SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                 Amendment No. 1
                                       on
                                   FORM 10-K/A

[X]     Annual  Report  Pursuant  to Section 13 or 15(d) of the  Securities  and
        Exchange Act of 1934 
        For the fiscal year ended December 31, 1995, or

[ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities  and
        Exchange Act of 1934 
        For the transition period from _________ to ___________
 

                         Commission file number 0-27182

                             The Italian Oven, Inc.
             (Exact name of registrant as specified in its charter)

           Pennsylvania                                25-1624305
    ----------------------------           ---------------------------------
   (State or other jurisdiction           (I.R.S. Employer Identification No.)
   of incorporation or organization)

      Eleven Lloyd Avenue, Latrobe, PA                     15650
      --------------------------------------              --------
     (Address of principal executive offices)            (Zip code)

Registrant's telephone number, including area code:  (412) 537-5380

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

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

           Class
----------------------------
Common stock, $.01 par value

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

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

State the aggregate  market value of the voting stock held by  nonaffiliates  of
the registrant at March 28, 1996: $21,905,401.25

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                              Outstanding at March 28, 1996
----------------------------                     ----------------------------- 
Common stock, $.01 par value                              4,327,991

Documents Incorporated by Reference: None

<PAGE>




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

         The  information  presented  in  this  Item  7 is as set  forth  in the
original  Form  10-K of the  Company  filed  with the  Securities  and  Exchange
Commission  on March 30,  1996,  except  for such  changes  as  required  by the
Securities and Exchange Committee,  principally relating to the disconsolidation
of the results of operations in connection  with the Company's 50% investment in
joint  ventures,  and,  accordingly,  this  information  speaks as of such date.
Subsequent  developments  in the  Company's  financial  condition  have,  in the
opinion of the Company's  independent  accountants,  created a substantial doubt
about the Company's ability to continue as a growing concern. See Note 19 to the
Consolidated Financial Statements.

Overview and Business Strategy

         The  Italian   Oven  owns,   operates  and   franchises   Italian-style
family-oriented  casual  dining  restaurants  in 16 states in the  Mid-Atlantic,
Midwest,  Southeast and Southwest Regions of the United States and in Australia.
The first  Company-owned  restaurant  opened in 1989,  and the first  franchised
restaurant  opened in 1991. As of March 28, 1996, there were 95 The Italian Oven
restaurants  in  operation,  consisting  of 16  Company-owned  and 78 franchised
restaurants.

         On November 27, 1995, the Company completed its initial public offering
(the "IPO") of 2,700,000  shares of its Common Stock,  of which  485,115  shares
were sold by an existing  shareholder.  The  Company  intends to utilize the net
proceeds of the IPO (after the payment of offering  expenses,  the  repayment of
certain  indebtedness,  the repurchase of certain stock held by one  shareholder
and  the  reserve  of  certain  funds  for  working  capital  purposes)  to open
additional Company-owned  restaurants.  Prior to the IPO, the Company's strategy
was to seek growth principally though the development of franchised restaurants.
The Company had  originally  intended  to open 28-32  restaurants  using the net
proceeds of the IPO and operating revenues from existing  restaurants;  however,
revenues  during  the  first  quarter  of  1996  were  lower  than  anticipated.
Consequently,  management  has  revised  its  business  strategy  to include the
opening of larger,  free  standing  restaurants.  Accordingly,  the  Company now
anticipates  that it will  open  or  acquire  20-28  restaurants  using  the net
proceeds of the IPO, available operating revenues and financing proceeds.

         In respect of the free standing  restaurants,  the Company entered into
an  agreement,  subject to certain  conditions,  to acquire six  Black-eyed  Pea
restaurants in the Kansas City metropolitan area, which are to be converted into
Company-owned  The Italian Oven  restaurants if this transaction is consummated.
Five of these restaurants are free standing. The larger restaurants are expected
to  cost  approximately   $800,000  per  restaurant  to  open,  as  compared  to
approximately  $500,000  previously  budgeted for smaller strip center locations
(excluding  pre-opening  expenditures  and  landlord  contributions,   if  any).
Management  estimates that the average investment for Company-owned  restaurants
opened or acquired in 1996 will be approximately $625,000 per restaurant.

         The  Company  capitalizes  restaurant   pre-opening   expenditures  for
Company-owned  restaurants  and  amortizes  such costs  over a  12-month  period
following the restaurant's opening.  Pre-opening  expenditures consist of direct
costs  related to hiring and  training  the initial  workforce  and 

<PAGE>

other direct costs  associated  with opening new  restaurants.  These costs have
averaged approximately $68,000 per restaurant opened during the past two years.

         The  Company has also  entered  into an  agreement,  subject to certain
conditions , to acquire four existing  franchised  restaurants  in  Pennsylvania
(three in the Pittsburgh metropolitan area and one in Erie) from the operator of
these  restaurants.  The Company has also entered into a  non-binding  letter of
intent to acquire another franchised  restaurant in the Pittsburgh  metropolitan
area along with a liquor license for neighboring Beaver County, Pennsylvania, in
which the Company  plans to develop one or more  additional  restaurants  if the
transaction is consummated.

         The  Company's  revenues are derived from (i) sales from  Company-owned
restaurants; (ii) royalties from franchised restaurants; and (iii) franchise and
development  fees.  Revenues  derived from  franchise and  development  fees are
recognized when the franchised  restaurant  commences operations or upon partial
or  complete  cancellation  of  the  development  agreement.  If  a  development
agreement is terminated, any remaining deferred revenue is recognized as income.

         Generally,  the Company  receives  development fees for each restaurant
subject  to  development  at the  time  of  the  execution  of  new  development
agreements  and,  upon receipt,  such fees are initially  classified as deferred
revenues. Revenues derived from initial franchise fees and area development fees
are not  recognized by the Company  until the  franchised  restaurant  commences
operations or the development agreement is terminated, in whole or in part. If a
development   agreement  is  terminated,   any  remaining  deferred  revenue  is
recognized as income by the Company. As a result, a comparison of the results of
operations for certain quarterly and annual periods may not be meaningful.

         Costs of restaurant sales include food, paper and beverage costs. Other
restaurant expenses consist primarily of costs of labor, maintenance, utilities,
direct advertising,  rent, real estate taxes and insurance.  Many of these costs
have  fluctuated in recent years and can be expected to fluctuate in the future,
and  certain  costs,   particularly   paper  costs,  have  increased.   However,
competitive  pressures  may prevent the Company  from raising its menu prices to
recover  increased  costs.  All costs  associated  with  selling  franchise  and
development rights to an exclusive area and opening  franchised  restaurants are
expensed as incurred and are included in general and administrative expenses.

         Revenues  generated by the restaurant  associated with The Italian Oven
University  and  Continuing  Education  Center,  which  are not  significant  in
relation  to total  revenues,  are not  included  in  restaurant  sales or total
revenue,  and are not used for the purpose of comparing results of Company-owned
restaurants  from period to period.  Such revenues are netted  against the costs
associated with such  operations and are recorded as general and  administrative
expenses.
<PAGE>


Results of Operations

         The following  table sets forth the percentage  relationship of certain
income statement data to total revenues, except as otherwise indicated.

                                                     Year Ended December 31,
                                                  ---------------------------- 
                                                                      
                                                   1993      1994        1995
                                                  ------    ------      ------

CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenue:
    Restaurant sales .......................       71.9%      74.4%      71.3%
    Franchise and development fees .........       10.9%       7.7%       9.6%
    Royalty fees ...........................       17.2%      17.9%      19.1%
                                                  -----      -----      -----

                                                  100.0%     100.0%     100.0%
Costs and Expenses:
    Cost of restaurant sales(1) ............       30.3%      27.1%      26.5%
    Other restaurant expenses:
        Restaurant labor expenses(1) .......       34.8%      37.2%      37.7%
        Occupancy and other costs(1) .......       24.9%      25.0%      24.4%
    General and administrative .............       52.1%      51.7%      48.6%
    Depreciation and amortization ..........        4.0%       5.3%       5.0%
Total operating expenses ...................      120.7%     123.3%     116.8%
Loss from operations .......................      (20.7%)    (23.3%)    (16.8%)
Net interest expense .......................       (2.7%)     (1.3%)     (1.2%)
    Net loss ...............................      (23.2%)    (25.5%)    (36.4%)

(1) As a percentage of restaurant sales.


