st Street             August 1997        Satellite
 Springfield, MO       Sunshine Avenue              August 1997        Satellite
 Midland, TX           Desta Drive                  October 1997       Bakery
 Mobile, AL            Azaela Road                  October 1997       Bakery
 Tuscaloosa, AL        McFarland Road               October 1997       Bakery
 Louisville, KY        Shelbyville Road             November 1997      Bakery
 Temple, TX            General Bruce Drive          November 1997      Bakery
 Manhattan, KS         Belmont Avenue               November 1997      Bakery
 San Antonio, TX       East Basse Road              January 1998       Satellite
 Oklahoma City, OK     A. May Avenue                February 1998      Satellite
 Montgomery, AL        Carmichael Road              Under Development  Bakery
 Mobile, AL            Hillcrest Road               Under Development  Satellite

                                       10

<PAGE>
                                                    DATE                TYPE OF 
 LOCATION                                           OPENED/ACQUIRED    RESTAURANT
 --------                                           ---------------   -----------
 LOTS A' BAGELS RESTAURANTS
 Colorado Springs, CO  East Cheyenne Mountain Blvd. December 1996      Satellite
 Colorado Springs, CO  North Academy                December 1996      Satellite
 Colorado Springs, CO  West Colorado Avenue         December 1996      Satellite
 Colorado Springs, CO  Austin Bluff Parkway         December 1996      Satellite
 Colorado Springs, CO  Centennial Boulevard         December 1996      Satellite
 Colorado Springs, CO  North Academy                December 1996      Satellite
 Monument, CO          Highway 105                  December 1996      Satellite
 Pueblo, CO            Highway 50                   Under Development  Satellite

                                                                        TYPE OF 
 LOCATION                                             DATE CLOSED      RESTAURANT
 --------                                           ---------------   -----------
 CLOSED COMPANY RESTAURANTS
 Nashville, TN         L&C Tower                    November 1997      Satellite
 Santa Fe, NM          St. Michaels Boulevard       November 1997      Bakery
 Santa Fe, NM          Montezuma Street             November 1997      Satellite
 Waco, TX              South 5th Street             November 1997      Satellite
 Austin, TX            Jefferson Street             January 1998       Satellite

                         FRANCHISED RESTAURANTS
                                                    DATE                TYPE OF 
 LOCATION                                           OPENED/ACQUIRED    RESTAURANT
 --------                                           ---------------   -----------
 Omaha, NE             South 106th                  December 1993      Bakery
 Knoxville, TN         Kingston Pike                March 1994         Bakery
 Little Rock, AR       Markham Avenue               November 1994      Bakery
 Omaha, NE             Farnam Street                February 1995      Satellite
 Littleton, CO         West Bowles Avenue           April 1995         Bakery
 Plano, TX             Legacy Drive                 April 1995         Bakery
 Knoxville, TN         Gay Street                   July 1995          Satellite
 Longview, WA          Ocean Beach Highway          July 1995          Bakery
 Columbia, SC          Harden Street                September 1995     Bakery
 Omaha, NE             Pacific Street               January 1996       Satellite
 Irving, TX            North MacArthur Boulevard    March 1996         Satellite
 New Orleans, LA       Veteran's Boulevard          March 1996         Bakery
 Englewood, CO         Holly Street                 June 1996          Bakery
 Birmingham, AL        20th Street South            June 1996          Bakery
 Littleton, CO         Wadsworth Avenue             September 1996     Satellite
 El Paso, TX           North Mesa Avenue            October 1996       Bakery
 Columbia, SC          Palmetto Plaza               October 1996       Satellite
 Little Rock, AR       Fairway Avenue               December 1996      Satellite
 Tyler, TX             Loop 323                     February 1997      Bakery
 Aurora, CO            Parker Road                  July 1997          Satellite
 San Carlos, CA        Redwood Shores Parkway       November 1997      Bakery
 Ft. Myers, FL         Tamiami Trail                December 1997      Bakery
 Birmingham, AL        Acton Road                   January 1998       Satellite
 Clarksville, TN       Madison Road                 Under Development  Bakery
 Ft. Myers, FL         Topaz Court                  Under Development  Satellite

                                       11

<PAGE>

                                                                         TYPE OF 
 LOCATION                                             DATE CLOSED      RESTAURANT
 --------                                           ---------------   -----------
 Closed Franchised Restaurants
 San Antonio, TX       Broadway Avenue              May 1997           Satellite
 Aurora, CO            East Mississippi Street      July 1997          Satellite
 Little Rock, AR       Center Street                July 1997          Satellite
 Tampa, FL             North Dal Mabry Highway      September 1997     Bakery
 Bismarck, ND          East Bismark Expressway      September 1997     Bakery
 Tucson, AZ            North Oracle Avenue          September 1997     Satellite
 Springdale, AR        West Sunset                  October 1997       Bakery
 Fayetteville, AR      Mission Boulevard            October 1997       Satellite
 Lincoln, NE           13th Street                  October 1997       Satellite
 Amarillo, TX          West Georgia Street          November 1997      Satellite
 Amarillo, TX          Soncy Road                   November 1997      Bakery
 Dallas, TX            Lemmon Avenue                December 1997      Bakery
 Tucson, AZ            East Broadway                December 1997      Bakery
</TABLE>

     The Company's principal executive offices are located at 300 I.M.A. 
Plaza, 250 North Water Street, Wichita, Kansas 67202-1213, where the Company 
subleases approximately 2,158 square feet of office space pursuant to a 
sublease agreement with Murfin Drilling Company, Inc., a wholly owned 
subsidiary of Murfin, Inc., on a month to month basis. The Company has the 
option to terminate such sublease upon 30 days' notice. David L. Murfin, a 
Director of the Company, is a 7.1% stockholder of Murfin, Inc. The Company 
believes that alternative office space is available at comparable rates from 
third parties. The Company's operational offices are located at 115 East 8th, 
Stillwater, Oklahoma 74074, where the Company leases approximately 2,200 
square feet of office space, 600 square feet of which the Company subleases 
to an unaffiliated third party on a monthly basis, and 1,000 square feet of 
storage space pursuant to a lease agreement that expires during December 
1999. The Company conducts its management and franchisee training at its 
Casady Square, Oklahoma City, Oklahoma facility in an approximately 3,400 
square foot space contiguous to the restaurant. Such facility is subject to a 
lease that expires during July 2003. The Company believes that its current 
executive offices, operational offices and training facilities are adequate 
for the near future and does not anticipate the need for significant 
expansion of these facilities in the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is involved from time-to-time in various legal proceedings 
and claims incident to the normal conduct of its business. The Company 
believes that such legal proceedings and claims, individually and in the 
aggregate, are not likely to have a material adverse effect on its financial 
condition or results of operations. 

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

     None. 

RISK FACTORS

     THIS FORM 10-K INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" 
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED 
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING 
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS 
OR STRATEGIES REGARDING THE FUTURE.  ALL STATEMENTS, OTHER THAN STATEMENTS OF 
HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL 
POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE 
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.  ALL FORWARD-LOOKING STATEMENTS 
INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY 
ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH 
FORWARD-LOOKING STATEMENTS.  ALTHOUGH THE COMPANY BELIEVES THAT THE 
ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE 
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO 
HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY 
PRESENTLY BE PLANNED.  CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL 
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED 
HEREIN, WHICH INCLUDE, WITHOUT 

                                       12

<PAGE>

LIMITATION, THE COMPANY'S ABILITY TO DEVELOP, CONSTRUCT, ACQUIRE OR FRANCHISE 
ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE COMPANY'S DEVELOPMENT SCHEDULE, 
CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS, AVAILABILITY AND TERMS OF 
CAPITAL, ACCEPTANCE OF NEW PRODUCT OFFERINGS, COMPETITION, MANAGEMENT OF 
QUARTER TO QUARTER EARNINGS, INCREASES IN OPERATING COSTS AND CHANGES IN 
GOVERNMENT REGULATION.  ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING 
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE 
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.

     RESTAURANT DEVELOPMENT.  As of March 1, 1998, there were 69 restaurants 
in operation, consisting of 39 New York Bagel Company-owned and 23 franchised 
restaurants and seven Lots A' Bagels restaurants. In addition, there were 
three Company-owned restaurants and two franchised restaurants in various 
stages of development. The Company expects to have approximately 45 to 55 
Company-owned and 20 to 25 franchised restaurants in operation by the end of 
1998. The Company has used substantially all of the net proceeds of its 
initial public offering to develop and acquire Company-owned restaurants. 
There can be no assurance that the Company will be able to open all of its 
planned restaurants or that, if opened, such restaurants can operate 
profitably. The opening and success of New York Bagel restaurants will depend 
on various factors, not all of which are within the control of the Company, 
including customer acceptance of the Company's concept in new markets, the 
availability of suitable sites, the negotiation of acceptable lease or 
purchase terms for new locations, the ability to introduce new products, 
permit and regulatory compliance, the ability to meet construction schedules, 
the financial and other capabilities of the Company and its franchisees, the 
ability of the Company to successfully manage this anticipated development 
and to hire and train personnel, and general economic and business 
conditions. Furthermore, because of the Company's relatively small restaurant 
base, an unsuccessful restaurant could have a more significant adverse effect 
on the Company's results of operations than would be the case for a company 
with a larger restaurant base.  There can be no assurance that the Company 
will be able to manage its expanding operations effectively.  The Company 
experienced growth in revenues in 1997.  There can be no assurance that the 
Company will continue to experience growth in, or maintain its present level 
of, revenues.  See "Management's Discussion and Analysis of Financial 
Condition and Results of Operations" and "Business-Company Strategy."

     DEPENDENCE ON FRANCHISEES.  The Company realizes a portion of its 
revenues from initial franchise fees and continuing royalty payments from its 
franchisees. If the Company's franchisees encounter business or operational 
difficulties, the Company's revenues from royalties will be adversely 
affected. Such difficulties may also negatively impact the Company's ability 
to sell new franchises. Consequently, the Company's financial prospects are 
significantly related to the success of its franchised restaurants, over 
which the Company has limited direct operational control. There can be no 
assurance that the Company will be able to successfully attract new 
franchisees or that the Company's franchisees will be able to successfully 
operate existing or develop and operate additional New York Bagel 
restaurants.  Through March 1, 1998, 13 franchised restaurants have been 
closed or disenfranchised.

     COMPETITION.  The quick-service restaurant industry is intensely 
competitive and characterized by relatively low barriers to entry. New York 
Bagel restaurants compete against many well established, quick-service 
restaurants, local food establishments, supermarkets and convenience stores, 
many of which have greater product and name recognition and larger financial 
and other resources than the Company. An increase in the number of 
competitors, particularly bagel restaurants or delicatessens, in the 
Company's territories could have an adverse impact on the Company's results 
of operations and expansion plans. See "Business-Competition." 

     TERMS OF CREDIT FACILITY; AVAILABILITY OF CAPITAL.  The Company has 
entered into a loan agreement with revolving line of credit and term loan 
facilities, which has a maximum aggregate commitment of $10.0 million (the 
"Credit Facility") with NationsBank, N.A. (the "Bank").  The Credit Facility 
provides for a $10.0 million revolving line of credit commitment, subject to 
availability under a borrowing base calculated by reference to the level of 
eligible equipment, inventory and accounts receivable, and includes a $2.0 
million sublimit for new construction, remodeling and acquisition of 
restaurant locations.  The Credit Facility also contains a "mini-perm" 
facility financing for new construction, remodeling and acquisition of 
restaurant locations with a ten year amortization and a balloon payment 
within five years.  The terms and conditions of the Credit Facility impose 
restrictions that affect, among other things, the ability of the Company to 
incur debt, make capital expenditures, redeem equity interests, loan funds to 
any of the Company's officers, directors and employees and their respective 
affiliates, merge, sell assets, make distributions, pay dividends, create or 
incur liens, waste assets, change the senior management, change the name and 
change the location of the assets. Availability of the Credit Facility is 
also subject to certain financial covenants.  The ability of the Company to 
comply with such covenants can be affected by events beyond the control of 
the Company and there can be no assurance that the Company will achieve 
operating results that comply with such provisions.  A breach of any 

                                       13

<PAGE>

of these covenants could result in a default under the Credit Facility.  In 
the event of a default, the Bank could elect to declare the outstanding 
principal amount of the Credit Facility, all interest thereon and all other 
amounts payable under the Credit Facility to be immediately due and payable.  
If the Company were unable to repay such amounts, the Bank could proceed 
against the collateral securing the Credit Facility, substantially all of the 
Company's assets, to repay the indebtedness and other obligations due and 
payable.

     The Company's ability to satisfy its debt obligations will depend upon 
its future operating performance, which will be affected by prevailing 
economic, financial and business conditions and other factors, some of which 
are beyond the control of the Company.  The Company anticipates that 
borrowings from the Credit Facility or the refinancing of such Credit 
Facility, proceeds from the sale-leaseback transactions discussed below and 
cash provided by operating activities, will provide sufficient funds to 
finance anticipated development plans, meet its operating expenses and 
service its debt requirements as they become due.  However, in the event that 
the Company requires additional capital, there can be no assurance that it 
will be able to raise such capital when needed or on satisfactory terms, if 
at all.  See "Management's Discussion and Analysis of Financial Condition and 
Results of Operations - Liquidity and Capital Resources."

     RESTAURANT INDUSTRY.  The Company and the restaurant industry are 
significantly affected by factors such as changes in local, regional or 
national economic conditions, changes in consumer tastes and concerns about 
the nutritional quality of quick-service foods. Multi-unit food service 
chains such as the Company can also be substantially adversely affected by 
publicity resulting from food quality, illness, injury or other health 
concerns or operating issues stemming from one restaurant or a limited number 
of restaurants. In addition, factors such as increases in food, labor and 
energy costs, the availability and cost of suitable restaurant sites, 
fluctuating insurance rates, state and local regulations and the availability 
of an adequate number of hourly-paid employees can also adversely affect the 
restaurant industry. 

     DEPENDENCE ON KEY PERSONNEL.  The Company's future success will be 
highly dependent on the continued efforts of senior management. The Company 
does not have employment agreements with any of its senior management. The 
loss of the services of one or more of such key personnel could have a 
material adverse effect upon the Company's results of operations. The 
Company's success is also dependent upon its ability to attract and retain 
skilled restaurant managers and employees and the ability of its key 
personnel to manage the Company's growth and integrate its operations. There 
can be no assurance that the Company will be successful in attracting and 
retaining such personnel. 

     INCREASES IN OPERATING COSTS; INTERRUPTIONS IN SUPPLIES.  An increase in 
operating costs could adversely affect the profitability of the Company. 
Factors such as inflation, increased food and labor costs, including the 
additional and any future increase in the minimum hourly wage requirement, 
and employee benefit costs and the availability of qualified management and 
other personnel may adversely affect the profitability of the Company. The 
cost and availability of many restaurant commodities are subject to 
fluctuations due to seasonality, weather, demand and other factors. The 
Company's restaurants are dependent on frequent deliveries of food supplies 
and any shortages or interruptions could have a material adverse effect on 
the Company. See "Business-Purchasing and Distribution." 

     GEOGRAPHIC CONCENTRATION.  All but five of the Company-owned restaurants 
are located in Oklahoma, Kansas, Tennessee, Texas and Colorado. As a result, 
the Company's results of operations may be materially affected by adverse 
business, economic or weather conditions in these states. Although the 
Company plans to open additional restaurants in new geographic areas, there 
can be no assurance that the current geographic concentration of the 
Company's business will not have an adverse effect on its results of 
operations or financial condition in the future.