         1995 Compared to 1994

         Revenues. Total revenue increased by $2,890,000 to $14,386,000 or 25.1%
for 1995  compared  to 1994,  primarily  due to an  increase  in the  number  of
Company-owned and franchised restaurants open. Restaurant sales at Company-owned
restaurants  increased  $1,709,000 to  $10,260,000 or 20.0% for 1995 compared to
1994.  This  increase  was largely  the result of the opening of two  additional
Company-owned  restaurants  during  1994  and 1995  and the  acquisition  of two
franchised  restaurants by the Company in the second quarter of 1994. Restaurant
sales for same Company-owned  restaurants increased by $117,000 to $7,810,000 or
15.2% for 1995 compared to 1994.

         Franchise and  development  fees increased by $499,000 to $1,381,000 or
56.6% for 1995 compared 1994. This increase was primarily due to the recognition
of deferred revenues as income due to the termination of development  agreements


<PAGE>

and prepaid  franchise fees totaling  $540,000  during 1995 compared to $240,000
during 1994, and to the opening of five more franchised  restaurants during 1995
than were opened during 1994.

         Royalties  increased  by  $683,000  to  $2,745,000  or  33.1%  for 1995
compared to 1994.  This increase was due to 81 franchised  restaurants  being in
operation at the end of 1995 compared to 61 franchised  restaurants in operation
at the end of 1994.

         Costs  and  expenses.   Cost  of  restaurant   sales  at  Company-owned
restaurants  increased by $407,000 to  $2,727,000  or 17.5% for 1995 compared to
1994, principally due to the opening of two additional Company-owned restaurants
during 1994 and 1995 and the  acquisition of two  franchised  restaurants by the
Company  in the  second  quarter  of 1994,  but  decreased  as a  percentage  of
restaurant  sales by 0.5% to 26.6% for the same  restaurants  open  during  both
periods, due to more favorable contract terms and volume discounts on food.

         Labor  expenses at  Company-owned  restaurants  increased from 35.4% to
36.0% as a percentage of restaurant sales for 1995 compared to 1994 for the same
restaurants  open  during  both  periods.  Occupancy  and  other  costs  at same
Company-owned restaurants decreased as a percentage of restaurant sales for same
restaurants  open during both periods  from 24.3% to 23.9% for 1995  compared to
1994.

         General  and   administrative   expenses  increased  by  $1,050,000  to
$6,989,000  or 17.7% for 1995  compared  to 1994 due to the  addition  of senior
management,  the expansion of corporate headquarters and the reserve for a store
closing and other  nonrecurring  items.  Excluding the reserve for store closing
and other nonrecurring items, general and administrative  expenses declined as a
percent of total revenue to 44.1% for 1995 from 51.7% in 1994.

         Depreciation  and  amortization   expenses  increased  by  $116,000  to
$720,000  or 19.2%  for 1995  compared  to 1994.  This  increase  was due to the
opening of two additional Company-owned restaurants during 1994 and 1995 and the
acquisition of two  franchised  restaurants by the Company in the second quarter
of 1994.

         Net interest expense increased by $31,000 to $176,000 for 1995 compared
to 1994.  This expense is expected to decrease  further in the short term as the
Company is using a portion  of the net  proceeds  of the IPO to prepay  existing
indebtedness,  but may increase in the future if the Company  borrows  under its
revolving line of credit.

         Net Operating Loss Carryforwards. At December 31, 1995, the Company had
available net operating  loss  carryforwards  for Federal income tax purposes of
approximately  $6.2 million.  These loss  carryforwards  expire at various dates
through  2010.  Ownership  changes  that  have  occurred,   including  those  in
connection  with  the IPO,  limit  the  utilization  of the net  operating  loss
carryforward in any year. Based upon a preliminary  estimate,  the net operating
loss that can be utilized in any year will not exceed  $980,000.  See Note 14 of
the Notes to the Consolidated Financial Statements of the Company.
<PAGE>

         1994 Compared to 1993

         Revenues. Total revenue increased by $2,790,000 to $11,496,000 or 32.0%
for 1994  compared  to 1993,  primarily  due to an  increase  in the  number  of
Company-owned  and franchised  restaurants.  Restaurant  sales at  Company-owned
restaurants  increased  $2,293,000  to  $8,551,000 or 36.6% for 1994 compared to
1993.  This  increase  was largely  the result of the opening of one  additional
Company-owned  restaurant and the  acquisition of two franchised  restaurants by
the Company during 1994.  Restaurant  sales for same  Company-owned  restaurants
increased by $241,000 to $7,692,000 or 3.2% for 1994 compared to 1993.

         Franchise and development fees decreased by $68,000 to $882,000 or 7.2%
for 1994 compared to 1993. This decrease was primarily due to the recognition as
income of deferred revenues due to the termination of development agreements and
prepaid  franchise fees totaling  $240,000 in 1994 compared to $253,000 in 1993,
and to the opening of 17 franchised  restaurants in 1994 compared to the opening
of 22 franchised restaurants in 1993.

         Royalties  increased  by  $565,000  to  $2,062,000  or  37.7%  for 1994
compared to 1993. This increase was due to there being 61 franchised restaurants
in  operation  at the end of  1994  compared  to 46  franchised  restaurants  in
operation  at the  end of 1993  and a 1.0%  increase  in  restaurant  sales  for
franchised restaurants open during both periods.

         Costs  and  expenses.   Cost  of  restaurant   sales  at  Company-owned
restaurants  increased by $425,000 to  $2,320,000  or 22.4% for 1994 compared to
1993 due to the  opening  of one  additional  Company-owned  restaurant  and two
franchised restaurants acquired by the Company, but decreased as a percentage of
restaurant  sales to 27.1% in 1994 from  30.0% in 1993 for the same  restaurants
open  during  both  periods  due to more  favorable  contract  terms and  volume
discounts  on food and paper  products.  Food and  beverage  costs  increased at
Company-owned  restaurants  from  $1,619,000 to $1,980,000  for 1994 compared to
1993.

         Labor  expenses at  Company-owned  restaurants  increased from 31.7% to
34.1% as a percentage of restaurant sales for 1994 compared to 1993 for the same
restaurants  open during both  periods,  principally  due to increased  worker's
compensation costs. Occupancy and other costs at same Company-owned  restaurants
open during both  periods  increased as a percentage  of  restaurant  sales from
24.1% to 24.3% for 1994 compared to 1993.

         General  and   administrative   expenses  increased  by  $1,405,000  to
$5,939,000  or 31.0% for 1994  compared  to 1993 due to the  addition  of senior
management and the expansion of corporate  headquarters  and  represented a 4.2%
increase as a percentage of total revenue for 1994 compared to 1993.

         Depreciation  and  amortization   expenses  increased  by  $263,000  to
$604,000  or 77.2%  for 1994  compared  to 1993.  This  increase  was due to the
opening  of  one   additional   Company-owned   restaurant  and  two  franchised
restaurants acquired by the Company.
<PAGE>

         Net  interest  expense  decreased  by $102,000 to $145,000 for 1994 and
declined as a  percentage  of total  revenue to 1.3% for 1994 from 2.8% for 1993
due  primarily to the  Company's  receipt of proceeds  from the sale of stock to
Armstrong.

Liquidity and Capital Resources

         The following  table presents a summary of the Company's cash flows for
the periods presented in thousands:

                                                    Year Ended December 31,
                                                ------------------------------ 
                                                   1993       1994       1995
                                                --------   --------   --------
Net cash used for operating activities ......   $ (1,034)  $   (217)  $ (1,061)
Net cash used for investing activities ......       (784)    (1,773)    (2,809)
Net cash provided by financing activities ...      1,438      2,229     14,946
                                                --------   --------   --------
Net (decrease) increase in cash .............   $   (380)  $    239   $ 11,076
                                                ========   ========   ========


         On November 27, 1995,  the Company  completed its IPO. The Company sold
2,700,000  shares of its  Common  Stock  (including  485,115  shares  sold by an
existing  shareholder  of the Company).  The Company  intends to utilize the net
proceeds of the IPO (after the payment of offering  expenses,  the  repayment of
certain  indebtedness,  the repurchase of certain stock held by one  shareholder
and  the  reserve  of  certain  funds  for  working  capital  purposes)  to open
additional Company-owned  restaurants.  Prior to the IPO, the Company's strategy
was to seek growth principally though the development of franchised restaurants.
The Company had  originally  intended  to open 28-32  restaurants  using the net
proceeds of the IPO and operating revenues from existing  restaurants;  however,
revenues  during  the  first  quarter  of  1996  were  lower  than  anticipated.
Consequently,  management  has  revised  its  business  strategy  to include the
opening of larger,  free  standing  restaurants.  Accordingly,  the  Company now
anticipates  that it will  open  or  acquire  20-28  restaurants  using  the net
proceeds of the IPO, available  operating revenues and financing  proceeds.  See
"Overview and Business Strategy" in this Item 7.

         The cash  investment for  the one new restaurant  opened by the Company
during 1995 was  $492,000,  with a cost for  leasehold  improvements  of $69 per
square foot and for equipment of $181,000.  The Company expects that restaurants
opening in 1996 will have an average cost of $600,000, with a cost for leasehold
improvements  of  $65  per  square  foot  and  for  equipment  of  $175,000  per
restaurant.

         In 1995,  the Company  entered into a credit  agreement  with PNC Bank,
National  Association ("Credit Agreement") for a line of credit in the principal
amount of the lesser of $2,500,000 or the borrowing  base. The borrowing base is
calculated  on the  basis of a  percentage  of  certain  current  assets  of the
Company, the aggregate of which is currently greater than $2,500,000. The Credit
Agreement provides that advances will bear interest at a rate the greater of the
prime rate or 1/2% in excess of the weighted  average  Federal  funds rate.  The
Company does not currently satisfy the financial  conditions necessary to enable
it to draw funds under the Credit  Agreement,  although it  anticipates  that it
<PAGE>

will do so  beginning  in the third  quarter.  In order to draw funds  under the
Credit  Agreement,  the Company must maintain net income plus income tax expense
and total  interest  expense  ranging  from  $100,000 per month in March 1996 to
$400,000 per month in September 1996. The Credit  Agreement  matures on November
15,  1996.  The lender has not agreed to an  extension  of the  maturity and the
Company has not identified an alternative source of financing.

         The statements,  and like statements elsewhere in this Report, that the
Company expects to open or acquire 20-28  restaurants  using the net proceeds of
the IPO, available operating revenues and financing proceeds,  and to be able to
draw funds under the Credit  Agreement are forward looking  statements.  Factors
which could  prevent the Company  from  realizing  its  objective  of opening or
acquiring 20-28 restaurants include (i) restaurant revenues and/or profits being
lower than  projected by management  as a result of changes in consumer  tastes,
adverse  weather  conditions  (as has been the case during the first  quarter of
1996), increased competition in the casual dining sector or unfavorable economic
conditions  generally,  (ii) there being fewer  franchised  store  openings than
projected by  management  due to the  inability of  developers  to obtain needed
financing or the decisions of developers to delay or terminate plans to open new
restaurants as a result of poor sales,  the failure to achieve  profitability or
other  factors (as has been the case with  certain  developers  during the first
quarter of 1996),  with the  attendant  loss to the  Company of  royalties  from
franchised  restaurant  sales  and of  the  ability  to  recognize  income  from
franchise  fees,  (iii)  the  Company  being  unable  to sell the  number of new
franchises  projected by  management,  with the attendant loss to the Company of
cash flow from franchise  fees payable prior to the opening of new  restaurants,
(iv)  restaurant  opening costs being higher than projected by management due to
increased  competition  for new  restaurant  sites or  higher  than  anticipated
construction  costs,  or  (v)  restaurant  operating  costs  being  higher  than
projected by  management  due to factors such as labor  shortages in  particular
markets or increases in the cost of food or paper products.

         In  projecting  that the  Company  will be able to open such  number of
restaurants,  management  is assuming  that the Company will be able to draw the
full  $2,500,000  potentially  available  under the Credit  Agreement or to have
available  to it an  alternative  source  of  financing.  The  Company  does not
currently  meet the  financial  conditions  necessary to enable it to draw funds
under the Credit  Agreement,  and no  assurance  can be given  that  alternative
sources of financing will be available to it. The Company could find alternative
sources of financing  difficult or  impossible to obtain if its  operations  are
unsatisfactory or if the credit markets tighten generally.



Seasonality

         Although the  Company's  limited  operating  history  makes  predicting
future trends difficult, The Italian Oven restaurants have generally experienced
slightly lower net sales in the fourth quarter.
<PAGE>

Inflation

     The  Company does not believe that  inflation  has  materially
affected earnings.  Substantial increases in costs, particularly labor, employee
benefits or food costs which the Company cannot pass along in increased  prices,
could have a significant impact on the Company.

Accounting Pronouncements

         In March 1995, the Financial  Accounting Standard Board ("FASB") issued
SFAS No. 121 -  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to be Disposed  Of".  SFAS No. 121 requires that the carrying
value of  long-lived  operating  assets,  when  determined  to be  impaired,  be
adjusted so as not to exceed the estimated  undiscounted  cash flows provided by
such asset.  SFAS No. 121 also addresses the  accounting  for long-lived  assets
that are expected to be disposed of in future periods. In October 1995, the FASB
issued SFAS No. 123-  "Accounting  for Stock-Based  Compensation".  SFAS No. 123
recommends,  but does  not  require,  that  companies  change  their  method  of
accounting  for   stock-based   compensation   plans  to  one  that   attributes
compensation  costs  equal  to the  fair  value  of a  stock-based  compensation
arrangement  over the periods  service is rendered that qualifies an employee to
receive  such  compensation.  Companies  not  electing to change their method of
accounting are required,  among other things, to provide additional  disclosures
which in effect restate a company's  results for  comparative  periods as if the
new method of accounting  had been  adopted.  The Company will be subject to the
provisions of SFAS No. 121 and SFAS No. 123 in 1996,  however,  the Company does
not believe  that the  adoption of either of the new  accounting  pronouncements
will have a  material  effect  on its  financial  condition  or  results  of its
operations.
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA


Index to Financial Statements


The Italian Oven, Inc.                                    Page



Report of Independent Public Accountants                    12


Consolidated Balance Sheets
   December 31, 1994 and 1995 ........................      13

Consolidated Statements of Operations
   for the years ended December 31, 1993,
   1994 and 1995 .....................................      16

Consolidated  Statements of Mandatory 
   Redeemable Equity and Shareholders' 
   Equity (Deficit) for the years ended 
   December 31, 1993, 1994 and 1995 ..................      18

Consolidated Statements of Cash Flows
   for the years ended December 31, 1993,
   1994 and 1995 .....................................      22

Notes to Consolidated Financial Statements ...........      24


<PAGE>












                             THE ITALIAN OVEN, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1994 AND 1995
                             TOGETHER WITH REPORT OF
                         INDEPENDENT PUBLIC ACCOUNTANTS


<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders,
The Italian Oven, Inc.:

We have  audited the  accompanying  consolidated  balance  sheets of The Italian
Oven,  Inc. (a  Pennsylvania  corporation) as of December 31, 1994 and 1995, and
the related consolidated  statements of operations,  mandatory redeemable equity
and shareholders' (deficit) equity and cash flows for each of the three years in
the period ended December 31, 1995. These consolidated  financial statements and
the  schedule  referred  to  below  are  the  responsibility  of  the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements and schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of The Italian Oven, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

As discussed further in Note 19, subsequent to February 6, 1996, the date of our
original report,  the Company has incurred a loss from operations during the six
months  ended June 30, 1996,  and utilized  funds  available  for  acquisitions,
building  Company-owned  stores and loans to its Chairman.  As of June 30, 1996,
based on unaudited  financial  statements,  the  Company's  current  liabilities
exceeded its current  assets by  $5,610,000.  These  factors,  among others,  as
described in Note 19, create a substantial  doubt about the Company's ability to
continue as a going  concern and an  uncertainty  as to the  recoverability  and
classification  of recorded asset amounts and the amounts and  classification of
liabilities.   The  accompanying   financial   statements  do  not  include  any
adjustments  relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements taken as a whole. The financial statement schedule for each
of the three years in the period ended December 31, 1995, listed in Item 14.(d),
is  presented  for  purposes  of  complying  with the  Securities  and  Exchange
Commission's rules and regulations under the Securities Exchange Act of 1934 and
is not  otherwise  a  required  part of the  basic  financial  statements.  This
schedule has been subjected to the auditing  procedures applied in our audits of
the  basic  financial  statements  and,  in our  opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Pittsburgh, Pennsylvania,
February 6, 1996


<PAGE>





                             THE ITALIAN OVEN, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1994 AND 1995

                                                       1994            1995
                                                   -----------     -----------
                                  ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                       $   349,620     $11,425,916
   Receivables, net of allowance 
     of $35,000 and $85,000, respectively              528,469         844,163
   Notes receivable from related parties                  --           442,249
   Inventories                                         165,800         286,427
   Prepaid expenses and other current assets            34,911          51,479
                                                   -----------     -----------

                  Total current assets               1,078,800      13,050,234

PROPERTY AND EQUIPMENT:
   Restaurant equipment                              1,774,348       2,010,179
   Building and leasehold improvements               1,979,704       2,357,273
   Office furniture and equipment                      398,830         492,896
   Construction-in-progress                               --         1,238,814
                                                   -----------     -----------

                                                     4,152,882       6,099,162

   Less- Accumulated depreciation                    1,208,783       1,723,444
                                                   -----------     -----------

                  Property and equipment, net        2,944,099       4,375,718

INTANGIBLE ASSETS:
   Preopening costs, net                                76,658         179,415
   Equity in/advances to joint venture                 304,729          10,958
   Liquor licenses, net                                 29,361          53,460
   Other long-term assets                               39,464          25,302
   Goodwill, net                                       260,506         197,731
                                                   -----------     -----------

                                                       710,718         466,866
                                                   -----------     -----------

TOTAL ASSETS                                       $ 4,733,617     $17,892,818
                                                   ===========     ===========

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

<PAGE>
                             THE ITALIAN OVEN, INC.
                     CONSOLIDATED BALANCE SHEETS (Continued)
                           DECEMBER 31, 1994 AND 1995


                                                       1994            1995
                                                   -----------     -----------
LIABILITIES, MANDATORY REDEEMABLE EQUITY 
AND SHAREHOLDERS'(DEFICIT) EQUITY
---------------------------------------- 

CURRENT LIABILITIES:
   Current portion of long-term debt                $   274,007   $   176,962
   Notes payable                                           --         423,032
   Accounts payable                                     633,856     1,586,940
   Deferred franchise and development fees
      and other deferred revenue                      1,112,077     1,264,577
   Reserve for store closing                               --         464,143
   Accrued payroll and other employee benefits          501,019       360,223
   Accrual for gift certificates outstanding            453,241       559,002
   Other accrued expenses                               202,942       450,741
                                                    -----------   -----------
          Total current liabilities                   3,177,142     5,285,620

LONG-TERM LIABILITIES:
   Deferred franchise and development fees revenue    2,421,957     1,715,125
   Long-term debt                                       392,717       180,437
   Subordinated debt                                    500,000          --
   Other long-term liabilities                          209,506       342,273
                                                    -----------   -----------
Total long-term liabilities                           3,524,180     2,237,835
                                                    -----------   -----------

Total liabilities                                     6,701,322     7,523,455

COMMITMENTS AND CONTINGENCIES

MANDATORY REDEEMABLE EQUITY:
Mandatory redeemable 6% preferred stock,
    par value $10 per share-                                        
      Authorized, 500,000 shares at
        December 31, 1994, and 96,771
        shares at December 31, 1995
      Issued and outstanding, 353,229 shares
        at December 31, 1994                          3,675,999          --

Common stock subject to rescission -
      50,000 shares at December 31, 1994                500,000          --
                                                    -----------   -----------
Total mandatory redeemable equity                     4,175,999          --

SHAREHOLDERS' (DEFICIT) EQUITY:
   Common stock, par value $.01 per share-
     Authorized, 20,000,000 shares
     Issued, 1,581,614 shares at 
     December 31, 1994, and 4,350,912 shares 
     at December 31, 1995                                15,816        43,509
   Additional paid-in capital                         2,342,430    22,053,222
   Warrants outstanding                                    --       1,975,000
   Accumulated deficit                               (8,001,950)  (13,471,000)
                                                    -----------   -----------
                                                     (5,643,704)   10,600,731

   Less - Common stock subject to rescission           (500,000)         --

   Less - Cost of common stock in treasury-
     No shares at December 31, 1994, and
     22,921 shares at December 31, 1995                   --        (231,368)
                                                    -----------   -----------
          Total shareholders' (deficit) equity       (6,143,704)   10,369,363
                                                    -----------   -----------

TOTAL LIABILITIES, MANDATORY REDEEMABLE EQUITY
AND SHAREHOLDERS' (DEFICIT)EQUITY                   $ 4,733,617  $ 17,892,818
                                                    ===========   ===========
                                                                             
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>
                             THE ITALIAN OVEN, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
                                                      1993            1994             1995
                                                  ------------    ------------     ------------
<S>                                               <C>             <C>              <C>     
REVENUE:    
   Restaurant sales                               $  6,258,508    $  8,551,277     $ 10,260,296
   Franchise and development fees                      949,584         881,965        1,380,757
   Royalty fees                                      1,497,469       2,062,353        2,744,572
                                                  ------------    ------------     ------------
          Total revenue                              8,705,561      11,495,595       14,385,625

COSTS AND EXPENSES:
   Costs of restaurant sales                         1,895,510       2,320,327        2,726,963
   Other restaurant expenses -
     Restaurant labor expenses                       2,179,018       3,181,629        3,865,014
     Occupancy and other costs                       1,555,806       2,133,142        2,499,678
                                                  ------------    ------------     ------------
                                                     3,734,824       5,314,771        6,364,692
General and administrative -
   Administrative labor expenses                     2,238,352       3,014,879        3,292,971
   Other general and administrative                  2,135,677       2,619,364        2,818,848
   Professional fees to a related party                160,375         304,837          236,301
   Provision for store closing and other                                           
   nonrecurring items                                     --              --            640,548
                                                  ------------    ------------     ------------
                                                     4,534,404       5,939,080        6,988,668
Depreciation and amortization                          340,906         604,009          719,741
                                                  ------------    ------------     ------------
Total costs and expenses                            10,505,644      14,178,187       16,800,064
                                                  ------------    ------------     ------------

Loss from operations                                (1,800,083)     (2,682,592)      (2,414,439)

OTHER INCOME (EXPENSE):
   Equity in loss of joint venture                    (130,769)       (135,995)        (454,866)
   Interest income                                       6,266          29,697           76,135
   Interest expense                                   (253,066)       (174,643)        (252,058)
   Inducement to convert preferred stock
       to common stock                                    --              --         (2,246,664)
   Other income (expense), net                         162,990          44,076           51,324
                                                  ------------    ------------     ------------
Total other income (expense)                          (214,579)       (236,865)      (2,826,129)
                                                  ------------    ------------     ------------