     FLUCTUATIONS IN QUARTERLY RESULTS.  The timing of restaurant openings, 
closing, remodelings or acquisitions, impairments, recognition of franchise 
fee income and seasonal factors may result in fluctuations in quarterly 
operating results of the Company. In accordance with generally accepted 
accounting principles, franchise and development fees and the corresponding 
deferred charges with respect to each franchise or development agreement are 
not recognized as income or expense until a restaurant commences operations. 
There can be no assurance that quarterly fluctuations will not continue and, 
accordingly, the Company's financial results for a particular quarter may not 
be indicative of results for an entire year. 

     CONTROL OF COMPANY.  As of March 1, 1998 the directors and officers of 
the Company beneficially owned approximately 45.3% of the outstanding Common 
Stock of the Company. In addition, the stockholders that existed prior to the 

                                       14

<PAGE>

Company's initial public offering and the Company are parties to a certain 
stockholders' agreement (the "Stockholders' Agreement"), which, among other 
things, sets forth certain agreements regarding the designation and election 
of directors of the Company. As of March 1, 1998 these stockholders owned 
approximately 53.2% of the outstanding Common Stock. Due to their ownership 
position and the Stockholders' Agreement, such stockholders will retain the 
power to direct the Company's business and affairs through their ability to 
control the outcome of elections of the Company's Board of Directors and to 
take other actions that require the vote or approval of the stockholders of 
the Company. Such stockholders' control may increase as a percentage of 
outstanding Common Stock of the Company due to open market purchases of the 
Common Stock by the Company pursuant to the terms of the Stock Repurchase 
Program discussed below.

     GOVERNMENT REGULATION.  The Company is subject to numerous federal, 
state and local government regulations, including those relating to the 
preparation and sale of food, the sale of alcoholic beverages, public health 
and building and zoning requirements. Also, the Company and its franchisees 
are subject to laws governing their relationship with employees, including 
minimum wage requirements, overtime, working conditions and citizenship 
requirements. The Company is also subject to federal regulation and certain 
state laws which govern the offer and sale of franchises. Many state 
franchise laws impose substantive requirements on franchise agreements, 
including limitations on non-competition provisions and termination or 
non-renewal of a franchise. Some states require that certain franchise 
offering materials be registered before franchises can be offered or sold in 
that state. The failure to obtain or retain food licenses, alcoholic beverage 
licenses or approvals to sell franchises could adversely affect the Company's 
and its franchisees' results of operations. The future enactment, adoption or 
amendment of laws or regulations, such as establishing basic franchisee 
rights, increasing the minimum wage or other costs associated with employees, 
could adversely affect the Company's results of operations. See 
"Business-Franchise Program" and "Business-Government Regulation." 

     TRADEMARKS AND SERVICE MARKS.  The Company is aware of the use by other 
persons and entities in certain geographic areas of names and marks that are 
the same as or similar to the Company's marks. Some of these persons or 
entities may have prior rights to those names or marks in their respective 
localities. Negative publicity surrounding such businesses may adversely 
affect the Company's operations in those markets. In addition, the Company's 
marks contain common descriptive words and thus may be subject to challenge 
by users of these words, alone or in combination with other words, which 
describe other services or products. Accordingly, there is no assurance that 
the Company's marks will be available in all locations or that a challenge to 
the Company's use of such marks will not result in adverse consequences, 
including a judgment that would entail damages and/or the discontinuation of 
the Company's use of its marks. It is the Company's policy to utilize other 
compatible marks in areas where there are preexisting competing marks. See 
"Business-Trademarks and Service Marks." 

     CLASSIFIED BOARD OF DIRECTORS.  The Company's Restated and Amended 
Articles of Incorporation and Restated and Amended Bylaws provide for a 
classified Board of Directors. The terms of each class expire in consecutive 
years so that only one class is elected in any given year. Such provisions 
could delay, deter or prevent a merger, consolidation, tender offer, or other 
business combination or change of control involving the Company that some or 
a majority of the Company's stockholders might consider to be in their best 
interests, including offers or attempted takeovers that might otherwise 
result in such stockholders receiving a premium over the market price for the 
Common Stock. 

     PREFERRED STOCK.  The Company's Restated and Amended Articles of 
Incorporation and Restated and Amended Bylaws authorize shares of Preferred 
Stock with respect to which the Board of Directors of the Company have the 
power to fix the rights, preferences, privileges and restrictions without any 
further vote or action by the stockholders. Depending upon the rights of such 
Preferred Stock, the issuance of Preferred Stock could have an adverse effect 
on holders of Common Stock by delaying or preventing a change in control of 
the Company, diluting the voting rights of holders of Common Stock, making 
removal of the present management of the Company more difficult or reducing 
or restricting the payment of dividends and other distributions to the 
holders of Common Stock, including, without limitation, any liquidation 
preferences which may relate to such Preferred Stock. Such provisions could 
delay, deter or prevent a merger, consolidation, tender offer, or other 
business combination or change of control involving the Company that some or 
a majority of the Company's stockholders might consider to be in their best 
interests, including offers or attempted takeovers that might otherwise 
result in such stockholders receiving a premium over the market price for the 
Common Stock. 

                                       15

<PAGE>

     SUPERMAJORITY STOCKHOLDER VOTES.  The Company's Restated and Amended 
Articles of Incorporation and Restated and Amended Bylaws require the 
affirmative vote of the holders of at least two-thirds of the outstanding 
capital stock in order to remove directors for cause, amend the Bylaws and 
approve certain business combinations with respect to a "related person." 
Such provisions could delay, deter or prevent a merger, consolidation, tender 
offer, or other business combination or change of control involving the 
Company that some or a majority of the Company's stockholders might consider 
to be in their best interests, including offers or attempted takeovers that 
might otherwise result in such stockholders receiving a premium over the 
market price for the Common Stock. 

     ABSENCE OF ACTIVE MARKET; VOLATILITY OF STOCK PRICE.  There can be no 
assurance that an active market for the Company's Common Stock will exist; 
therefore, a purchaser of the Common Stock may not be able to readily 
liquidate its investment in the Common Stock. Market prices for the Common 
Stock may be influenced by a number of factors, including the Company's 
operating results and other factors affecting the Company specifically and 
the restaurant industry and the financial markets generally, as well as the 
liquidity of the market for the Common Stock. The Company believes that the 
market price of its Common Stock reflects expectations that the Company will 
be able to operate its restaurants profitably and to develop new restaurants 
and operate them profitably. If the Company is unable to operate its 
restaurants as profitably and develop restaurants at a pace that reflects the 
expectations of the market, investors could sell shares of the Common Stock 
at or after the time that it becomes apparent that such expectations may not 
be realized, resulting in a decrease in the market price of the Common Stock. 
In recent years the stock market has experienced extreme price and volume 
fluctuations. This volatility has had a significant effect on the market 
prices of securities issued by many companies for reasons unrelated to their 
operating performance. 

     SHARES ELIGIBLE FOR FUTURE SALE.  Shares of Common Stock outstanding 
prior to completion of the Company's initial public offering are "restricted 
securities" as that term is defined in Rule 144 ("Rule 144") promulgated 
under the Securities Act of 1933, as amended (the "Securities Act"). These 
"restricted securities," and any shares purchased by affiliates of the 
Company in such offering or thereafter may be publicly sold only if 
registered under the Securities Act or if sold in accordance with an 
available exemption from registration, such as those provided by Rule 144. No 
prediction can be made as to the effect, if any, that future sales of shares, 
or the availability of shares for future sales, will have on the market price 
of the Common Stock. The sale of substantial amounts of Common Stock, or the 
perception that such sales could occur, could adversely affect the prevailing 
market price for the Common Stock. 

                                    PART II

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

MARKET INFORMATION

     The Company's Common Stock is traded on the Nasdaq National Market under 
the symbol "NYBS."  For the period commencing on August 27, 1996 (the date of 
the Company's initial public offering), through December 28, 1997, high and 
low closing sale prices for the Common Stock as reported by the Nasdaq 
National Market were $11.13 and $1.88, respectively. 

     The table sets forth, for the periods indicated, the reported high and 
low close sale prices of the Company's Common Stock, as reported on the 
Nasdaq National Market: 
<TABLE>
                                                          1996             
                                               -----------------------
                                               HIGH BID        LOW BID
                                               --------        -------
 <S>                                            <C>             <C>
 Third Quarter . . . . . . . . . . . . . . . .  $11.13          $9.00
 Fourth Quarter  . . . . . . . . . . . . . . .  $9.25           $5.50
                                                          1997             
                                               -----------------------
                                                HIGH BID       LOW BID
                                               --------        -------
 First Quarter . . . . . . . . . . . . . . . .  $7.63           $3.94
 Second Quarter  . . . . . . . . . . . . . . .  $5.31           $4.00
 Third Quarter . . . . . . . . . . . . . . . .  $4.31           $3.25
 Fourth Quarter  . . . . . . . . . . . . . . .  $4.00           $1.88
</TABLE>

                                       16

<PAGE>

STOCKHOLDERS

     According to the records of the Company's transfer agent, the Company 
had 121 holders of record of the Common Stock as of March 1, 1998. The 
Company believes that a substantially larger number of beneficial owners hold 
such shares in depository or nominee form. 

DIVIDENDS AND DISTRIBUTIONS

     S CORPORATION DISTRIBUTIONS.  From January 1, 1994 until August 25, 1996 
(the "Termination Date"), the Company and certain of the Prior Entities were 
treated for federal and state income tax purposes as S corporations under 
Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). 
During such period, the Company's earnings were taxed for federal and most 
state income tax purposes directly to the Company's stockholders, rather than 
to the Company. The Company is responsible for the payment of all federal and 
state income taxes on earnings subsequent to the Termination Date and 
continuing thereafter. 

     Certain Prior Entities paid cash distributions to their stockholders in 
the aggregate amounts of approximately $2.5 million during 1995. The 
distributions made in 1995 were in excess of the earnings of such Prior 
Entities and were partially funded by borrowings of such Prior Entities which 
were assumed by the Company in connection with the Reorganization. The 
Company repaid all of its bank borrowings with a portion of the net proceeds 
of its initial public offering. The Company used a portion of the net 
proceeds of its initial public offering to fund a distribution on March 4, 
1997 of $156,000 to the stockholders that existed prior to the Company's 
initial public offering in connection with their estimated federal and state 
income tax obligations attributable to the Company's 1996 earnings through 
the Termination Date. Under federal tax laws, if the Company failed to 
distribute its undistributed S corporation earnings within a limited period 
of time following the Termination Date, a later distribution could be taxed 
as a dividend to the stockholders. No S corporation distributions have been 
or are anticipated to be made to the stockholders in connection with the 
Company's earnings for any period after the Termination Date. 

     DIVIDEND POLICY.  The Company currently intends to retain all earnings 
to provide funds for its operations and expansion, and therefore does not 
anticipate paying cash dividends or making any other distributions on its 
shares of Common Stock in the foreseeable future. The Company's future 
dividend policy will be determined by its Board of Directors based on various 
factors, including the Company's results of operations, financial condition, 
business opportunities, capital requirements, credit restrictions and such 
other factors as the Board of Directors may deem relevant.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated financial data for 
the Company at the dates and for the periods indicated. The selected 
consolidated financial data at December 28, 1997 and December 29, 1996, 
December 31, 1995 and 1994, and for the fifty-two weeks ended December 28, 
1997 and December 29, 1996 and for each of the years in the three-year period 
ended December 31, 1995, have been derived from the audited Consolidated 
Financial Statements of the Company. The selected consolidated financial data 
at December 31, 1993 has been prepared on the same basis as the audited 
financial statements, have been derived from the unaudited financial 
statements of the Company for such period and includes, in the opinion of 
management, all adjustments (consisting of normal recurring adjustments) 
necessary for the fair presentation of the financial position for such 
periods. Selected financial data should be read in conjunction with, and is 
qualified in its entirety by, "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" and the Consolidated Financial 
Statements of the Company and the Notes thereto appearing herein. 

                                       17

<PAGE>
<TABLE>
                                                                       FIFTY-TWO WEEKS ENDED
                                                                  -------------------------------      YEAR ENDED DECEMBER 31,  
                                                                  DECEMBER 28,       DECEMBER 29,  -----------------------------
                                                                     1997(3)          1996(1)(2)   1995(1)       1994       1993
                                                                  ------------       ------------  -------       ----       ----
                                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
 <S>                                                              <C>                 <C>           <C>         <C>        <C>  
 STATEMENT OF OPERATIONS DATA:
      Revenues:
           Sales from Company-owned restaurants  . . . . . . . .     $18,571          $10,865       $6,875      $5,653     $3,539
           Franchise revenues  . . . . . . . . . . . . . . . . .         417              672          484         169         22
                                                                     -------          -------       ------      ------     ------
                Total revenues . . . . . . . . . . . . . . . . .      18,988           11,537        7,359       5,822      3,561
      Costs and expenses:                                                                              
           Cost of Sales . . . . . . . . . . . . . . . . . . . .       6,190            3,750        2,612       2,280      1,527
           Restaurant operating expenses . . . . . . . . . . . .      10,273            5,185        3,084       2,326      1,386
           General and administrative expenses . . . . . . . . .       1,818              964          838         452        469
           Depreciation and amortization . . . . . . . . . . . .         930              552          159         117         80
           Provision for impairments and closures  . . . . . . .       3,774                -            -           -          -
                                                                     -------          -------       ------      ------     ------
                Total costs and expenses . . . . . . . . . . . .      22,985           10,451        6,693       5,175      3,462
                Operating income (loss)  . . . . . . . . . . . .      (3,997)           1,086          666         647         99
      Interest expense (income), net . . . . . . . . . . . . . .         (73)              86           40          53         14
                                                                     -------          -------       ------      ------     ------
           Earnings (loss) before income taxes . . . . . . . . .      (3,924)           1,000          626         594         85
      Income tax expense (benefit) . . . . . . . . . . . . . . .        (144)             270            7          (3)         9
                                                                     -------          -------       ------      ------     ------
      Earnings (loss) before cumulative effect of accounting    
       change  . . . . . . . . . . . . . . . . . . . . . . . . .      (3,780)             730          619         597         76 
      Cumulative effect of accounting change(3)  . . . . . . . .        (129)               -            -           -          -  
                                                                     -------          -------       ------      ------     ------
                  Net earnings (loss)  . . . . . . . . . . . . .     $(3,909)        $    730       $  619     $   597    $    76 
                                                                     -------          -------       ------      ------     ------
                                                                     -------          -------       ------      ------     ------
      Pro forma to reflect income taxes(4):
                  Net earnings (loss)  . . . . . . . . . . . . .                         $610         $380                        
      Earnings (loss) per share-basic and diluted(5):
           Earnings (loss) before cumulative effect of accounting   
                change . . . . . . . . . . . . . . . . . . . . .     $ (0.81)           $0.17        $0.13
           Cumulative effect of accounting change  . . . . . . .     $ (0.03)               -            -
                  Net earnings (loss)  . . . . . . . . . . . . .     $ (0.84)          $ 0.17        $0.13
      Weighted average shares outstanding(5) . . . . . . . . . .       4,667            3,585        3,019
                                                                                                       
                                                                                                              DECEMBER 31,      
                                                                     DECEMBER 28,   DECEMBER 29,       -------------------------
                                                                         1997           1996            1995    1994        1993
                                                                     ------------   ------------        ----    ----        ----
 BALANCE SHEET DATA:
 Working capital (deficit) . . . . . . . . . . . . . . . . . . . . . . $(1,831)        $5,297          $(368)  $(120)      $(171)
 Total assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14,100         15,713          2,295     872         819
 Total debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,520             86          3,365     359         560
 Stockholders' equity (deficit)  . . . . . . . . . . . . . . . . . . .   9,766         13,675         (1,578)    159         126
</TABLE>
---------------
(1)   The Company acquired seven restaurants in December 1996, a restaurant in 
      September 1996 and two restaurants in December 1995. If such 
      transactions had occurred on January 1, 1996 and January 1, 1995, 
      respectively, "Total revenues," "Net earnings" and "Net earnings per 
      share" would have been approximately $15,315,000, $605,000 and $0.17, 
      respectively, for the fifty-two weeks ended December 29, 1996 and 
      $12,104,000, $222,000 and $0.07, respectively, for the year ended 
      December 31, 1995, on a pro forma basis. The pro forma results do not 
      necessarily reflect what would have occurred if the acquisitions had 
      been made at the beginning of the respective periods or the results 
      that may occur in the future. See Note 11 of the Notes to Consolidated 
      Financial Statements. 

(2)   Effective January 1, 1996, the Company elected to change its fiscal year 
      end from a calendar year end to a 52/53-week fiscal year, ending on the 
      last Sunday of the year, which consists of four 13-week periods. 

(3)   Effective September 28, 1997 and applied retroactively to the beginning 
      of fiscal 1997, the Company changed its accounting for restaurant 
      preopening costs.  The effect of adopting the accounting change on 
      earnings (loss) before cumulative effect of accounting change, net 
      earnings (loss), and net earnings (loss) per share for 1997 is to 
      decrease such amounts $40,000, $169,000 and $0.04, respectively.  
      See Note 2(j) of the Notes to Consolidated Financial Statements.

(4)   Reflects a pro forma adjustment assuming the Company had been treated 
      as a C corporation rather than as an S corporation for income tax 
      purposes for the periods presented. See "Market for Registrant's Common 
      Equity and Related Stockholder Matters-Dividends and Distributions-S 
      Corporation Distributions" and Note 2(h) of the Notes to Consolidated 
      Financial Statements. 

(5)   Net earnings (loss) per share for all periods presented has been restated
      for SFAS No. 128, EARNINGS PER SHARE. See Notes 2(k) and 13 of the Notes 
      to Consolidated Financial Statements. 

                                       18

<PAGE>

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

Overview

     THIS FORM 10-K INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" 
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED 
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING 
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS 
OR STRATEGIES REGARDING THE FUTURE.  ALL STATEMENTS, OTHER THAN STATEMENTS OF 
HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL 
POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE 
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.  ALL FORWARD-LOOKING STATEMENTS 
INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY 
ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH 
FORWARD-LOOKING STATEMENTS.  ALTHOUGH THE COMPANY BELIEVES THAT THE 
ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE 
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO 
HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY 
PRESENTLY BE PLANNED.  CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL 
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN 
THE "RISK FACTORS" SECTION OF THIS FORM 10-K ANNUAL REPORT, WHICH INCLUDE, 
WITHOUT LIMITATION, THE COMPANY'S ABILITY TO DEVELOP, CONSTRUCT, ACQUIRE OR 
FRANCHISE ADDITIONAL RESTAURANTS IN ACCORDANCE WITH THE COMPANY'S DEVELOPMENT 
SCHEDULE, CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS, AVAILABILITY AND 
TERMS OF CAPITAL, ACCEPTANCE OF NEW PRODUCT OFFERINGS, COMPETITION, 
MANAGEMENT OF QUARTER TO QUARTER EARNINGS, INCREASES IN OPERATING COSTS AND 
CHANGES IN GOVERNMENT REGULATION.  ALL SUBSEQUENT WRITTEN OR ORAL 
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON 
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.

     The Company opened its first restaurant in 1986, and has developed, as 
of March 1, 1998, 34 of its 46 Company-owned restaurants in Oklahoma, Kansas, 
Tennessee, Texas, Alabama, Kentucky and Missouri. In addition to developing 
new restaurants, as of March 1, 1998 the Company has acquired one bagel 
restaurant in Tennessee, seven Lots A' Bagels restaurants in Colorado and 
four franchised New York Bagel restaurants in Kansas and Texas. The Company 
commenced franchising the New York Bagel concept in 1993 and has 14 
franchisees operating 23 restaurants. 

     The Company's business was previously operated through the Prior 
Entities. The Company was incorporated in December 1995 under the laws of 
Kansas, and on December 31, 1995, the Prior Entities were merged into the 
Company (the "Reorganization"). The financial statements and supplementary 
financial information for 1995 and prior periods herein include the results 
of operations of the Prior Entities on a combined basis. See Note 1 of the 
Notes to Consolidated Financial Statements. 

     The Company's revenues are derived from sales from Company-owned 
restaurants and franchise revenues, which consist of royalties from 
franchised restaurant sales as well as franchise and development fees. 
Franchise and development fees are initially recorded as deferred revenue 
until each franchised restaurant opens, at which time these fees are recorded 
as revenue. 

     Cost of sales includes food, paper and beverage costs associated with 
Company-owned restaurants. Restaurant operating expenses consist primarily of 
labor costs, rent, advertising, utilities, maintenance and insurance 
associated with Company-owned restaurants. General and administrative 
expenses include corporate and administrative salaries, accounting, legal and 
direct costs associated with franchise operations. 

     The Company completed its initial public offering in August 1996 in 
which it raised $14.7 million that enabled the Company to grow and expand.  
From August 1996 through February 1998, the Company utilized such proceeds to 
develop 15 new restaurants and to acquire eleven additional restaurants.  
Consequently, Company-owned restaurants have increased from 20 restaurants 
just prior to the initial public offering to 46 Company-owned restaurants as 
of March 1, 1998. During 1998, the Company anticipates shifting its strategy 
from that of aggressive growth to that of limited growth with an enhanced 
focus on operations.  The strategy includes new product initiatives that are 
anticipated to stimulate sales growth from existing restaurants.  It also 
includes a focus on cost controls, primarily cost of sales and restaurant 
operating expenses. The Company anticipates that its limited development and 
enhanced focus on operations will position the Company to renew restaurant 
development and growth.

                                       19
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth the percentage relationship of certain 
operating statement data to total revenues, except as otherwise indicated: 
<TABLE>
                                                FIFTY-TWO WEEKS ENDED   
                                             ---------------------------    YEAR ENDED 
                                             DECEMBER 28,   DECEMBER 29,   DECEMBER 31,
                                                1997           1996           1995     
                                             ------------   ------------   ------------
<S>                                            <C>           <C>            <C>
Revenues:                               
 Sales from Company-owned restaurants  . . .    97.8%          94.2%          93.4%
 Franchise revenues  . . . . . . . . . . . .     2.2            5.8            6.6 
                                               -----          -----          ----- 
   Total revenues  . . . . . . . . . . . . .   100.0%         100.0%         100.0%
 Costs and expenses:                                                               
  Cost of sales(1) . . . . . . . . . . . . .    33.3%          34.5%          38.0%
  Restaurant operating expenses(1) . . . . .    55.3           47.7           44.9 
  General and administrative expenses. . . .     9.6            8.4           11.4 
  Depreciation and amortization. . . . . . .     4.9            4.8            2.2 
  Provision for impairments and closures . .    19.9              -              - 
 Operating income (loss) . . . . . . . . . .   (21.0)           9.4            9.0 
 Interest expense (income), net  . . . . . .    (0.4)           0.7            0.5 
 Cumulative effect of accounting change, net                                       
  of tax benefit . . . . . . . . . . . . . .    (0.7)             -              - 
  Net earnings (loss). . . . . . . . . . . .   (20.6)           6.3            8.4 
</TABLE>
-------------------
(1)  As a percentage of sales from Company-owned restaurants. 

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     Total revenues increased by $7.5 million, or 64.6%, to $19.0 million for 
1997 compared to $11.5 million for 1996, primarily due to an increase in the 
number of Company-owned restaurants open.

     Sales from Company-owned restaurants increased $7.7 million, or 70.9%, 
to $18.6 million for 1997 compared to $10.9 million for 1996. This is 
primarily the result of opening 13 additional Company-owned restaurants ($1.5 
million 1997 sales) throughout 1997, acquiring seven Lots A' Bagels 
restaurants ($3.2 million 1997 sales) in December 1996 and acquiring three 
franchised New York Bagel restaurants ($912,000 1997 sales) in the first half 
of 1997.  In addition, the Company experienced a 3.1% decrease in same 
restaurant sales (sales from restaurants that were open during the entire 
period indicated and the entire corresponding prior period) during 1997 
primarily as a result of additional restaurant development within existing 
markets.  At December 28, 1997, the Company had 45 Company-owned restaurants 
compared to 33 restaurants at December 29, 1996.

     Franchise revenues decreased by $255,000, or 37.9%, to $417,000 for 1997 
compared to $672,000 for 1996. This decrease is primarily due to the decrease 
in new store development within the franchise program as well as the closing 
or disenfranchising of 13 franchise restaurants during 1997. There were 25 
franchised restaurants at the end of 1997 as compared to 33 franchised 
restaurants at the end of 1996. Consequently, franchise and development fees 
decreased $81,000, or 35.5%, to $148,000 for 1997 compared to $229,000 for 
1996 and franchise royalty revenue decreased by $174,000, or 39.2%, to 
$270,000 for 1997 compared to $443,000 for 1996.  Franchise royalty revenue 
has also decreased due to the discontinuance of royalty revenue recognition 
on certain franchise restaurants due to collectibility concerns. Due to the 
aforementioned activity within the franchise program, management expects 
franchise revenues to continue to decline.

     Cost of sales increased by $2.4 million, or 65.0%, to $6.2 million for 
1997 compared to $3.7  million for 1996. This increase is primarily 
attributable to the increase in sales from Company-owned restaurants. As a 
percentage of sales from Company-owned restaurants, cost of sales decreased 
to 33.3% in 1997 from 34.5% in 1996 primarily as a result of the full year 
favorable impact of the Lots A' Bagels restaurants.  The seven Lots A' Bagels 
restaurants have historically experienced a lower cost of sales percentage 
than New York Bagel restaurants.  In 1997, Lots A' Bagels cost of sales as a 
percentage of sales was 

                                       20

<PAGE>

24.3%.  New York Bagel restaurants experienced a 0.6% increase in cost of 
sales percentage to 35.2% for 1997 as compared to 34.6% for 1996.  The 
overall increase of 0.6% is primarily due to the development of frozen-dough 
bagels and pre-packaged cream cheeses offset to a certain extent by 
purchasing efficiencies and portioning refinements.  Prices of the Company's 
commodities (meat and cheese, flour and other bakery ingredients) have 
generally remained stable during the comparable periods. 

     Restaurant operating expenses increased by $5.1 million, or 98.1%, to 
$10.3 million for 1997 compared to $5.2 million for 1996.  This increase is 
primarily due to the increase in sales from Company-owned restaurants 
discussed above.  As a percentage of sales from Company-owned restaurants, 
restaurant operating expenses increased to 55.3% for 1997 from 47.7% for 
1996. This increase is primarily the result of the following:  (i) direct 
labor costs increased from 27.5% in 1996 to 29.0% in 1997; (ii)  the change 
in accounting for restaurant preopening costs (see below discussion) 
increased restaurant operating expenses 1.9% in 1997;  (iii)  a full year of 
Lots A' Bagels restaurant operations in 1997 which restaurants experience 
higher restaurant operating expenses (as a percentage of Company-owned 
restaurant sales); and (iv) utilities and rent expenses for New York Bagel 
restaurants increased from 8.1% in 1996 to 9.9% in 1997.  Items (i) and (iv) 
can be primarily attributed to a certain portion of the Company's new 
restaurant development in which sales levels have not matured.

     General and administrative expenses increased by $854,000, or 88.6%, to 
$1.8 million for 1997 compared to $964,000 for 1996. This increase is 
primarily attributable to the increase in the number of Company-owned 
restaurants and a full year operating as a public company. As a percentage of 
total revenues, general and administrative expenses increased to 9.6% in 1997 
from 8.4% in 1996 primarily due to writeoff of uncollectible receivables 
attributable to certain franchisees that began experiencing financial 
difficulties and increased legal and accounting costs, and other general and 
administrative costs due to the growth of the Company.

     Depreciation and amortization increased by $378,000 or 68.4%, to 
$930,000 for 1997 compared to $552,000 for 1996. As a percentage of total 
revenues, depreciation and amortization increased to 4.9% for 1997 from 4.8% 
in 1996. This increase is attributable to the significant addition of capital 
expenditures to develop and acquire additional Company-owned restaurants.  
Newly developed restaurants with increased property and equipment costs incur 
higher depreciation and amortization as compared to older restaurants that 
were not as expensive to develop.  The increase from new restaurant 
development has been offset, to a certain extent, by the following:  (i) 1997 
does not reflect amortization of restaurant preopening costs (due to the 
Company's change in accounting for such costs as discussed below) whereas 
1996 incurred amortization of such costs of $175,000, or 1.5%; and (ii) 
during the third fiscal quarter of 1997, the Company impaired seven 
restaurants in four operating markets and approved for closure four 
restaurants in three operating markets whereby depreciation and amortization 
was completely or significantly reduced for such restaurants during the 
fourth fiscal quarter of 1997.  

     A provision for impairment and restaurant closures of $3.8 million was 
recorded in 1997.  Based on management's review of Company-owned operating 
markets, four markets were determined to be impaired primarily due to current 
and historical operating losses.  The impairment charge, which amounted to 
$2.4 million, represents a reduction of the carrying value of long-lived 
assets (property, equipment and goodwill) to estimated fair value.  In 
addition, the Company closed or approved for closure five under-performing 
restaurants in 1997. Accordingly, restaurant closure costs of $1.4 million 
were recorded in 1997. Such costs included the write down of the carrying 
amount of assets to estimated fair value of $1.1 million and the present 
value of remaining noncancelable lease payments after the closure date, net 
of estimated sublease income, of $317,000.

     Net interest income increased by $159,000 to $73,000 for 1997 compared 
to net interest expense of $86,000 for 1996. The increase in net interest 
income is due to the interest income earned from the remaining proceeds of 
the Company's initial public offering that was completed in August 1996 and a 
significant reduction in interest expense.  Interest expense decreased from 
$238,000 in 1996 to $37,000 in 1997 due to the retirement of significantly 
all of the Company's debt in August 1996 with proceeds from the public 
offering.  The Company expects that it will continue to incur interest 
expense in the foreseeable future as the proceeds from the public offering 
have been fully utilized, the Company has $1.5 million outstanding under its 
Credit Facility as of March 1, 1998 and remaining restaurant development is 
anticipated to be funded primarily through additional debt borrowings.

     Income tax benefit increased by $414,000 to $144,000 in 1997 as compared 
to income tax expense of $270,000 for 1996.  As a result of the Company's 
operating loss for 1997, the Company was able to recognize a tax benefit for 
income taxes paid in 1996.  However, the 1997 tax benefit is net of a 
valuation allowance of $1.2 million that was recorded in 1997.  Based 

                                       21

<PAGE>

on the cumulative net loss over the past three years, management believes 
that the valuation allowance is appropriate due to the uncertainty regarding 
the realization of the Company's net deferred tax assets.

     During 1997, the Company changed its accounting policy concerning 
restaurant preopening costs.  In prior periods, the Company initially 
capitalized and then amortized preopening costs over the initial 12-months of 
a restaurant's operation.  Under the new method, the Company expenses 
restaurant preopening costs as incurred.  As a result, restaurant preopening 
costs, net of the cumulative effect of the accounting change discussed below, 
are included in restaurant operating expenses in 1997 as compared to a 
component of depreciation and amortization in 1996.  Management believes the 
change is preferable to obtain a better matching of expenses with revenues.  
The change is considered a cumulative effect-type accounting change and, 
accordingly, the cumulative effect as of the beginning of fiscal 1997 of 
$129,000, net of tax benefit of $81,000, has been reported in 1997.   