Loss before taxes                                   (2,014,662)     (2,919,457)      (5,240,568)
PROVISION FOR INCOME TAXES                              (1,410)        (10,727)          (1,191)
                                                  ------------    ------------     ------------

Net loss                                            (2,016,072)     (2,930,184)      (5,241,759)

UNDECLARED DIVIDENDS ON PREFERRED STOCK                 (7,984)       (161,937)        (201,079)
ACCRETION OF DISCOUNT ON PREFERRED STOCK                (1,520)         (4,558)         (26,212)
                                                  ------------    ------------     ------------
NET LOSS APPLICABLE TO COMMON STOCK               $ (2,025,576)   $ (3,096,679)    $ (5,469,050)
                                                  ============    ============     ============

PRO FORMA NET LOSS PER COMMON SHARE                               $      (1.42)    $      (2.24)
                                                                  ============     ============
SHARES USED IN COMPUTING PRO FORMA
PER SHARE AMOUNTS                                                    2,065,923        2,336,048
                                                                  ============     ============

</TABLE>                                                              
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>   
                             THE ITALIAN OVEN, INC.
             CONSOLIDATED STATEMENTS OF MANDATORY REDEEMABLE EQUITY
                       AND SHAREHOLDERS' (DEFICIT) EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
                                                                              Mandatory Redeemable Equity
                                                        ---------------------------------------------------------------------------
                                                                                                                             Total
                                                     Shares      Amount     Shares     Amount      Stock     Common Stock  Mandatory
                                                                                                Subscription  Subject to  Redeemable
                                                                                                 Receivable   Rescission     Equity
                                                    --------  ----------  ---------  ----------  ----------  ----------  ----------

<S>                                                 <C>       <C>          <C>        <C>        <C>           <C>       <C>     
BALANCE, December 31, 1992                              --      $   --     $   --          --      $   --      $   --      $   --  
Common stock issued as compensation                     --          --         --          --          --          --          --
Preferred stock issued                                53,229     500,000       --          --          --          --       500,000
Preferred stock subscription                            --          --      300,000   3,000,000  (3,000,000)       --          --
Accretion of discount on preferred stock                --         1,520       --          --          --          --         1,520
Subordinated debt converted to common stock             --          --         --          --          --          --          --
Investment by co-venturer in 
  The Italian Oven of Charlotte                         --          --         --          --          --          --          --
Net loss                                                --          --         --          --          --          --          --
Cumulative dividends on preferred stock                 --         7,984       --          --          --          --         7,984
                                                    --------  ----------  ---------  ----------  ----------  ----------  ----------

BALANCE, December 31, 1993                            53,229     509,504    300,000   3,000,000  (3,000,000)       --       509,504
Common stock issued as compensation                     --          --         --          --          --          --          --
Preferred stock subscription                         300,000   3,000,000   (300,000) (3,000,000)  3,000,000        --     3,000,000
Accretion of discount on preferred stock                --         4,558       --          --          --          --         4,558
Subordinated debt converted to 
  common stock subject to rescission                    --          --         --          --          --       500,000     500,000
Common stock issued in acquisition 
  of co-venturer's interest                             --          --         --          --          --          --          --
Net loss                                                --          --         --          --          --          --          --
Cumulative dividends on preferred stock                 --       161,937       --          --          --          --       161,937
                                                    --------  ----------  ---------  ----------  ----------  ----------  ----------
                                                                                                                             
BALANCE, December 31, 1994                           353,229   3,675,999       --          --          --       500,000   4,175,999
Common stock issued                                     --          --         --          --          --          --          --
Conversion of preferred stock to common stock       (403,229) (4,403,290)      --          --          --          --    (4,403,290)
Reacquisition of outstanding shares                     --          --         --          --          --          --          --
Accretion of discount on preferred stock                --        26,212       --          --          --          --        26,212
Conversion of common stock subject to rescission        --          --         --          --          --      (500,000)   (500,000)
Subordinated debt converted to preferred stock        50,000     500,000       --          --          --          --       500,000
Common stock issued in initial public offering          --          --         --          --          --          --          --
Warrants issued                                         --          --         --          --          --          --          --
Net loss                                                --          --         --          --          --          --          --
Cumulative dividends on preferred stock                 --       201,079       --          --          --          --       201,079
                                                    --------  ----------  ---------  ----------  ----------  ----------  ----------

BALANCE, December 31, 1995                              --      $   --     $   --      $   --      $   --      $   --      $   --
                                                    ========  ==========  =========  ==========  ==========  ==========  ==========
</TABLE>
                                                                                
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
<PAGE>
                             THE ITALIAN OVEN, INC.
             CONSOLIDATED STATEMENTS OF MANDATORY REDEEMABLE EQUITY
                 AND SHAREHOLDERS' (DEFICIT) EQUITY (Continued)
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>

                                                                     Shareholders' (Deficit) Equity
                              ------------------------------------------------------------------------------------------------------
                                 Shares   Amount    Additional  Warrants   Accumulated    Common                          Total
                                                      Paid-in  Outstanding   Deficit       Stock      Treasury Stock   Shareholders'
                                                      Capital                           Subject to  ----------------    (Deficit)
                                                                                        Rescission  Shares    Amount      Equity
                               -----------------------------------------------------------------------------------------------------

<S>                            <C>       <C>      <C>            <C>      <C>            <C>        <C>      <C>         <C>        
BALANCE, December 31, 1992     1,434,600 $ 14,346 $   835,845    $   --   $ (2,879,695)  $    --       --    $   --      (2,029,504)
Common stock issued 
  as compensation                  5,100       51      25,449        --           --          --       --        --          25,500
Preferred stock issued              --       --          --          --           --          --       --        --            --
Preferred stock subscription        --       --          --          --           --          --       --        --            --
Accretion of discount
  on preferred stock                --       --          --          --         (1,520)       --       --        --          (1,520)
Subordinated debt converted 
  to common stock                 63,427      634     499,366        --           --          --       --        --         500,000
Investment by co-venturer   
  in The Italian Oven
  of Charlotte                      --       --        55,250        --           --          --       --        --          55,250
Net loss                            --       --          --          --     (2,016,072)       --       --        --      (2,016,072)
Cumulative dividends
 on preferred stock                 --       --          --          --         (7,984)       --       --        --          (7,984)
                               -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993     1,503,127   15,031   1,415,910        --     (4,905,271)       --       --        --      (3,474,330)
Common stock issued
  as compensation                 10,000      100     149,900        --           --          --       --        --         150,000
Preferred stock subscription        --       --          --          --           --          --       --        --            --
Accretion of discount 
  on preferred stock                --       --          --          --         (4,558)       --       --        --          (4,558)
Subordinated debt 
  converted to common stock
  subject to rescission           50,000      500     499,500        --           --      (500,000)    --        --            --
Common stock issued in
  acquisition of 
  co-venturer's interest in 
  The Italian Oven of Raceway     18,487      185     277,120        --           --          --       --        --         277,305
Net loss                            --       --          --          --     (2,930,184)       --       --        --      (2,930,184)
Cumulative dividends
  on preferred stock                --       --          --          --       (161,937)       --       --        --        (161,937)
                               -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994     1,581,614   15,816   2,342,430        --     (8,001,950)   (500,000)    --        --      (6,143,704)
Common stock issued                4,002       40      79,960        --           --          --       --        --          80,000
Conversion of preferred 
  stock  to common stock         550,411    5,504   4,397,786        --           --          --       --        --       4,403,290
Reacquisition of 
  outstanding shares                --       --          --          --           --          --    (22,921) (231,368)     (231,368)
Accretion of discount
   on preferred stock               --       --          --          --        (26,212)       --       --        --         (26,212)
Conversion of common stock 
  subject to rescission             --       --          --          --           --       500,000     --        --         500,000
Subordinated debt converted 
  to preferred stock                --       --          --          --           --          --       --        --            --
Common stock issued in
  initial public offering      2,214,885   22,149  15,233,046        --           --          --       --        --      15,255,195
Warrants issued                     --       --          --     1,975,000         --          --       --        --       1,975,000
Net loss                            --       --          --          --     (5,241,759)       --       --        --      (5,241,759)
Cumulative dividends 
  on preferred stock                --       --          --          --       (201,079)       --       --        --        (201,079)
                               -----------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995     4,350,912 $ 43,509 $22,053,222  $1,975,000 $(13,471,000)  $    --    (22,921) $(231,368) $10,369,363
                               =====================================================================================================
</TABLE>