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

     Total revenues increased by $4.2 million, or 56.8%, to $11.6 million for 
1996 compared to $7.4 million for 1995, primarily due to an increase in the 
number of Company-owned and franchised restaurants open. 

     Sales from Company-owned restaurants increased $4.0 million, or 58.0%, 
to $10.9 million for 1996 compared to $6.9 million for 1995. This is 
primarily the result of opening nine restaurants throughout 1996, acquiring 
seven restaurants in December 1996 and acquiring one restaurant in September 
1996. In addition, the Company experienced a 4.4% increase in same restaurant 
sales (sales from restaurants that were open during the entire period 
indicated and the entire corresponding prior period) during 1996. At December 
29, 1996, the Company had 33 Company-owned restaurants compared to 15 
restaurants at December 31, 1995. 

     Franchise revenues increased by $188,000, or 38.8%, to $672,000 for 1996 
compared to $484,000 for 1995. This increase is primarily due to the full 
year of royalty revenues from franchise restaurants opened in 1995 and the 
new franchise restaurants opened in 1996. There were 33 franchised 
restaurants at the end of 1996 and 25 franchised restaurants at the end of 
1995, which impacted both initial franchise fees and royalty revenue. Initial 
franchise and development fees decreased $22,000, or 8.8%, to $229,000 for 
1996 compared to $251,000 for 1995, due to a decrease in the number of 
franchise restaurants opened in 1996 as compared to 1995. Franchise royalty 
revenue increased by $210,000, or 89.7%, to $444,000 for 1996 compared to 
$234,000 for 1995. 

     Cost of sales increased by $1.1 million, or 43.5%, to $3.7 million for 
1996 compared to $2.6 million for 1995. This increase is primarily 
attributable to the increase in sales from Company-owned restaurants. As a 
percentage of sales from Company-owned restaurants, cost of sales decreased 
to 34.5% in 1996 from 38.0% in 1995 as a result of purchasing and operating 
efficiencies, portioning refinements and, to a lesser extent, modest price 
increases in 1996. Prices of the Company's commodities (meat and cheese, 
flour and other bakery ingredients) have generally remained stable during the 
comparable periods. 

     Restaurant operating expenses increased by $2.1 million, or 68.1%, to 
$5.2 million for 1996 compared to $3.1 million for 1995. This increase is 
primarily due to the increase in sales from Company-owned restaurants 
discussed above. As a percentage of sales from Company-owned restaurants, 
restaurant operating expenses increased to 47.7% for 1996 from 44.9% for 
1995. This increase is primarily the result of remodeling five Company-owned 
restaurants for an aggregate of 16 weeks in 1996. The increase is also 
attributable to increased labor costs as a result of an increase in the 
minimum wage rate. Finally, labor and occupancy rates associated with the 
Nashville market, a market developed in 1996 with the acquisition of a bagel 
restaurant in December 1995 and the opening of three additional New York 
Bagel restaurants in 1996, are higher than rates historically experienced by 
Company-owned restaurants. 

     General and administrative expenses increased by $126,000, or 15.0% to 
$964,000 for 1996 compared to $838,000 for 1995. This increase is primarily 
attributable to the continued growth of the Company. As a percentage of total 
revenues, general and administrative expenses decreased to 8.4% in 1996 from 
11.4% in 1995, primarily as a result of increased economies of scale in 
management infrastructure as it relates to new Company-owned and franchised 
restaurant activities. 

                                       22
<PAGE>

     Depreciation and amortization increased by $393,000, or 247.4%, to 
$552,000 for 1996 compared to $159,000 for 1995. As a percentage of total 
revenues, depreciation and amortization increased to 4.8% for 1996 from 2.2% 
in 1995. This increase is primarily attributable to the significant addition 
of capital expenditures to develop and acquire the additional Company-owned 
restaurants discussed above. 

     Interest expense increased by $198,000 to $238,000 for 1996 compared to 
$40,000 for 1995 as a result of increased bank borrowings during the first 
seven months of 1996. 

     Interest income was $152,000 in 1996 compared to $0 for 1995 as a result 
of investing proceeds from the initial public offering in interest-bearing, 
short-term, investment grade securities until such proceeds were used to fund 
Company growth. 

     Income tax expense increased by $263,000 to $270,000 for 1996 compared 
to $7,000 for 1995 as a result of the Company changing from an S corporation 
to a C corporation concurrent with the Company's initial public offering of 
its Common Stock. See Note 8 of Notes to Consolidated Financial Statements. 

LIQUIDITY AND CAPITAL RESOURCES

     The Company requires capital primarily for the development of new 
restaurants, possible acquisitions and the remodeling of existing 
Company-owned restaurants. Capital expenditures totaled $475,000, $4.7 
million and $7.3 million for 1995, 1996 and 1997, respectively. Acquisition 
expenditures totaled $656,000, $2.5 million and $1.4 million for 1995,1996 
and 1997, respectively. The Company has funded its capital expenditures with 
proceeds from its initial public offering, proceeds from bank borrowings, and 
cash flows from operating activities. Net cash provided by operating 
activities was $777,000, $1.3 million and $672,000 for 1995, 1996 and 1997, 
respectively.  The decrease in cash flow from operations from 1996 to 1997 is 
due primarily to the development of certain new operating markets in which 
sales have not matured as well as the additional overhead incurred by the 
Company due to its growth and its first full year of expenses related to 
being a public company.

     The Company distributed $156,000 on March 4, 1997 to the stockholders 
existing prior to its initial public offering in connection with their 
estimated federal and state income tax obligations attributable to the 
Company's 1996 earnings prior to the Termination Date.  No other dividends 
were declared or paid in 1997 and it is currently the Company's intention to 
utilize all cash flows from operations to fund operations and expansion.  
Thus, the Company does not anticipate paying cash dividends in the 
foreseeable future.   

     Based on its contemplated expansion plans of new Company-owned 
restaurants, the Company estimates that its total capital expenditures will 
be approximately $1.0 million in 1998.  The Company expects that borrowings 
from the Credit Facility discussed below, or the refinancing of borrowings 
from such Credit Facility, proceeds from the sale-leaseback 
program discussed below and cash provided by operating activities will 
provide sufficient funds to finance such capital expenditures.

     CREDIT FACILITY.  On September 5, 1997, the Company entered into a loan 
agreement with revolving line of credit and term loan facilities, which has a 
maximum aggregate commitment of $10.0 million (the "Credit Facility") with 
NationsBank, N.A. (the "Bank").  The Credit Facility provides for a $10.0 
million revolving line of credit commitment, subject to availability under a 
borrowing base calculated by reference to the level of eligible equipment, 
inventory and accounts receivable, and includes a $2.0 million sublimit for 
new construction, remodeling and acquisition of restaurant locations.  The 
Credit Facility also contains a "mini-perm" facility financing for new 
construction, remodeling and acquisition of restaurant locations with a ten 
year amortization and a balloon payment within five years.  Interest on 
borrowings outstanding under the revolving line of credit facility is payable 
at an annual rate set forth in each note. All such notes currently 
outstanding are at the Bank's prime rate.  The Credit Facility is secured by 
substantially all of the Company's assets and matures on September 30, 1998.  
The proceeds from the Credit Facility (which are classified as a current 
liability at December 28, 1997) were primarily used for acquisition of 
long-lived assets such as property and equipment.  To the extent such notes 
are not otherwise repaid in the normal course of business prior to maturity, 
the Company anticipates that it will refinance the outstanding balance of 
such notes payable although the Company does not currently have a commitment 
from the Bank to refinance such notes payable.  As of March 1, 1998, the 
Company has approximately $1.5 million in outstanding borrowings pursuant to 
the Credit Facility as 

                                       23

<PAGE>

approximately $1.0 million of the outstanding borrowings as of December 28, 
1997 has been repaid from proceeds of the February 1998 sale-leaseback 
transaction discussed below. The Company has approximately $1.0 million 
available under the Credit Facility as of March 1, 1998.

     SALE-LEASEBACK TRANSACTIONS.  During October 1997 and February 1998, the 
Company entered into agreements to sell and lease back five restaurant sites 
with an entity owned by an officer of the Company and a significant 
stockholder, both of whom are Directors.  The sale-leaseback transactions 
include five owned restaurant locations in which the Company sold such 
properties  to such entity for approximately $2.0 million and leased back 
over a 15-year period.  The Company believes that the terms and conditions of 
both the real estate sale and the related lease back were fair and reasonable 
and were on terms at least as favorable as would be available from 
non-affiliated parties.  The Company utilized the proceeds to fund new 
restaurant development and to reduce borrowings under the Credit Facility.  
The Company intends to enter into similar sale-leaseback transactions in the 
future.  

     STOCK REPURCHASE PROGRAM.  In January 1998, the Company's Board of 
Directors approved a plan to repurchase up to 1.0 million shares of the 
Company's Common Stock (the "Stock Repurchase Program").  Purchases pursuant 
to the Stock Repurchase Program are to be made from time to time in the open 
market or directly from stockholders at prevailing market prices.  The Stock 
Repurchase Program is anticipated to be funded with internally generated cash 
and borrowings under the Credit Facility or the refinancing of such Credit 
Facility.  As of March 1, 1998, the Company had purchased 6,000 shares of 
Common Stock for $10,000.  

     FINANCIAL CONDITION.  Total assets at December 28, 1997 are $14.1 
million as compared to $15.2 million at December 29, 1996.  Cash and cash 
equivalents and investment securities available for sale have significantly 
decreased due to the Company's significant capital investments in developing 
and acquiring Company-owned restaurants. This is the primary reason for the 
$4.4 million overall decrease in current assets.  Deferred costs have been 
almost eliminated due to the change in accounting for restaurant preopening 
costs as previously discussed and the limited new franchise development.  
Goodwill has increased due to three acquisitions completed since 1996.  The 
income tax receivable has significantly increased as a result of the 
operating loss incurred in 1997 and the ability to recover income taxes paid 
in 1996.  Current liabilities have increased $2.8 million primarily as a 
result of the bank borrowings initiated in 1997.  Other long term liabilities 
reflect the accrual for future noncancelable lease obligations on closed 
restaurants.  Stockholders' equity has decreased from $13.7 million in 1996 
to $9.8 million in 1997 primarily due to the $3.8 million charge for 
impairments and restaurant closures incurred in 1997. The charge is primarily 
reflected as a reduction in the carrying value of property and equipment.  

YEAR 2000 COMPLIANCE

     The Company is currently taking actions to provide that its computer 
systems are capable of processing the Year 2000.  The gross costs associated 
with this are not expected to be material and are being expensed as incurred. 
 

INFLATION

     The Company believes that the relatively moderate rates of inflation 
over the past few years have not had a significant impact on its results of 
operations or total revenues.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable to the Company for this Form 10-K.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Consolidated Financial Statements referred to 
in the Index on page F-1 setting forth the consolidated financial statements 
of New York Bagel Enterprises, Inc. and Subsidiary, together with the report 
of KPMG Peat Marwick LLP dated February 6, 1998. 

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

     None. 

                                      24
<PAGE>


                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by this Item 10 is incorporated herein by reference 
to "Directors and Executive Officers of the Company" in the Company's Proxy 
Statement. 

ITEM 11.  EXECUTIVE COMPENSATION

     Information required by this Item 11 is incorporated herein by reference 
to "Executive Compensation - Compensation Committee Interlocks and Insider 
Participation, -Summary Compensation Table, -Stock Option Grant Table, 
-Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option 
Values Table, -Employment Arrangements, and -Incentive Plan" and "Directors 
and Executive Officers of the Company-Compensation of Directors" in the 
Company's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information required by this Item 12 is incorporated herein by reference 
to "Security Ownership of Certain Beneficial Owners and Management" in the 
Company's Proxy Statement. 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information required by this Item 13 is incorporated herein by reference 
to "Certain Relationships and Related Transactions" in the Company's Proxy 
Statement. 

                                    PART IV

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

      (a)(1)   FINANCIAL STATEMENTS.  Reference is made to the Index to
               Consolidated Financial Statements on page F-1 for a list of all
               financial statements filed as part of this Report. 

     (a)(2)    FINANCIAL STATEMENT SCHEDULES.  None.

     (a)(3)    EXHIBITS.  Reference is made to the Index to Exhibits on page E-1
               for a list of all exhibits filed as part of this Report.

     (b)        REPORTS ON FORM 8-K.  None. 

                                       25

<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, as amended, the Registrant has duly caused this Report 
to be signed on its behalf by the undersigned, thereunto duly authorized this 
27th day of March, 1998.

                                   NEW YORK BAGEL ENTERPRISES, INC.


                                   By:     /s/  Robert J. Geresi  
                                       -------------------------------------
                                                Robert J. Geresi
                                       CHIEF EXECUTIVE OFFICER AND PRESIDENT

     Pursuant to the requirements of the Securities Exchange Act of 1934, 
this Report has been signed below by the following persons on behalf of the 
Registrant and in the capacities and on the dates indicated. 

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

   /s/ Robert J. Geresi         Chairman of the Board, Chief     March 27, 1998
--------------------------------Executive Officer and
       Robert J. Geresi         President (Principal Executive
                                Officer)

 /s/ Jon H. Cramer              Chief Financial Officer,         March 27, 1998
--------------------------------Secretary and Treasurer
     Jon H. Cramer              (Principal Financial and
                                Accounting Officer)

 /s/ Paul T. Sorrentino         Vice President-New Store         March 27, 1998
--------------------------------Development and Director
     Paul T. Sorrentino         

 /s/ Paul R. Hoover             Vice President-Strategic         March 27, 1998
--------------------------------Planning and Director
     Paul R. Hoover             

 /s/ Stanley K, Clark           Director                         March 27, 1998
--------------------------------
     Stanley K. Clark           

 /s/ David L. Murfin            Director                         March 27, 1998
--------------------------------
     David L. Murfin            

 /s/ William J. Walsh, Jr.      Director                         March 27, 1998
--------------------------------
     William J. Walsh, Jr.      


                                       26
<PAGE>
                       NEW YORK BAGEL ENTERPRISES, INC.      
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 
<TABLE>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
New York Bagel Enterprises, Inc.:

 Independent Auditors' Report

 Consolidated Balance Sheets at December 28, 1997 and December 29, 1996     F-2

 Consolidated Statements of Operations for the Fifty-Two Weeks Ended
   December 28, 1997 and December 29, 1996 and the Year Ended
   December 31, 1995                                                        F-4

 Consolidated Statements of Stockholders' Equity (Deficit) for the 
   Fifty-Two Weeks Ended December 28, 1997 and December 29, 1996 and
   the Year Ended December 31, 1995                                         F-6

 Consolidated Statements of Cash Flows for the Fifty-Two Weeks Ended
   December 28, 1997 and December 29, 1996 and the Year Ended
   December 31, 1995                                                        F-7

 Notes to Consolidated Financial Statements                                 F-9
</TABLE>

                                         F-1
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors
New York Bagel Enterprises, Inc.:

We have audited the accompanying consolidated balance sheets of New York 
Bagel Enterprises, Inc. as of December 28, 1997 and December 29, 1996, and 
the consolidated statements of operations, stockholders' equity (deficit), 
and cash flows for the fifty-two weeks ended December 28, 1997 and December 
29, 1996 and for the year ended December 31, 1995.  These consolidated 
financial statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these consolidated financial 
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of New York Bagel Enterprises, Inc. as of December 28, 1997 and December 29, 
1996, and the results of its operations and its cash flows for the fifty-two 
weeks ended December 28, 1997 and December 29, 1996 and for the year ended 
December 31, 1995, in conformity with generally accepted accounting 
principles.