Accompanying  notes  are  an  integral  part  of  these  consolidated  financial
statements.
<PAGE>
                             THE ITALIAN OVEN, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
                                                         1993             1994           1995
                                                     ------------    ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                  <C>             <C>             <C>          
   Net loss                                          $ (2,016,072)   $ (2,930,184)   $ (5,241,759)

   Adjustments required to reconcile net loss to
    net cash used for operating activities -
     Depreciation and amortization                        340,906         604,009         719,741
     Bad debt expense                                       7,000          25,000          50,000
     Equity in loss of joint venture                      130,769         135,995         454,866
     Common stock issued as compensation                   25,500         150,000            --
     Loss on sale of property and equipment                13,497            --              --
     Provision for store closing                             --              --           464,146
     Inducement to convert preferred stock to  
          common stock                                       --              --         2,246,664
                                                     ------------    ------------    ------------

                                                          517,672         915,004       3,935,417
Cash provided by (used for) working capital items-
   Receivables                                           (141,145)        251,564        (365,694)
   Inventories                                            (40,343)          7,309        (120,627)
   Prepaid expenses and other current assets               45,584           1,244         (16,568)
   Other long-term assets                                     606         (14,648)          4,422
   Accounts payable                                      (361,461)        (20,313)        953,084
   Deferred franchise and development fees and
     other deferred revenue                               533,166       1,095,035        (554,332)
   Accrued payroll and other employee benefits             71,934         277,295        (140,796)
   Change in gift certificates outstanding                197,294         141,054         105,761
   Other accrued expenses                                 128,457         (14,455)        247,799
   Other long-term liabilities                             30,303          74,442         132,767
                                                     ------------    ------------    ------------

Cash provided by working capital items                    464,395       1,798,527         245,816
                                                     ------------    ------------    ------------

Net cash used for operating activities                 (1,034,005)       (216,653)     (1,060,526)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net acquisitions of property, equipment, 
     liquor licenses and license agreement               (517,500)     (1,285,543)     (1,991,296)
   Preopening costs                                      (104,014)       (189,040)       (214,408)
   Advances to joint venture                             (162,431)       (249,978)       (161,095)
   Acquisition of joint venture                              --          (139,435)           --
   Investment by co-venturer                                 --            90,655            --
   Net increase in notes receivable                         
     from related parties                                    --              --          (442,249)
                                                     ------------    ------------    ------------

Net cash used for investing activities                   (783,945)     (1,773,341)     (2,809,048)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from initial public offering                 --              --        15,255,195
   Collection of subscription receivable                     --         3,000,000            --
   Issuance of redeemable preferred stock                 500,000            --              --
   Issuance of common stock                                  --              --            80,000
   Subordinated debt borrowings                           500,000            --              --
   Notes payable borrowings                               809,500         819,754       1,661,452
   Notes payable payments                                (579,138)     (1,330,000)     (1,741,452)
   Note payable borrowings from related parties           215,262       1,258,246         241,650
   Note payable payments to related parties               (11,904)     (1,409,055)       (241,650)
   Long-term debt borrowings                              311,891         215,000            --
   Long-term debt payments                               (307,530)       (324,638)       (309,325)
                                                     ------------    ------------    ------------

Net cash provided by financing activities               1,438,081       2,229,307      14,945,870
                                                     ------------    ------------    ------------
<PAGE>

Net (decrease) increase in cash and cash                 (379,869)        239,313      11,076,296
equivalents

CASH AND CASH EQUIVALENTS, beginning of year              490,176         110,307         349,620
                                                     ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, end of year               $    110,307    $    349,620    $ 11,425,916
                                                     ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
     Interest paid                                   $    239,268    $    137,007    $    310,866
                                                     ============    ============    ============

     Income taxes paid                               $      1,410    $     10,727    $      1,191
                                                     ============    ============    ============

     Noncash financing activities-
       Purchase of treasury stock 
          with  notes payable                        $       --      $       --      $    231,368
                                                     ============    ============    ============

</TABLE>
                                                                              
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>


                             THE ITALIAN OVEN, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION:

Nature of Business

The  Italian   Oven,   Inc.  (the  Company)   owns,   operates  and   franchises
Italian-style,  family-oriented  casual  dining  restaurants  in 17  states  (at
year-end) in the Mid-Atlantic,  Midwest,  Southeast and Southwest Regions of the
United States and in Australia.

                                                       1994        1995
                                                      ------      ------

    Number of unopened restaurants 
      covered by executed development 
      or franchise agreements                              336          361
                                                    ==========  =========== 

    Number of restaurants open -
    Franchised                                              61           81
    Company owned                                           11           11
    Joint ventures                                           2            2
                                                    ----------  ----------- 

    Total                                                   74           94
                                                    ==========  =========== 

During 1994, the Company exercised its option to purchase the rights,  title and
interest of the co-venturer in The Italian Oven of Dublin for cash consideration
of $139,425.

In August 1994, the Company  purchased all of the rights,  title and interest of
the  co-venturer in The Italian Oven of Raceway in exchange for 18,487 shares of
stock valued at $277,305.

These transactions resulted in consideration paid in excess of the fair value of
assets  acquired  of  $188,805.  Such  excess is  classified  as goodwill in the
accompanying consolidated balance sheets.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The consolidated  financial statements are prepared in conformity with generally
accepted accounting principles.

Principles of Consolidation

The consolidated  financial statements include the accounts of The Italian Oven,
Inc. The Company  operates on a 52-53 week fiscal year ending the last Sunday in
December.  This report  reflects  the  Company's  year-end as of December 31 for
consistency  of reference.  The Company's 1993 fiscal year ended on December 26,
1993,  its 1994 fiscal year ended on December 25, 1994, and its 1995 fiscal year
ended on December 31, 1995. These fiscal periods were comprised of 52, 52 and 53
weeks, respectively.

Investments in other than wholly-owned and majority owned  subsidiaries  include
one 50% owned subsidiary in 1995 and two 50% owned  subsidiaries in 1994, all of
which are carried at equity.
<PAGE>


Franchising Operations - Domestic

The Company grants franchising rights under a development  agreement to open and
operate a specified  number of restaurants in an exclusive  geographic  area. An
initial  development fee of $10,000 for each planned  restaurant site within the
geographic  area is  payable  in full  upon  execution  of the  agreement.  Each
franchised  restaurant opened under a development  agreement requires an initial
franchise fee of $29,500.

Franchised  restaurants  opened  which are not part of a  development  agreement
require an initial franchise fee of $39,500.

The  Company  is  obligated,  in  accordance  with the  terms  of the  franchise
agreement,  to provide  the  following  supervision,  assistance  and  services:
prototype store design,  training and preopening  assistance,  site location, an
operations manual, continuing assistance and initial advertising,  promotion and
materials.

A monthly royalty of 4% and a National  Advertising Fund contribution of 1% (see
Note 4) are payable based upon franchise restaurant sales.

Franchising Operations - International

The Company grants franchising rights under a development  agreement to open and
operate a specified  number of  restaurants  in an  exclusive  geographic  area.
Franchise and development fees totaling $39,500 are required for each franchised
restaurant opened.

The  Company  is  obligated  in  accordance  with  the  terms  of the  franchise
agreement,  to provide  the  following  supervision,  assistance  and  services:
prototype store design, initial training and preopening assistance, site review,
an operations manual and continuing assistance.

A  monthly  royalty  of 2% is  payable  to  the  Company  based  upon  franchise
restaurant sales. No contribution to the National Advertising Fund is required.

Franchise and Development Costs and Revenue Recognition

All costs associated with selling an exclusive area and a franchise are expensed
as incurred.  Revenue derived from initial  franchise fees and area  development
fees is recognized when the franchise store commences operations or upon partial
or  complete  cancellation  of the  agreement.  If a  development  agreement  is
terminated,  any remaining  deferred revenue is recognized as income.  Royalties
are  recognized  in the period when  related  franchisee  revenue is  generated.
Revenue from  Company-operated  restaurants  is  recognized in the period of the
related restaurant sales.

Cash Equivalents

The Company  considers  all highly liquid  investments  with a maturity of three
months or less when purchased to be cash  equivalents.  The majority of cash and
cash equivalents is on deposit at one bank.

Inventories

Inventories,  which consist of food and  beverages,  retail gift items and paper
supplies,  are  stated  at the lower of cost  (first-in,  first-out  method)  or
market.
<PAGE>


Property, Equipment and Leasehold Improvements

Purchased  property,  equipment and leasehold  improvements are recorded at cost
and include expenditures for additions and major improvements.  Leased equipment
is stated at the present value of the minimum lease payments required during the
lease period, less accumulated  depreciation.  Maintenance and repairs which are
not considered to extend the useful lives of assets are charged to operations as
incurred.

Depreciation  is computed  using  accelerated  and  straight-line  methods  over
estimated  useful  lives of five to 31.5 years for  leasehold  improvements  and
three to seven years for furniture  and office and  restaurant  equipment.  Upon
disposition,  the cost and related accumulated depreciation are removed from the
accounts and the  resulting  gain or loss is reflected in income  (loss) for the
period.

Amortization

Liquor licenses and goodwill  arising from the acquisition of joint ventures are
being amortized on a straight-line basis over five years.

Preopening  costs,  which consist  primarily of salaries,  rent and other direct
expenses  relating  to the setup,  training  and general  management  activities
incurred  prior to the opening of new Company owned  stores,  are amortized on a
straight-line  basis  over one  year,  beginning  when the new  store  commences
operations.

Income Taxes

Income  taxes  are  provided  on the  basis  of  items  included  in the  income
statements  and thus  include  the  effects  of  temporary  differences  between
reported and taxable earnings.

The Company follows  Statement of Financial  Accounting  Standards No. 109 (SFAS
109),  "Accounting  for Income Taxes." SFAS 109 requires the use of an asset and
liability  method of accounting for current and expected future tax consequences
of events that have been  recognized in the financial  statements or tax returns
(see Note 14).




<PAGE>


Pro Forma Net Loss Per Share

Pro forma net loss per share is computed by  dividing  net loss by the  weighted
average number of common shares  outstanding during the respective periods after
giving  retroactive  adjustment  for  the  conversion  of all  of the  Company's
preferred stock  (including that acquired  through the exercise of the preferred
stock  warrant),  accretion  and  cumulative  unpaid  dividends to common stock.
Historical  earnings per share are not deemed  meaningful due to the significant
change in the Company's  capital structure which occurred in connection with the
initial public  offering (see Note 17).  Pursuant to the Securities and Exchange
Commission Staff Accounting  Bulletin No. 83 (Bulletin No. 83), common stock and
common stock  equivalent  shares which were issued or became issuable during the
12 months  immediately  preceding the initial public offering have been included
in the calculation as if they were  outstanding for all periods  presented using
the treasury stock method and the initial  public  offering price per share (see
Note 17). The weighted average computation does not include the effect of common
stock  equivalents  issued  more  than one  year  prior  to the  initial  public
offering, as these are antidilutive during periods of losses and are not subject
to inclusion per Bulletin No. 83.

Use of Estimates in the Preparation of Financial Statements

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

Prior Year Presentation

Certain prior year amounts have been reclassified  where necessary to conform to
the current year presentation.

3.       INTANGIBLE ASSETS:

Intangible assets and related accumulated amortization are as follows:

                                                  1994
                           --------------------------------------------------- 
                                               Accumulated
                                Cost          Amortization         Net Balance
                           ---------------- ------------------ --------------- 

   Goodwill                  $  319,504       $   58,998         $  260,506
   Preopening costs             189,040          112,382             76,658
   Liquor licenses               77,604           48,243             29,361



<PAGE>


                                                   1995
                            -------------------------------------------------- 
                                                Accumulated       Net Balance
                                 Cost          Amortization
                           ---------------- ------------------ --------------- 

     Goodwill                 $  319,504         $  121,773       $  197,731
     Preopening costs            214,408             34,993          179,415
     Liquor licenses             114,354             60,894           53,460

The  Company  evaluates  the  recoverability  of  intangible  assets,  including
goodwill,  at each balance sheet date based on forecasted  future operations and
undiscounted  cash flows exclusive of capital  investments and other  subjective
criteria.  Based upon this  information,  management  believes that the carrying
amount  of these  intangible  assets  will be  realizable  over  the  respective
amortization periods.

4.       NATIONAL ADVERTISING FUND:

The Company  administers  a National  Advertising  Fund (the Fund) to which both
Company owned and franchised  restaurants make contributions based on individual
franchise  agreements  (currently 1% of revenues).  Collected  amounts are spent
primarily on developing marketing and advertising  materials for use systemwide.
Such amounts are  segregated  from the cash  resources  of the Company,  and the
activity  of the  Fund is  accounted  for  separately  and not  included  in the
accompanying consolidated financial statements.

During 1994,  the Company  borrowed a total of $69,000  from the Fund.  All such
borrowings were repaid by the Company in the same year.

During 1995, the Company  loaned  $589,012 to the Fund. As of December 31, 1995,
the unpaid balance on these  borrowings  was $404,012.  The Company has expensed
$56,562 of this amount,  which  represents  the estimated  portion of the unpaid
balance to be contributed by the Company in the future (see Note 15).

5.       NOTES PAYABLE:

The  Company  issued a  promissory  note for  $423,032 in  conjunction  with its
initial  public  offering,  which was repaid by the Company in January 1996 (see
Note 17).

The Company  maintained  various lines of credit  throughout 1995, with interest
rates  ranging from prime rate to prime rate plus 2.5%.  The maximum  borrowings
outstanding at any month-end during 1995 were $1,000,000.

As of December 31, 1995,  the Company had $2,500,000  available  under a line of
credit which expires  November 15, 1996. This line of credit became available to
the  Company  after its  initial  public  offering.  Interest  is payable on any
borrowings at the greater of the weighted average federal funds rate plus .5% or
prime rate. There were no outstanding borrowings under this line of credit as of
December 31, 1995.  As of December 31, 1995,  the Company was not in  compliance
with certain financial covenants (including those related to maintaining minimum
levels of earnings  and tangible  net worth,  as defined) as required  under the
terms of this line of credit.  The Company has obtained  waivers of these events
of default through February 29, 1996;  however,  until the Company complies with
these  covenants  or  obtains  additional  waivers  beyond  February  29,  1996,
borrowings under this line of credit are not permitted.
<PAGE>


6.       LONG-TERM DEBT:

Long-term debt consisted of the following:

                                                         1994          1995
                                                     ------------ ------------

      Various capital lease obligations and 
      installment notes payable, which
      were repaid in 1995.                            $  123,898   $        -

      Various capital lease  obligations due 
      to a shareholder in varying monthly
      installments,  interest  ranging  from  
      8% to  20.01%  through  1996.  The
      obligations are collateralized by 
      the property obtained under the  leases.           217,327       98,343
     

      Note payable - due in equal monthly  
      installments,  including  interest at
      the U.S.  Treasury  Bill June  auction
      average  rate plus 4.5%  (9.53% at
      December 31, 1994, and 9.88% at
      December 31, 1995). The note is guaranteed
      by a principal shareholder.
                                                         213,566      199,723

      Note payable - due in minimum 
      monthly payments of $2,500.                        111,933       59,333
                                                     ------------ ------------

                                                         666,724      357,399
      Less - Current portion                             274,007      176,962
                                                     ------------ ------------

                                                      $  392,717   $  180,437
                                                     ============ ============

The prime rate was 8.5% at December  31,  1994 and 1995.  The  weighted  average
federal funds rate was 4.73% at December 31, 1995.