As discussed in note 2 of notes to consolidated financial statements, the 
Company changed its method of accounting for restaurant preopening costs in 
1997.


                                                 KPMG Peat Marwick LLP

Wichita, Kansas
February 6, 1998

                                  
<PAGE>
                       NEW YORK BAGEL ENTERPRISES, INC.   
                                                          
                         Consolidated Balance Sheets      
                                                          
                   December 28, 1997 and December 29, 1996
<TABLE>
                   ASSETS                                 1997            1996  
                   ------                                 ----            ----
<S>                                                    <C>             <C>
Current assets:
 Cash and cash equivalents                             $  872,949      1,305,130
 Investment securities available for sale                       -      4,265,862
 Accounts receivable                                      171,068        315,293
 Inventories                                              349,937        272,261
 Deferred costs                                             4,993        239,269
 Income tax receivable                                    484,957         87,783
 Property and equipment available for sale                193,256              -
 Prepaid expenses and other current assets                164,163        120,145
                                                     ------------     ----------
   Total current assets                                 2,241,323      6,605,743

Property and equipment, net                            10,281,696      7,616,344
Other assets, net of accumulated amortization of 
 $47,412 in 1997 and $20,581 in 1996                      357,001        145,118
Goodwill, net of accumulated amortization of 
 $75,524 in 1997 and $26,341 in 1996                    1,220,441        806,016
                                                     ------------     ----------
                                                    $  14,100,461     15,173,221
                                                     ------------     ----------
                                                     ------------     ----------
</TABLE>
See accompanying notes to consolidated financial statements.

                                       F-2

<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.   

                   Consolidated Balance Sheets (Continued)     
                                                          
                   December 28, 1997 and December 29, 1996
<TABLE>

   LIABILITIES AND STOCKHOLDERS' EQUITY                   1997            1996  
   ------------------------------------                   ----            ----  
<S>                                                    <C>             <C>
Current liabilities:
 Current installments of long-term debt              $  2,490,858         28,750
 Accounts payable                                         715,453        515,206
 Accrued payroll and benefits                             292,321        220,182
 Accrued liabilities                                      539,143        262,113
 Current portion of deferred franchise fees                35,000         61,000
 Deferred income taxes                                          -         56,808
 Distributions payable                                          -        164,194
                                                     ------------     ----------
  Total current liabilities                             4,072,775      1,308,253

Long-term debt, less current installments                  28,750         57,500
Deferred franchise fees                                         -         34,000
Deferred rents payable                                     99,201         72,035
Deferred income taxes                                           -         26,600
Other liabilities                                         133,724              -
                                                     ------------     ----------
  Total liabilities                                     4,334,450      1,498,388
                                                     ------------     ----------
Stockholders' equity:
 Class A common stock, $.01 par value.  Authorized
  30,000,000 shares; issued and outstanding
  4,667,500 shares                                         46,675         46,675
 Additional paid-in capital                            13,390,769     13,390,769
 Retained earnings (accumulated deficit)               (3,671,433)       237,389
                                                     ------------     ----------
   Total stockholders' equity                           9,766,011     13,674,833

Commitments
                                                     ------------     ----------
                                                    $  14,100,461     15,173,221
                                                     ------------     ----------
                                                     ------------     ----------
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
                    Consolidated Statements of Operations

            For the Fifty-Two Weeks Ended December 28, 1997 and
           December 29, 1996 and the Year Ended December 31, 1995

<TABLE>
                                                          1997           1996          1995
                                                          ----           ----          ----
<S>                                                  <C>              <C>            <C>
Revenues:
 Sales from Company-owned restaurants                $ 18,570,822     10,864,863     6,875,146
 Franchise revenues                                       417,030        671,987       484,300
                                                     ------------     ----------     ---------
  Total revenues                                       18,987,852     11,536,850     7,359,446
                                                     ------------     ----------     ---------

Costs and expenses:
 Cost of sales                                          6,189,510      3,749,471     2,612,772
 Restaurant operating expenses                         10,273,538      5,185,362     3,083,902
 General and administrative expenses                    1,818,099        963,927       838,190
 Depreciation and amortization                            930,177        552,419       158,996
 Provision for impairments and closures                 3,773,580              -             -
                                                     ------------     ----------     ---------
  Total costs and expenses                             22,984,904     10,451,179     6,693,860
                                                     ------------     ----------     ---------

  Operating income (loss)                              (3,997,052)     1,085,671       665,586

Other income (expense):
 Interest income                                          109,588        152,167             -
 Interest expense                                         (36,734)      (237,858)      (39,800)
                                                     ------------     ----------     ---------
  Total other income (expense)                             72,854        (85,691)      (39,800)
                                                     ------------     ----------     ---------

  Earnings (loss) before income taxes                  (3,924,198)       999,980       625,786

Income tax expense (benefit)                             (144,417)       269,714         6,689
                                                     ------------     ----------     ---------
  Earnings (loss) before cumulative                  
   effect of accounting change                         (3,779,781)       730,266       619,097
                                                     
Cumulative effect of accounting change, net of       
 income tax benefit of $80,782                           (129,041)             -             -
                                                     ------------     ----------     ---------

  Net earnings (loss)                                $ (3,908,822)       730,266       619,097
                                                     ------------     ----------     ---------
                                                     ------------     ----------     ---------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>

                         NEW YORK BAGEL ENTERPRISES, INC.

                 Consolidated Statements of Operations, Continued

               For the Fifty-Two Weeks Ended December 28, 1997 and
             December 29, 1996 and the Year Ended December 31, 1995

<TABLE>
                                                       1997            1996           1995
                                                       ----            ----           ----
<S>                                                <C>               <C>             <C>
Pro forma earnings to reflect income taxes:

 Income tax expense                                                  $389,505        245,628
                                                                     --------        -------
                                                                     --------        -------

 Net earnings (loss)                                                 $610,475        380,158
                                                                     --------        -------
                                                                     --------        -------
Earnings (loss) per share (basic and diluted):
 Earnings (loss) before cumulative effect
  of accounting change                             $      (.81)           .17            .13
 Cumulative effect of accounting change                   (.03)             -              -
                                                   -----------       --------        -------

 Net earnings (loss)                               $      (.84)           .17            .13
                                                   -----------       --------        -------
                                                   -----------       --------        -------
Pro forma amounts assuming the new method of
 accounting for restaurant preopening costs is
 applied retroactively:

  Net earnings (loss)                              $(3,779,781)       518,608        342,984
                                                   -----------       --------        -------
                                                   -----------       --------        -------

  Net earnings (loss) per share - basic and
   diluted                                         $      (.81)           .15            .11
                                                   -----------       --------        -------
                                                   -----------       --------        -------
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                        NEW YORK BAGEL ENTERPRISES, INC.

             Consolidated Statements of Stockholders' Equity (Deficit)

               For the Fifty-Two Weeks Ended December 28, 1997 and
              December 29, 1996 and the Year Ended December 31, 1995

<TABLE>
                                                                                           Retained
                                                     Common Stock           Additional     Earnings
                                                -----------------------      Paid-In     (Accumulated
                                                Class A         Class B      Capital        Deficit)         Total
                                                -------         -------      -------       ---------         -----
<S>                                             <C>             <C>        <C>           <C>             <C>
Balance, December 31, 1994                      $14,170         13,687        151,293       (20,182)        158,968
Net earnings                                          -              -              -       619,097         619,097
Stock compensation                                    -              -          6,500             -           6,500
Distributions to stockholders                         -              -              -    (2,363,030)     (2,363,030)
                                                -------        -------     ----------     ---------       ---------

Balance, December 31, 1995                       14,170         13,687        157,793    (1,764,115)     (1,578,465)
Net earnings                                          -              -              -       730,266         730,266
Issuance of 14,308 shares of common stock             -            143           (143)            -              -
Issuance of 1,867,500 shares of common
 stock pursuant to initial public offering       18,675              -     14,660,357             -      14,679,032
Reclassification of accumulated deficit
 pursuant to termination of S corporation
 status at August 27, 1996                            -              -     (1,427,238)    1,427,238               -
Conversion of 1,383,012 shares of Class B
 common stock to Class A common stock
 on a one-for-one basis pursuant to the
 initial public offering                         13,830        (13,830)             -             -               -
Distributions to stockholders                         -              -              -      (156,000)       (156,000)
                                                -------        -------     ----------     ---------       ---------

Balance, December 29, 1996                       46,675              -     13,390,769       237,389      13,674,833
Net loss                                              -              -              -    (3,908,822)     (3,908,822)
                                                -------        -------     ----------     ---------       ---------

Balance, December 28, 1997                      $46,675              -     13,390,769    (3,671,433)      9,766,011
                                                -------        -------     ----------     ---------       ---------
                                                -------        -------     ----------     ---------       ---------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>

                         NEW YORK BAGEL ENTERPRISES, INC.

                      Consolidated Statements of Cash Flows

               For the Fifty-Two Weeks Ended December 28, 1997 and
             December 29, 1996 and the Year Ended December 31, 1995

<TABLE>
                                                                  1997             1996          1995
                                                                  ----             ----          ----
<S>                                                           <C>            <C>             <C>
Cash flows from operating activities:
 Net earnings (loss)                                          $(3,908,822)       730,266        619,097
 Adjustments to reconcile net earnings (loss) to net
  cash provided by operating activities:
   Depreciation and amortization                                  930,177        552,419        158,996
   (Gain) loss on sale of equipment                                18,957        (21,286)             -
   Provision for impairments and closures                       3,773,580              -              -
   Cumulative effect of accounting change, net
    of income tax benefit                                         129,041              -              -
   Noncash stock compensation expense                                   -              -          6,500
   Increase (decrease) in cash resulting from
    changes in listed items, net of effects from
    acquisitions:
      Deferred income taxes                                        (2,626)        83,408          1,302
      Inventory                                                   (60,780)       (96,654)      (178,209)
      Income taxes receivable                                    (397,174)       (71,036)         1,300
      Property and equipment available for sale                  (193,256)             -              -
      Prepaid expenses and other current assets                  (119,660)       (90,312)        (1,588)
      Accounts receivable                                         145,425       (123,545)       (23,361)
      Deferred costs                                               24,453       (337,492)       (70,672)
      Other assets                                                   (121)             -         (2,403)
      Accounts payable                                            200,247        352,034        140,253
      Accrued liabilities, accrued payroll and
       benefits, and deferred rents payable                       192,341        399,213         78,509
      Deferred franchise fees                                     (60,000)       (72,000)        47,500
                                                              -----------    -----------     ----------
        Net cash provided by operating activities                 671,782      1,305,015        777,224
                                                              -----------    -----------     ----------

Cash flows from investing activities:
 Additions to property and equipment                           (7,304,032)    (4,716,867)      (474,674)
 Acquisitions, net of cash acquired                            (1,373,456)    (2,468,092)      (656,174)
 Proceeds from sales of property and equipment including
  proceeds from sale-leaseback transactions                     1,238,632         21,722              -
 Purchase of investment securities available for sale          (7,244,550)    (7,265,862)             -
 Proceeds from sales and maturities of investment
  securities available for sale                                11,510,412      3,000,000              -
 Purchase of other assets                                        (186,154)       (72,468)             -
                                                              -----------    -----------     ----------
        Net cash used in investing activities                  (3,359,148)   (11,501,567)    (1,130,848)
                                                              -----------    -----------     ----------
                                                                                             (Continued)
</TABLE>

                                     F-7
<PAGE>

                      NEW YORK BAGEL ENTERPRISES, INC.

              Consolidated Statements of Cash Flows, Continued

             For the Fifty-Two Weeks Ended December 28, 1997 and
           December 29, 1996 and the Year Ended December 31, 1995

<TABLE>
                                                          1997          1996           1995
                                                          ----          ----           ----
<S>                                                   <C>            <C>            <C>
Cash flows from financing activities:
 Proceeds from issuance of long-term debt             $2,500,000      1,398,700      3,049,210
 Principal payments on long-term debt                    (66,642)    (4,677,450)       (90,852)
 Proceeds from initial public offering of common
  stock                                                        -     14,679,032              -
 Decrease in due to stockholders                               -              -        (26,330)
 Decrease in distributions payable                      (164,194)       (40,499)        (8,807)
 Debt issuance costs                                     (13,979)             -        (13,916)
 Deferred offering costs                                       -          8,474         (8,474)
 Distributions to stockholders                                 -              -     (2,459,982)
                                                      ----------     ----------     ----------
   Net cash provided by financing
   activities                                           2,255,185    11,368,257        440,849
                                                      ----------     ----------     ----------

    Net increase (decrease) in cash                     (432,181)     1,171,705         87,225

Cash and cash equivalents at beginning of year         1,305,130        133,425         46,200
                                                      ----------     ----------     ----------

Cash and cash equivalents at end of year              $  872,949      1,305,130        133,425
                                                      ----------     ----------     ----------
                                                      ----------     ----------     ----------
</TABLE>

See accompanying notes to consolidated financial statements.

                                       F-8
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements

(1) OPERATIONS AND REORGANIZATION
   OPERATIONS
   The Company owns and franchises New York Bagel and Lots A' Bagels
   restaurants that provide a wide variety of bagels that are made from
   scratch, boiled and baked in the traditional "New York style".  Breakfast
   menu items include a wide variety of bagels and custom-blended cream
   cheeses, gourmet coffees, muffins and croissants.  Lunch and dinner items
   include an assortment of bagel delicatessen sandwiches, prepared salads,
   cookies and soft drinks.  As of December 28, 1997, the Company has 45
   Company-owned restaurants (33 at December 29, 1996) primarily located in
   Oklahoma, Kansas, Colorado, Texas and Tennessee and 25 franchised
   restaurants (33 at December 29, 1996) located throughout the United States.

   Effective August 27, 1996, the Company completed an initial public offering
   (IPO) in which it sold 1,867,500 shares of its Class A common stock and
   realized net proceeds, net of offering costs of $951,943, of $14,679,032.

   REORGANIZATION
   The Company was formed as a result of a merger (the Merger) between New
   York Bagel Enterprises, Inc., which became the surviving corporation, and
   New York Bagel Shop, Inc.; New York Bagel Shop & Delicatessen, Inc.; Bagels
   of Norman, Inc.; Bagel Boss, Inc.; and VPR Incorporated (the five
   restaurant entities).  The Merger was effective on December 31, 1995.  The
   term Company as used herein refers to New York Bagel Enterprises, Inc.
   including the five restaurant entities.  Since the primary stockholders of
   each of the five restaurant entities prior to the Merger were also the
   primary stockholders of the Company subsequent to the Merger, the Merger
   essentially represents a transfer to New York Bagel Enterprises, Inc. of
   nonmonetary assets in exchange for stock and has been accounted for at
   historical cost.  The accompanying financial statements for periods prior
   to the effective date of the Merger are presented on a combined basis since
   this is the most meaningful presentation of the business and due to
   substantial commonality of ownership and management of the prior entities
   throughout such prior periods.

 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (a)  PRINCIPLES OF CONSOLIDATION
            The consolidated financial statements include the accounts of New
            York Bagel Enterprises, Inc. and its wholly-owned subsidiary.  All
            material intercompany activity has been eliminated.

                                     F-9
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
       (b)  FRANCHISE REVENUES
            Franchise agreements are executed for each franchise restaurant and
       provide the terms of the franchise arrangement between the Company and
       the franchisee.  The franchise agreement requires the franchisee to pay
       an initial, non-refundable franchise fee plus continuing royalties based
       upon a percentage of restaurant sales.  Additionally, the Company
       executes development agreements with certain franchisees which
       stipulates the area, the number of restaurants, and the timeframe for
       development in exchange for an initial, non-refundable development fee
       based on a standard price per type of restaurant.

            Initial franchise fees are recognized as revenue when the Company
       performs substantially all initial services required by the franchise
       agreement, which generally occurs shortly after restaurant opening.
       Continuing royalties are recognized as earned with an appropriate
       provision for estimated uncollectible amounts.  Initial franchise fees
       received applicable to restaurants for which substantially all initial
       services required by the franchise agreement have not been performed are
       recorded as deferred franchise fees in the accompanying balance sheets.
       Development fees are received upon signing the agreement and are
       initially recorded as deferred franchise fees.  Such fees are applied to
       reduce the initial franchise fees paid for each restaurant opened and
       are accounted for as a component of the initial franchise fees.

            Deferred initial and development fees that are expected to be
       recognized within twelve months of the balance sheet date are classified
       as current portion of deferred franchise fees in the accompanying
       balance sheets.

       (c)  INVESTMENT SECURITIES AVAILABLE FOR SALE
            Investment securities at December 29, 1996 consist of highly liquid
       debt securities with maturities of less than six months.  The Company
       classifies its debt securities as available for sale which are recorded
       at fair value.  Unrealized holding gains and losses, net of related tax
       effect, on available for sale securities are excluded from earnings and
       are reported as a separate component of stockholders' equity until
       realized.  Realized gains and losses from sales and maturities of
       available for sale securities are determined on a specific
       identification basis.  Gross unrealized holding gains and gross
       unrealized holding losses were immaterial as of December 29, 1996.

       (d)  INVENTORIES
            Inventories are stated at the lower of cost or market.  Cost is
       determined using the first-in, first-out method.

                                     F-10
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
       (e)  DEFERRED FRANCHISE COSTS
            Direct, incremental costs incurred to secure franchise agreements
       are charged to expense in the same period the related initial franchise
       fees are recognized as revenue.  Costs applicable to initial franchise
       fees not yet recognized as revenue are recorded as deferred franchise
       costs.

       (f)  PROPERTY AND EQUIPMENT
            Property and equipment are stated at cost, except for assets that
       have been impaired in which the carrying amount is reduced to estimated
       fair value.  Depreciation is calculated using the straight-line method
       over the estimated useful lives of the assets.  Leasehold improvements
       are amortized on a straight-line basis over the lesser of the remaining
       lease term, including renewal periods when the Company intends to
       exercise renewal options, or the estimated useful life of the asset.
       Estimated useful lives are as follows:

       Buildings                                                    30 years
       Restaurant and bakery equipment                          5 - 10 years
       Leasehold improvements                                   7 - 15 years
       Delivery vehicles, office furniture and equipment        5 - 10 years

       (g)  GOODWILL
            Goodwill, which represents the excess of purchase price over fair
       value of net assets acquired, is amortized on a straight-line basis over
       primarily 20 years.  The Company periodically assesses the
       recoverability of this intangible asset by determining whether the
       amortization of the goodwill balance over its remaining life can be
       recovered through undiscounted future operating cash flows of the
       acquired operation.  The amount of goodwill impairment, if any, is
       measured based on projected future operating cash flows discounted at a
       rate commensurate with the risks involved.  The assessment of the
       recoverability of goodwill will be impacted if estimated future
       operating cash flows are not achieved.

       (h)  INCOME TAXES
            Effective January 1, 1994, New York Bagel Enterprises, Inc. and
       certain of the restaurant entities elected and received approval to
       become S corporations.  During the periods the entities operated as S
       corporations, income tax expense or benefit was not recorded in the
       accompanying financial statements as the entities' results of operations
       were reported to the entities' stockholders for inclusion in their
       individual income tax returns.

                                     F-11
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
       (h)  INCOME TAXES, CONTINUED
            Concurrent with the IPO, the Company terminated its S corporation
       status.  Accordingly, income taxes subsequent to the effective date of
       the IPO are accounted for under the asset and liability method whereby
       deferred tax assets and liabilities are recognized for the future tax
       consequences attributable to differences between the financial statement
       carrying amounts of existing assets and liabilities and their respective
       tax bases and operating loss and tax credit carryforwards.  Deferred tax
       assets and liabilities are measured using enacted tax rates expected to
       apply to taxable income in the years in which those temporary
       differences are expected to be recovered or settled.  Any effect on
       deferred tax assets and liabilities due to a change in tax rates is
       recognized in income in the period that includes the enactment date.

            Pro forma income tax expense, as set forth in the accompanying 1996
       and 1995 consolidated statements of operations, reflects what the income
       tax expense of the Company would have been for the fifty-two weeks ended
       December 29, 1996 and the year ended December 31, 1995 if none of the
       entities included in the financial statements had operated as S
       corporations during such periods.

       (i)  STATEMENTS OF CASH FLOWS
            For purposes of the consolidated statements of cash flows, the
       Company considers cash and cash equivalents to include currency on hand,
       demand deposits and money market funds.

        Noncash investing and financing activities during 1997, 1996 and
       1995 included:

       <TABLE>                                                    
                                                               1997         1996         1995
                                                               ----         ----         ----
<S>                                                           <C>         <C>         <C>

        Noncash distributions to stockholders:
          Distributions payable                               $     -     156,000       15,500
          Net asset (liability) distributions                       -          -      (112,452)
                                                              -------     -------     --------
          Total noncash distributions                         $     -     156,000      (96,952)
                                                              -------     -------     --------
                                                              -------     -------     --------
        Property and equipment sale proceeds included
          in accounts receivable and other assets             $26,282      53,895           -
                                                              -------     -------     --------
                                                              -------     -------     --------
        Long-term debt issued to seller in connection with      
          acquisition                                         $     -           -      115,000
                                                              -------     -------     --------
                                                              -------     -------     --------
</TABLE>

                                     F-12
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
       (i)  STATEMENTS OF CASH FLOWS, CONTINUED
            Cash paid during the years for interest and taxes is as follows:

<TABLE>
                                             1997         1996         1995
                                             ----         ----         ----
<S>                                       <C>           <C>           <C>
        Interest                          $ 12,511       238,181      36,676
        Taxes, net                         255,383       257,342           -
</TABLE>

       (j) CHANGE IN ACCOUNTING PRINCIPLE
           Effective September 28, 1997, the Company changed its accounting
       policy on restaurant preopening costs.  In prior periods, the Company
       initially capitalized and then amortized preopening costs over the
       initial 12-months of a restaurant's operation.  Under the new method,
       the Company expenses such restaurant preopening costs as incurred.
       Management believes the change is preferable to obtain a better matching
       of expenses with revenues.  The effect of adopting the accounting change
       on earnings (loss) before cumulative effect of accounting change, net
       earnings (loss), and net earnings (loss) per share for 1997 is to
       decrease such amounts $40,388, $169,429 and $.04, respectively.  The
       change is considered a cumulative effect-type accounting change and,
       accordingly, the cumulative effect as of January 1, 1997 has been
       reported in the accompanying consolidated 1997 financial statements.
       Financial statements for fiscal 1996 and prior periods have not been
       restated but net earnings and earnings per share computed on a pro forma
       basis have been disclosed in the accompanying consolidated financial
       statements for all periods presented as if the accounting change had
       been applied consistently during all periods affected.

       (k)  NET EARNINGS PER SHARE
            In 1997, the Financial Accounting Standards Board issued SFAS No. 
       128, EARNINGS PER SHARE (Statement 128) which replaces the prior 
       accounting standard regarding computation and presentation of earnings 
       per share. Statement 128 requires a dual presentation of basic earnings 
       per share (based on the weighted average number of common shares 
       outstanding) and diluted earnings per share which reflects the potential 
       dilution that could occur if contracts to issue securities (such as 
       stock options) were exercised.  The Company has adopted Statement 128 as 
       of December 28, 1997 and, accordingly, earnings per share data for all 
       periods presented has been computed in accordance with Statement 128.  
       See note 13.

                                     F-13
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 

   (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
       (l) USE OF ESTIMATES
           The preparation of financial statements in accordance with generally
       accepted accounting principles requires management of the Company to
       make estimates and assumptions that affect the reported amounts of
       assets and liabilities and disclosure of contingent liabilities at the
       date of the financial statements and the reported amounts of revenues
       and expenses during the reporting periods.  Actual results could differ
       from these estimates.

       (m) STOCK AWARDS
           The Company accounts for its stock options in accordance with the
       provisions of Accounting Principles Board (APB) Opinion No. 25,
       ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.  As such, compensation expense
       is recorded on the date of grant only if the current market price of the
       underlying stock exceeds the exercise price.  In addition, SFAS No. 123,
       ACCOUNTING FOR STOCK-BASED COMPENSATION, requires that pro forma net
       earnings and pro forma earnings per share disclosures be provided for
       employee stock option grants made in 1996 and subsequent years as if the
       fair-value-based cost measurement method defined in SFAS No. 123 had
       been applied.

       (n)  FISCAL PERIODS
            Prior to 1996, the Company's financial reporting was done on a
       calendar basis.  Effective January 1, 1996, the Company changed to a
       52/53-week fiscal year comprised of four thirteen-week periods.

       (o)  IMPAIRMENT OF LONG-LIVED ASSETS
            Long-lived assets and certain identifiable intangibles are reviewed
       for impairment whenever events or changes in circumstances indicate that
       the carrying amount of an asset may not be recoverable.  Recoverability
       of assets to be held and used (including associated goodwill) is
       measured by a comparison of the carrying amount of an asset to estimated
       future net cash flows (undiscounted and without interest charges)
       expected to be generated by the asset.  If such assets are considered to
       be impaired, the impairment to be recognized is measured by the amount
       by which the carrying amount of the assets exceed the fair value of the
       assets.  Assets to be disposed of are reported at the lower of the
       carrying amount or fair value less costs to sell.

       For purposes of determining impairment, the Company groups long-lived
       assets at a market level due to the bakery-satellite relationship which,
       in management's estimation, results in the market-level as the lowest
       level for which there are cash flows that are largely independent of the
       cash flows of other groups of assets.

                                     F-14
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 


(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED     
       (o)  IMPAIRMENT OF LONG-LIVED ASSETS, CONTINUED

            The impairment charge, which amounted to $2,342,766 for the 
       fifty-two weeks ended December 28, 1997, represents a reduction of the 
       carrying value of the impaired assets to estimated fair value.  Such 
       impairment charge relates to long-lived restaurant assets and 
       associated goodwill. The primary indicators of impairment are continued 
       operating losses or sufficient negative trends that management 
       determines impairment is probable.  Estimated fair values were 
       determined by using a combination of discounted estimated future cash 
       flows and valuation multiples recently used by the Company in actual 
       acquisitions.  Management judgment is inherent in the estimated fair 
       value determinations and, accordingly, actual results could vary from 
       such estimates.
       
       (p)  STORE CLOSURE COSTS
            Store closure costs are recognized when a decision is made to close 
       a restaurant within the next twelve months.  Store closure costs, which
       amounted to $1,430,814 for the fifty-two weeks ended December 28, 1997
       include the costs of writing down the carrying amount of a restaurant's
       assets to estimated fair value less costs of disposal aggregating
       $1,113,800, and the net present value of any remaining noncancelable
       lease payments after the expected closure date net of estimated sublease
       income considered by management to be probable aggregating $317,014.
       Included in other liabilities and accrued liabilities is $133,724 and
       $169,186, respectively, for expected future lease costs related to store
       closures.  Net revenues from restaurants approved for closure are not
       considered material.

       (q)  YEAR 2000
            The Company is currently taking actions to provide that its 
       computer systems are capable of processing for the Year 2000.  The gross 
       costs associated with this remediation effort are not expected to be 
       material and will be expensed as incurred.

(3)  FRANCHISE REVENUES
     Franchise revenues for the fifty-two weeks ended December 28, 1997 and
     December 29, 1996 and the year ended December 31, 1995 consist of the
     following:
<TABLE>
                                                1997       1996     1995
                                                ----       ----     ----
   <S>                                        <C>         <C>       <C>
   Initial franchise and development fees     $147,500    228,500   250,500
   Royalty revenue                             269,530    443,487   233,800
                                              --------    -------   -------
         Total                                $417,030    671,987   484,300
                                              --------    -------   -------
                                              --------    -------   -------
</TABLE>

                                     F-15
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 

(3) FRANCHISE REVENUES, CONTINUED
    The associated franchise receivables included within accounts receivable in
  the accompanying consolidated balance sheets at December 28, 1997 and
  December 29, 1996 are as follows:

<TABLE>

                                                   1997          1996
                                                   ----          ----
   <S>                                          <C>            <C>
   Initial and development fee receivables      $  26,000       41,000
   Royalty receivables                             54,266      116,528
   Less allowance for doubtful accounts           (20,000)     (28,200)
                                                ---------      -------
                                                $  60,266      129,328
                                                ---------      -------
                                                ---------      -------
</TABLE>

(4)  DEFERRED COSTS
     Deferred costs as of December 28, 1997 and December 29, 1996 include the
  following:

<TABLE>
                                                  1997      1996
                                                  ----      -----
   <S>                                          <C>        <C>
   Preopening costs                             $    -     209,823
   Deferred franchise costs                      4,993      29,446
                                                ------     -------
         Total deferred costs                   $4,993     239,269
                                                ------     -------
                                                ------     -------
</TABLE>

(5)  PROPERTY AND EQUIPMENT
     A summary of property and equipment and accumulated depreciation as of
   December 28, 1997 and December 29, 1996 is as follows:

<TABLE>
                                                         1997          1996
                                                         ----          ----
   <S>                                               <C>             <C>
   Land and buildings                                $ 1,841,773     1,045,724
   Restaurant and bakery equipment                     4,066,611     3,856,681
   Leasehold improvements                              5,536,480     3,469,730
   Delivery vehicles, office furniture and equipment     232,908       136,289
                                                     -----------     ---------
                                                      11,677,772     8,508,424
   Less accumulated depreciation                      (1,396,076)     (892,080)
                                                     -----------     ---------
   Net property and equipment                        $10,281,696     7,616,344
                                                     -----------     ---------
                                                     -----------     ---------
</TABLE>

                                     F-16
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 


(6) LEASES
    The Company leases several restaurant facilities under noncanelable
    operating leases.  These leases generally contain renewal options for
    periods ranging from 3 to 15 years and require the Company to pay executory
    costs such as maintenance and insurance.  Rent expense for operating leases
    aggregated $1,363,563, $631,021 and $296,950 for the fifty-two weeks ended
    December 28, 1997 and December 29, 1996 and the year ended December 31,
    1995, respectively.

    Future minimum lease payments under noncancelable operating leases with
    initial or remaining lease terms in excess of one year as of December 28,
    1997 are:

   <TABLE>

   <S>                                <C>
   1998                               $ 1,667,523
   1999                                 1,666,123
   2000                                 1,499,683
   2001                                 1,238,191
   2002                                 1,035,972
   Thereafter                           4,555,894
                                      -----------
     Total minimum lease payments     $11,663,386
                                      -----------
                                      -----------
</TABLE>

    The Company is party to certain operating leases with companies that are
    owned by certain stockholders of the Company.  Rent expense paid to these
    related companies pursuant to lease agreements aggregated $101,863, $60,177
    and $63,249 in 1997, 1996 and 1995, respectively.

    Deferred rents payable in the accompanying balance sheets represent
    accruals for escalating rental payments on operating leases.

    SALE-LEASEBACK TRANSACTIONS
    During October 1997, the Company entered into an agreement to sell and
    leaseback three restaurant facilities (land and buildings) to an entity
    owned by an officer of the Company and a significant stockholder, both of
    whom are members of the Board of Directors of the Company.  The proceeds
    from the sale-leaseback transactions amounted to approximately $1.2 million
    and the primary leaseback term is 15 years.  As a result of the sale-
    leaseback transactions, the Company incurred a loss of $379,752 which has
    been deferred for financial reporting purposes and is included within
    leasehold improvements and is being amortized over the term of the related
    leases.  The Company believes that the terms and conditions of both the
    real estate sale and the related leaseback are fair and reasonable and were
    on terms at least as favorable as would be available from non-affiliated
    parties.  The Company will utilize the proceeds to fund the Company's
    continued restaurant development.

                                     F-17
<PAGE>
                      NEW YORK BAGEL ENTERPRISES, INC.
                                       
                 Notes to Consolidated Financial Statements, Continued 


(7)  LONG-TERM DEBT
     Long-term debt at December 28, 1997 and December 29, 1996 consists of the
     following:

<TABLE>
                                                               1997          1996
                                                               ----          -----
     <S>                                                    <C>             <C>
     Prime rate (8.5% at December 28, 1997) notes
       payable to bank pursuant to credit facility
       described below                                      $2,462,108           -
     4% subordinated debenture payable in annual
       installments of $28,750 plus interest through
       December 1999.  The debenture is subordinate to
       all other liabilities of the Company                     57,500      86,250
                                                            ----------      ------
              Total long-term debt                           2,519,608      86,250

     Less current installments of long-term debt             2,490,858      28,750
                                                            ----------      ------

     Long-term debt, less current installments              $   28,750      57,500
                                                            ----------      ------
                                                            ----------      ------
</TABLE>

   In September 1997, the Company entered into a loan agreement for a
   revolving line of credit and term loan facilities with a bank.  The loan
   agreement provides for a maximum commitment of $10 million subject to
   availability under a borrowing base calculated based on the level of
   eligible equipment, inventory and accounts receivable.  The Company had
   $93,055 available under the loan agreement at December 28, 1997.  Each
   borrowing under the loan agreement is represented by a promissory note that
   provides specific terms.  Notes issued pursuant to the loan agreement are
   secured by substantially all of the Company's assets and mature through
   October 2000.  The loan agreement contains customary restrictive covenants
   including a restriction on the payment of dividends in excess of $1,000,000
   annually.

   The aggregate maturities of long-term debt for each of the years subsequent
   to December 28, 1997 are as follows: 1998 - $2,490,858 and 1999 - $28,750.

   The proceeds from the notes payable to bank (such notes payable are
   classified as a current liability at December 28, 1997) were primarily used
   for acquisition of long-lived assets such as property and equipment.  To
   the extent such notes are not otherwise repaid in the normal course of
   business prior to maturity on September 30, 1998, the Company anticipates
   that it will refinance the outstanding balance of such notes payable
   although the Company does not currently have a commitment from the lender
   to refinance such notes payable.

   The 4% subordinated debenture issued in 1995 included a conversion feature
   whereby the debenture holder had the right to convert all or a portion of
   the debenture principal into shares of the Company's common stock.  The
   conversion feature expired unexercised June 13, 1997.

                                     F-18
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(8) INCOME TAXES
    Income tax expense (benefit) for the fifty-two weeks ended December 28,
    1997 and December 29, 1996 and the year ended December 31, 1995 consists of
    the following:

<TABLE>
                               1997           1996        1995
                               ----           ----        ----
<S>                        <C>              <C>         <C>
    Current                $ (141,791)      186,306      9,805
    Deferred                   (2,626)       83,408     (3,116)
                           ----------       -------     -------

         Total             $ (144,417)      269,714      6,689
                           ----------       -------     -------
                           ----------       -------     -------
</TABLE>

    Certain entities included in the consolidated financial statements were S
    corporations during 1995 and part of 1996, and as a result did not pay
    corporate income taxes.  Concurrent with the IPO, the Company terminated
    its S corporation status and, consequently, incurred a one-time charge of
    $74,000 to deferred tax expense to properly record deferred tax assets and
    liabilities that existed as of the effective date of the IPO.

    Actual income tax expense (benefit) differs from the "expected" tax expense
    computed by applying the U.S. Federal corporate tax rate of 34% to earnings
    (loss) before income taxes for the fifty-two weeks ended December 28, 1997
    and December 29, 1996 and the year ended December 31, 1995 as follows:

<TABLE>
                                                            1997             1996           1995
                                                            ----             ----           ----
<S>                                                    <C>                <C>            <C>
    Computed expected tax expense (benefit)            $ (1,334,227)       339,993        212,767
    S corporation earnings allocated to stockholders              -       (167,578)      (195,515)
    S corporation termination deferred tax charge                 -         74,000              -
    State taxes, net of federal income tax benefit         (141,516)        19,503              -
    Nondeductible goodwill impairment and
     amortization                                           139,988          2,462              -
    Change in valuation allowance                         1,189,251              -         (9,736)
    Other                                                     2,087          1,334           (827)
                                                       ------------       --------       --------

                                                       $   (144,417)       269,714          6,689
                                                       ------------       --------       --------
                                                       ------------       --------       --------
</TABLE>
                                      F-19
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued

(8) INCOME TAXES, CONTINUED
    The tax effects of temporary differences that give rise to deferred tax
    assets and deferred tax liabilities at December 28, 1997 and  December 29,
    1996 are presented below:

<TABLE>
                                                                              1997           1996
                                                                              ----           ----
<S>                                                                      <C>                <C>
    Deferred tax assets:
      Accounts receivable, due to allowance for doubtful
       accounts                                                          $        -          10,716
      Accrued and other liabilities, due to accrual for financial
       reporting purposes                                                    159,472         30,252
      Property and equipment, due to provision for impairments
       and closures for financial reporting purposes, net of
       accelerated depreciation for tax reporting purposes                   976,460              -
      Net operating loss carryforward                                        198,624              -
      Other                                                                        -          8,337
                                                                         -----------        -------
         Total deferred tax assets                                         1,334,556         49,305
         Valuation allowance                                              (1,189,251)             -
                                                                         -----------        -------
         Net deferred tax assets                                             145,305         49,305
                                                                         -----------        -------

    Deferred tax liabilities:
      Deferred loss on sale-leaseback transactions
       recognized for tax reporting purposes                                 144,306              -
      Capitalized preopening costs expensed for tax
       reporting purposes                                                          -         79,209
      Property and equipment, due to accelerated depreciation
       for tax reporting purposes                                                  -         53,504
      Other                                                                      999              -
                                                                         -----------        -------
         Total deferred tax liabilities                                      145,305        132,713
                                                                         -----------        -------
 
         Net deferred tax liability                                      $         -         83,408
                                                                         -----------        -------
                                                                         -----------        -------
</TABLE>

    The net change in the total valuation allowance for the fifty-two weeks
    ended December 28, 1997 was an increase of $1,189,251.  In assessing the
    realizability of deferred tax assets, management considers whether it is
    more likely than not that some portion or all of the deferred tax assets
    will not be realized.  Based on the cumulative net loss over the past three
    fiscal years, management believes the valuation allowance is appropriate
    due to the uncertainty regarding the realization of the deferred tax
    assets.

                                    F-20
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(8)  INCOME TAXES, CONTINUED
     At December 28, 1997, the Company has net operating loss carryforwards for
     federal and state income tax purposes of $462,168 and $830,119,
     respectively, which are available to offset future taxable income through
     2012.

(9)  STOCKHOLDERS' EQUITY
     In 1996, as a result of the Company's termination of its S corporation
     status immediately prior to the effective date of the IPO, the Company
     declared a distribution to the then current stockholders in an amount
     commensurate with their federal and state income tax obligations arising
     from the Company's 1996 results of operations while an S corporation which
     are reported to the stockholders for inclusion in their individual income
     tax returns.  The distribution is included in distributions payable at
     December 29, 1996.

     The Company is authorized to issue 5,000,000 shares of preferred stock with
     no par value.  There were no shares issued or outstanding at December 28,
     1997 or December 29, 1996.
  
(10) FINANCIAL INSTRUMENTS FAIR VALUE INFORMATION
     The carrying value of the Company's long-term debt approximates its fair
     value based on current interest rates of similar instruments.  The carrying
     values of the Company's other financial instruments at December 28, 1997
     and December 29, 1996, including cash and cash equivalents, investment
     securities, accounts receivable, other current assets, and accounts payable
     approximate their fair values because of their short maturity.

(11) ACQUISITIONS
     Effective February 28, 1997, the Company purchased substantially all of the
     operating assets and business operations of Bagel Buds, Inc. for $415,000.
     The acquisition has been accounted for by the purchase method of accounting
     and, accordingly, the operations of Bagel Buds, Inc. have been included in
     the accompanying statements of operations subsequent to February 28, 1997.
     The initial purchase price has been allocated to the assets acquired based
     on their estimated fair values at date of acquisition.  Goodwill arising
     from the acquisition amounted to $248,240.

     Effective May 9, 1997, the Company purchased substantially all of the
     operating assets and business operations of M.Y. Bagel Shop, Inc. for
     $323,000.  The acquisition has been accounted for by the purchase method of
     accounting and, accordingly, the operations of M.Y. Bagel Shop, Inc. have
     been included in the accompanying statements of operations subsequent to
     May 9, 1997.  The initial purchase price has been allocated to the assets
     acquired based on their estimated fair values at date of acquisition.
     Goodwill arising from the acquisition amounted to $148,975.

                                     F-21
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued

(11) ACQUISITIONS, CONTINUED
     The aggregate pro forma effect of the aforementioned 1997 acquired
     operations on revenues, net earnings (loss) and earnings (loss) per share
     for the fifty-two weeks ended December 28, 1997 and December 29, 1996 is
     not material and, accordingly, no related pro forma information is
     provided.

     Effective December 6, 1996, the Company purchased substantially all of the
     operating assets and business operations and assumed certain liabilities of
     Lots A' Bagels, Inc. for an initial cash payment of $2,100,000.  In
     addition, certain contingent consideration was to be paid as additional
     purchase price based on Lots A' Bagels, Inc.'s earnings (as defined in the
     purchase agreement) for the period July 1, 1996 through March 30, 1997.  On
     July 17, 1997, the Company paid $515,000 as full payment of the contingent
     consideration, which was recorded as additional goodwill at that time.
     Total acquisition expenses amounted to $139,761.  The acquisition has been
     accounted for by the purchase method of accounting and, accordingly, the
     operations of Lots A' Bagels, Inc. have been included in the accompanying
     statements of operations subsequent to December 6, 1996.  The purchase
     price has been allocated to the assets acquired and liabilities assumed
     based on their estimated fair values at date of acquisition.  Goodwill as
     of December 28, 1997 and December 29, 1996 arising from the acquisition
     amounted to $852,116 and $279,124, respectively.

     Effective September 27, 1996, the Company purchased certain assets of Jeff
     Eateries Limited Partnership for $245,000.  The acquisition has been
     accounted for by the purchase method of accounting.  The purchase price has
     been allocated to the assets acquired based on their estimated fair values
     at date of acquisition.  Goodwill arising from the acquisition amounted to
     $94,182.
  
     Effective December 14, 1995, the Company purchased all the outstanding
     common stock of Nashville Bagel Co., Inc. for $565,000.  Acquisition
     expenses amounted to $23,338.  The acquisition has been accounted for by
     the purchase method of accounting and, accordingly, the operations of
     Nashville Bagel Co., Inc. have been included in the accompanying statements
     of operations subsequent to December 14, 1995.  The purchase price has been
     allocated to the assets acquired and liabilities assumed based on their
     estimated fair values at date of acquisition.  Goodwill arising from the
     acquisition amounted to $434,451.

     Effective December 31, 1995, the Company purchased certain assets of
     Central & Ridge Yogurt, Inc. by assuming liabilities amounting to $225,000.
     The acquisition has been accounted for by the purchase method of
     accounting.  The purchase price has been allocated to the net assets
     acquired based on their estimated fair values at date of acquisition.
     Goodwill arising from the acquisition amounted to $24,600.  A Company
     officer was also an officer and stockholder of Central & Ridge Yogurt, Inc.

                                     F-22
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(11) ACQUISITIONS, CONTINUED
     The following table summarizes the pro forma results of operations for the
     fifty-two weeks ended December 29, 1996 and the year ended December 31,
     1995 as if the acquisitions consummated in 1996 had been consummated at the
     beginning of 1996 and 1995, respectively, and the acquisitions consummated
     in 1995 had been consummated at the beginning of 1995.  In presenting the
     pro forma information, depreciation, amortization and interest expense have
     been adjusted to reflect the purchase accounting recorded in the
     acquisitions and income taxes have been recognized as if none of the
     entities included in the pro forma results had operated as an S
     corporation.  For purposes of determining pro forma results of operations,
     the acquisition cost of Lots A' Bagels, Inc. includes the contingent
     consideration paid in 1997.  The pro forma results do not necessarily
     reflect what would have occurred if the acquisitions had been made at the
     beginning of the respective periods or the results that may occur in the
     future.

<TABLE>
                                                       1996            1995
                                                       ----            ----
<S>                                                <C>              <C>
     Revenues                                      $ 15,314,832     12,103,662
     Net earnings                                  $    604,741        222,121
     Net earnings per share - basic and diluted    $        .17            .07
</TABLE>

(12) STOCK AWARDS
     In 1996, the Company adopted the 1996 Incentive Plan (the Plan) pursuant to
     which the Company may grant incentive stock options, nonqualified stock
     options or restricted stock to officers, directors, employees, consultants
     and advisors.  The Plan, as amended, authorizes grants of up to 500,000
     shares of authorized but unissued common stock.  In addition to the stock
     options granted under the Plan, the Company entered into nonqualified stock
     option agreements with four of its non-employee directors to purchase a
     total of 70,000 shares of authorized but unissued common stock.  Stock
     options are granted with an exercise price equal to the stock's fair market
     value at the date of grant except for options granted to employees and
     directors that are also greater than 10% stockholders of the Company in
     which case such options are granted with an exercise price equal to 110% of
     the stock's fair market value at the date of grant.  Stock options granted
     have terms of either ten years or five years.  The majority of options
     granted vest (i) 20% exercisable six months after date of grant and, (ii)
     20% exercisable on each of the first four anniversaries of the date of
     grant.  Certain options granted in 1997, however, were immediately vested
     as of the grant date.

                                      F-23
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(12) STOCK AWARDS, CONTINUED
     In October 1997, the Company modified the terms of 276,000 options that
     were originally granted in 1996 and 8,500 options that were originally
     granted in January 1997.  The modification consisted of reducing the
     original exercise price of such options which ranged from $6.13 to $9.90 to
     $5.50 for 207,000 options and $6.05 for 77,500 options.  Vesting periods
     were not modified and are calculated from the original grant date.  The
     exercise prices for the modified options were greater than the market price
     of the stock on the modification date.  The weighted average exercise price
     for the modified options is $5.65 and the weighted average fair value of
     the modified options is $1.13.  The modified options are reflected in the
     table of stock option activity below as 1997 granted options and 1997
     canceled options.  The incremental value as a result of the modified terms
     is included in the pro forma compensation cost disclosed below.

     At December 28, 1997, there were 144,500 additional shares available for
     grant under the Plan.  The per share weighted average fair value of stock
     options granted during 1997 and 1996 was $1.32 and $3.70 on the date of
     grant using the Black Scholes option-pricing model with the following
     weighted average assumptions for 1997 and 1996, respectively:  expected
     dividend yield of 0% for both years, expected volatility of 40.35% and
     38.5%, risk-free interest rate of 5.93% and 6.58%, and an expected life of
     5 years for both years.
  
     The Company applies APB Opinion No. 25 in accounting for its stock options
     and, accordingly, no compensation cost has been recognized for its stock
     options in the financial statements.  Had the Company determined
     compensation cost based on the fair value at the grant date for its stock
     options under SFAS No. 123, the Company's 1997 and 1996 net earnings (loss)
     and earnings (loss) per share (for 1996, on a pro forma basis) would have
     been the amounts indicated below.

<TABLE>
                                                                        1997         1996
                                                                        ----         ----
<S>                                 <C>                            <C>             <C>
   Net earnings (loss)              As reported                    $ (3,908,822)   610,475
                                    Pro forma for SFAS No. 123     $ (4,277,606)   496,251
                                                                 
   Earnings (loss) per share -      As reported                    $       (.84)       .17
    basic and diluted               Pro forma for SFAS No. 123     $       (.92)       .14
</TABLE>

                                     F-24
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(12) STOCK AWARDS, CONTINUED
     Stock option activity during 1997 and 1996 is as follows:

<TABLE>
                                             Number of    Weighted Average
                                              Shares       Exercise Price
                                              ------       --------------
<S>                                          <C>          <C>
     Balance at December 31, 1995                   -         $    -
       Granted                                331,000           8.77
       Exercised                                    -              -
       Forfeited                              (34,500)          9.00
                                             --------         ------
  
     Balance at December 29, 1996             296,500           8.74
       Granted                                441,000           5.14
       Exercised                                    -              -
       Forfeited                              (27,500)          8.23
       Canceled                              (284,500)          8.65
                                             --------         ------

     Balance at December 28, 1997             425,500         $ 5.10
                                             --------         ------
                                             --------         ------
</TABLE>

     At December 28, 1997 and December 29, 1996, the number of options
     exercisable was 206,900 and 47,300 and the weighted average exercise price
     of those options was $4.84 and $9.29, respectively.
  
     At December 28, 1997, the range of exercise prices and weighted average
     remaining contractual life of outstanding options was $3.69 - $6.05 and
     7.51 years, respectively.


                                      F-25
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(13) EARNINGS PER SHARE
     The following is a reconciliation of the net earnings (loss) and
     outstanding shares utilized in the computation of earnings (loss) per
     share.

<TABLE>
                                                           1997            1996           1995
                                                           ----            ----           ----
<S>                                                   <C>               <C>            <C>
     Earnings (loss) before cumulative effect of
      accounting change - basic                       $ (3,779,781)       730,266        619,097
     Pro forma adjustment to income tax expense                  -       (119,791)      (238,939)
                                                      ------------      ---------      ---------
          Pro forma net earnings (loss) - basic         (3,779,781)       610,475        380,158
     Debenture interest adjustment, net of income
      tax effect                                                 -          2,852              -
                                                      ------------      ---------      ---------

     Adjusted net earnings (loss) for diluted
      calculation                                     $ (3,779,781)       613,327        380,158
                                                      ------------      ---------      ---------
                                                      ------------      ---------      ---------
     Outstanding shares:
        Weighted average shares outstanding -       
         basic                                           4,667,500      3,565,464      3,018,538
        Effect of dilutive convertible debenture                 -         19,121              -
                                                      ------------      ---------      ---------

        As adjusted for diluted calculation              4,667,500      3,584,585      3,018,538
                                                      ------------      ---------      ---------
                                                      ------------      ---------      ---------
</TABLE>

     Options to purchase common stock were not included in the computation of
     diluted earnings (loss) per share because the options' exercise price was
     greater than the average market price of the common shares during such
     period so the effect would not be dilutive.  As of December 28, 1997, there
     are 425,500 options outstanding at a weighted average exercise price of
     $5.10 which may become dilutive in the future.
  
     The weighted average shares outstanding for 1996 and 1995 include pro forma
     shares of 145,292 and 218,538, respectively, based on the assumed number of
     shares whose proceeds would be sufficient (based upon the net initial
     public offering price) to replace the excess of distributions to
     stockholders over net earnings for the year ended December 31, 1995.

                                      F-26
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
     Financial results by quarter are as follows:

<TABLE>
                                                          First    Second    Third    Fourth
                                                         Quarter   Quarter  Quarter   Quarter
                                                         -------   -------  -------   -------
                                                     (Dollars in thousands except per share data)
<S>                                                      <C>       <C>      <C>       <C>
     1997:
       Total revenues                                    $ 4,474    4,819     4,815     4,880
       Gross profit (a)                                    2,925    3,208     3,161     3,087
       Provision for impairments and closures                  -        -     3,558       216
       Operating income (loss) (d)                           411      255    (3,928)     (735)
       Earnings (loss) before cumulative effect of                                   
        accounting change (c) (d)                            289      179    (2,596)   (1,652)
       Cumulative effect of accounting change (d)           (129)       -         -         -
       Net earnings (loss) (c) (d)                           160      179    (2,596)   (1,652)
       Net earnings (loss) per share - basic and                                     
        diluted (d)                                          .03      .04      (.56)     (.35)
                                                                                     
     1996:                                                                           
       Total revenues                                    $ 2,389    2,801     2,891     3,456
       Gross profit (a)                                    1,406    1,711     1,774     2,224
       Operating income                                      338      338       244       166
       Net earnings                                          260      252        59       159
       Pro forma net earnings (b)                            156      155       133       166
       Pro forma net earnings per share - basic                                      
        and diluted (b)                                      .05      .05       .04       .04
</TABLE>

     (a) Gross profit is sales from Company-owned restaurants less cost of 
         sales.

     (b) Pro forma net earnings and net earnings per share is based on 
         reported earnings before income taxes less pro forma income
         tax expense.

                                       F-27
<PAGE>

                       NEW YORK BAGEL ENTERPRISES, INC.
                                       
            Notes to Consolidated Financial Statements, Continued


(14) QUARTERLY FINANCIAL INFORMATION (UNAUDITED), CONTINUED
     (c) Includes effect of establishing a valuation allowance for deferred tax 
         assets of $1,189,251.  See note 8.

     (d) Amounts for the first and second quarter of 1997 have been restated 
         to reflect adoption of the accounting change for restaurant preopening 
         cost discussed in note 2(j).  The effect of the restatement was to 
         increase (decrease) the amounts originally reported in the Company's 
         quarterly reports for such quarters as follows:

<TABLE>
                                                              First    Second
                                                             Quarter   Quarter
                                                             -------   -------
<S>                                                          <C>       <C>
         Operating income (loss)                              $  49      (52)
         Earnings (loss) before cumulative effect of
          accounting change                                      30      (32)
         Cumulative effect of accounting change                (129)       -
         Net earnings (loss)                                    (99)     (32)
         Net earnings (loss) per share - basic and diluted     (.02)    (.01)
</TABLE>


                                    F-28
<PAGE>

                          NEW YORK BAGEL ENTERPRISES, INC.

                                  INDEX TO EXHIBITS


EXHIBIT NO.                    EXHIBIT DESCRIPTION
-----------                    -------------------

  2.1     Plan and Agreement of Merger dated December 27, 1995, by and between 
          New York Bagel Enterprises, Inc., a Kansas corporation, and New York
          Bagel Enterprises, Inc., an Oklahoma corporation (filed as Exhibit 2.1
          to the Registration Statement on Form S-1, File No. 333-05785), 
          incorporated herein by reference.

  2.2     Plan and Agreement of Merger dated December 27, 1995, by and among 
          New York Bagel Enterprises, Inc., VPR Incorporated, New York Bagel 
          Shop, Inc., Bagel Boss, Inc., Bagels of Norman, Inc., New York Bagel
          Shop & Delicatessen, Inc. (filed as Exhibit 2.2 to the Registration 
          Statement on Form S-1, File No. 333-05785), incorporated herein by 
          reference.

  2.3     Certificate of Ownership and Merger (Articles of Merger) Merging 
          Nashville Bagel Co. (a Tennessee corporation) into New York Bagel 
          Enterprises, Inc. (an Oklahoma corporation) (filed as Exhibit 2.3 to
          the Registration Statement on Form S-1, File No. 333-05785), 
          incorporated herein by reference.

  2.4     Asset Sale and Purchase Agreement dated December 27, 1995, by and 
          among New York Bagel Enterprises, Inc., Central & Ridge Yogurt, Inc. 
          and Paul R. Hoover (filed as Exhibit 2.4 to the Registration Statement
          on Form S-1, File No. 333-05785), incorporated herein by reference.

  2.5     Asset Purchase Agreement dated November 25, 1996 by and among LAB 
          Acquisition Corporation, New York Bagel Enterprises, Inc., Lots A' 
          Bagels, Inc., and Stephen K. Goldstone and Linda F. Goldstone (filed
          as Exhibit 2 to Form 8-K, Date of Event: December 6, 1996), 
          incorporated herein by reference.

  2.6     Post Closing Purchase Price Modification Agreement dated July 17, 1997
          by and Among Lots A' Bagels, Inc., New York Bagel Enterprises, Inc., 
          JBA Enterprises, Inc. and Stephen K. Goldstone and Linda F. Goldstone.

  2.7     Asset Sale and Purchase Agreement dated September 26, 1997, by and 
          Between New York Bagel Enterprises, Inc. and Il Vicino International,
          L.L.C.

  3.1     Restated and Amended Articles of Incorporation of the Registrant 
          (filed as Exhibit 3.3 to the Registration Statement on Form S-1, 
          File No. 333-05785), incorporated herein by reference.

  3.2     Restated and Amended Bylaws of the Registrant (filed as Exhibit 3.4 to
          the Registration Statement on Form S-1, File No. 333-05785), 
          incorporated herein by reference.

  4.1     Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the 
          Registration Statement on Form S-1, File No. 333-05785), incorporated
          herein by reference.

  4.2     Form of New York Bagel Enterprises, Inc. Grant of Incentive Stock 
          Option (filed as Exhibit 4.2 to the Registration Statement on Form 
          S-1, File No. 333-05785), incorporated herein by reference.


                                     E-1

<PAGE>

  4.3     Form of New York Bagel Enterprises, Inc. Grant of Nonqualified Stock 
          Option (filed as Exhibit 4.3 to the Registration Statement on 
          Form S-1, File No. 333-05785), incorporated herein by reference.

  4.4     Form of New York Bagel Enterprises, Inc. Non-qualified Option 
          Agreement (filed as Exhibit 10.1 to Form 10-Q for the quarter period
          ended September 28, 1997), incorporated herein by reference.

  4.5     New York Bagel Enterprises, Inc. 4% Convertible and Subordinated 
          Debenture due December 14, 1999 (filed as Exhibit 4.4 to the 
          Registration Statement on Form S-1, File No. 333-05785), incorporated
          herein by reference.

  4.6     New York Bagel Enterprises, Inc. Warrant to Purchase Common Stock 
          (filed as Exhibit 4 to Form 8-K, Date of Event: December 6, 1996), 
          incorporated herein by reference.

  4.7     Schedule of Employees Receiving Stock Option Grants.

  4.8     Schedule of Non-employees Receiving Stock Option Grants.

  9.1     Contract for Sale of Stock dated June 21, 1994, by and between Robert
          Geresi, Paul Sorrentino and Vince Vrana and David L. Murfin and Paul 
          R. Hoover (filed as Exhibit 9.1 to the Registration Statement on Form
          S-1, File No. 333-05785), incorporated herein by reference.

  9.2     Stockholders' Agreement dated January 1, 1996, by and among Robert J.
          Geresi, Vincent J. Vrana, Paul T. Sorrentino, Paul R. Hoover, David 
          L. Murfin, Nancy Murfin Moxley, Mark A. Moxley, Barbara Murfin Murphy,
          V. Richard Hoover, Philip Faubert, Rodney Joe Trizza, Brent Durham, 
          John R. Geresi, Chad E. Watkins, Markus K. Scholler and New York Bagel
          Enterprises, Inc., a Kansas corporation (filed as Exhibit 9.2 to the 
          Registration Statement on Form S-1, File No. 333-05785), incorporated
          herein by reference.

 10.1     New York Bagel Enterprises, Inc. 1996 Incentive Plan (filed as Exhibit
          10.1 to the Registration Statement on Form S-1, File No. 333-05785),
          incorporated herein by reference.

 10.2     First Amendment to New York Bagel Enterprises, Inc. 1996 Incentive 
          Plan dated May 21, 1997.

 10.3     Representative Uniform Franchise Offering Circular dated March 27, 
          1997, including form of Franchise Agreement and form of Development
          Agreement.

 10.4     Lease Agreement dated June 1, 1994, by and between Bagel Land, Inc. 
          and Bagels of Norman, Inc. (filed as Exhibit 10.11 to the 
          Registration Statement on Form S-1, File No. 333-05785), incorporated
          herein by reference.

 10.5     Lease Agreement dated December 1, 1993, by and between Cherry Street 
          Land and Bagel Boss, Inc. (filed as Exhibit 10.12 to the Registration
          Statement on Form S-1, File No. 333-05785), incorporated herein
          by reference.

 10.6     Sublease dated April 1, 1996, by and between Murfin Drilling Company
          and New York Bagel Enterprises, Inc. (filed as Exhibit 10.13 to the 
          Registration Statement on Form S-1, File No. 333-05785), incorporated
          herein by reference.

 10.7     Real Estate Purchase Agreement dated October 10, 1996 by and between 
          New York Bagel Enterprises, Inc. and Bagel Land, Inc. (filed as 
          Exhibit 10.6 to Form 10-K for the annual period ended December 29, 
          1996), incorporated herein by reference.


                                      E-2

<PAGE>

 10.8     Loan Agreement dated September 5, 1997, by and Among New York Bagel 
          Enterprises, Inc., Lots A' Bagels, Inc. and NationsBank, N.A. (filed
          as Exhibit 10.2 to Form 10-Q for the quarter period ended September 
          28, 1997), incorporated herein by reference.

 10.9     Form of Agreement of Purchase and Sale by and Between New York Bagel
          Enterprises, Inc. and Commercial Equity, Inc.

 10.9.1   Schedule of Agreements of Purchase and Sale by and Between New York 
          Bagel Enterprises, Inc. and Commercial Equity, Inc.

 10.10    Form of Lease Between Commercial Equity, Inc., as Lessor, and New York
          Bagel Enterprises, Inc., as Lessee (filed as Exhibit 10.4 to Form 10-Q
          for the quarter period ended September 28, 1997), incorporated herein
          by reference.

 10.10.1  Schedule of Leases by and Between New York Bagel Enterprises, Inc. 
          and Commercial Equity, Inc.

 10.11    Form of Promissory Note of New York Bagel Enterprises, Inc. and 
          Lots A' Bagels, Inc. payable to the order of NationsBank, N.A.

 10.11.1  Schedule of Promissory Notes of New York Bagel Enterprises, Inc. and
          Lots A' Bagels, Inc. payable to the order of NationsBank, N.A.

 10.12    Lease Between L.P.V. Properties, L.L.C. and New York Bagel 
          Enterprises, Inc. dated November 1, 1997.

 18       Letter of KPMG Peat Marwick LLP dated November 11, 1997 regarding 
          change in accounting principle concerning restaurant preopening costs
          (filed as Exhibit 18 to Form 10-Q for the quarter period ended
          September 28, 1997), incorporated herein by reference.

 21       Subsidiaries of the Company.
 27       Financial Data Schedule.


                                    E-3