Substantially all of the Company's assets,  including  franchise  agreements and
fees, are pledged as collateral on the Company's various debts.
<PAGE>


Maturities of long-term  debt and capital lease  obligations  as of December 31,
1995, are as follows:

                  Year Ending December -
                  1996                           $   177,000
                  1997                                28,000
                  1998                                17,000
                  1999                                19,000
                  2000                                21,000
                  Thereafter                          95,000
                                                 ------------
                                                 $   357,000
                                                 ============

Notes payable incurred to purchase equipment total $215,000 in 1994. The Company
entered into capital lease obligations  totaling $142,000 in 1994 to finance the
purchase of equipment.

7.       SUBORDINATED DEBT:

On November 25, 1992, the Company  borrowed  $1,000,000 under a 10% Subordinated
Convertible   Note   Agreement.   The  note  was   subordinated  to  all  senior
indebtedness.  Interest was payable  quarterly.  The note was  convertible  into
fully paid and nonassessable  shares of common stock. On September 24, 1993, the
holder  converted  $500,000 of the note into 63,427 shares of common stock.  The
remaining  $500,000  balance was  converted by the holder into 50,000  shares of
common stock on December 1, 1994.

The Company also issued a $500,000  subordinated  debenture  in September  1993,
which bore interest at the prime rate.  The debenture was to mature on September
15, 2000.  The debenture was issued with  detachable  preferred and common stock
warrants.  The  initial  holder  of the  warrants  could  elect to  satisfy  its
obligation  to pay the purchase  price upon  exercise of the warrant by reducing
the principal amount due on the debenture.

The common stock warrant  expires  September 24, 2002. The warrant  entitles the
holder to purchase up to 100,000  shares of common stock at a purchase  price of
$5.00 per share, the fair value at the warrant issue date. The purchase price is
subject to adjustment to prevent dilution.

The preferred stock warrant  entitled the holder to purchase up to 50,000 shares
of Series A Convertible  Preferred  Stock at $10.00 per share (the fair value of
the warrant at the warrant issue date) and was exercised in conjunction with the
initial public offering by discharging the $500,000 subordinated  debenture (see
Note 17).

8.       MANDATORY REDEEMABLE PREFERRED STOCK:

The Company had authorized  500,000 shares and 96,771 shares of preferred stock,
par value $10.00 per share, as of December 31, 1994 and 1995, respectively.

Series A Convertible Preferred Stock (Series A)

As of December 31, 1993, 300,000 shares of Series A stock had been subscribed at
$10.00 per share. The $3,000,000 stock subscription  receivable was presented as
a reduction  (contra  account) to preferred  stock at December 31, 1993.  During
1994,  the  Company  collected  the  $3,000,000   preferred  stock  subscription
receivable and issued 300,000 shares of Series A stock in return.
<PAGE>

The holders of Series A stock were entitled to cumulative  cash dividends at the
rate of $.60 per share per year.  The balance at  December  31,  1994,  included
undeclared  dividends  of  $169,921.  Each  share  of  Series  A stock  could be
converted in whole or in part, at the option of the holder, into common stock of
the Company at a rate equal to $10.00 per share divided by the conversion  price
in effect at the conversion date. Cumulative unpaid dividends could be converted
at an initial  conversion  price of $10.00 per  share.  The  holders of Series A
stock could compel the Company to redeem all of the outstanding shares under the
same terms as the optional redemption.

In conjunction with the initial public offering, the sole preferred shareholder,
Armstrong Holdings,  Inc. (Armstrong),  converted all of the Company's preferred
stock  (including  that  acquired  through the exercise of the  preferred  stock
warrant),  accretion and cumulative unpaid dividends into common stock (see Note
17).

9.       TREASURY STOCK:

In 1995,  the Company  purchased  4,000  shares of its common stock at a cost of
$20.00 per share.

In addition,  the Company purchased 18,921 shares of common stock from Armstrong
at $8.00 per share  through the issuance of a  promissory  note (see Notes 5 and
17).

10.      STOCK OPTIONS AND AWARDS:

The Company  has an  Employee  Stock  Option  Plan  (Employee  Plan) under which
options to purchase up to 559,715  shares of common stock may be granted.  Under
the terms of the  Employee  Plan,  the  Company  may grant  options  to  certain
employees, officers and consultants of the Company.

Eligibility  of employees is based upon  employment  status in the Company and a
minimum salary  requirement.  Options  granted under the Employee Plan expire 10
years after the grant date.  In the event that an  individual  owns greater than
10% of the combined  voting  power of the Company,  the option price is equal to
110% of the fair market  value at the date of grant,  and each option has a term
of five years. The options granted vest at a rate of 25% per year.

The Company also maintains an Executive Stock Option Plan (Executive Plan) under
which  options to purchase up to 90,000  shares of common  stock may be granted.
Under the terms of the  Executive  Plan,  the Company  may grant  options to key
employees, officers and consultants of the Company. Each option has a term of 10
years. The options vest at a rate of 10% in the first year, an additional 20% at
the end of the second year and an  additional  30% at the end of the third year,
with the balance vesting at the end of the fourth year from the date of grant.

The  Company  has also made  special  stock  option  grants in addition to those
granted through the Employee Plan and the Executive Plan.

The Company  granted  stock  options to purchase  440,000  shares of stock at an
exercise price of $5.00 per share (expiring December 17, 2002) and 60,000 shares
at $15.00 per share (expiring July 21, 2004) to the Chairman and Chief Executive
Officer of the Company.  In conjunction with the initial public  offering,  this
individual  surrendered for  cancellation  options to purchase 170,000 shares of
stock at an exercise price of $5.00 per share (see Note 17).

The  Company's  Board of  Directors  (with the  exception of the Chairman of the
Board and President) was granted  options to purchase  16,000 shares of stock at
an exercise  price of $10.00  (expiring  December 15, 2003) and 35,000 shares at
$15.00 per share (expiring July 2004).
The President was granted  options to purchase 10,000 shares at $15.00 per share
(expiring July 21, 2004).
<PAGE>

During 1995,  the Company  instituted a Nonemployee  Director  Option Plan under
which  options to purchase up to 240,000  shares of common stock may be granted.
As of December  31, 1995,  no options to purchase  shares have been issued under
this plan.

The Company awarded a total of 15,000 shares of common stock to its President in
accordance with an employment agreement,  with a charge to operations of $25,000
(5,000 shares) in 1993 and $150,000 (10,000 shares) in 1994.

The following is a summary of the Company's  stock option activity for the years
ended December 31, 1993, 1994 and 1995:

                                               Number of      Option Price
                                                Options         Per Share
                                             -------------------------------

   Outstanding, December 31, 1992               440,000          $ 5.00

   Granted                                      126,611        5.00 - 10.00
   Exercised                                       -                -
   Canceled                                     (6,675)            5.00
                                             -------------------------------

   Outstanding, December 31, 1993               559,936        5.00 - 10.00

   Granted                                      338,756       10.00 - 15.00
   Exercised                                       -                -
   Canceled                                      (3,721)       5.00 - 10.00
                                             -------------------------------

   Outstanding, December 31, 1994               894,971        5.00 - 15.00

   Granted                                       35,000       15.00 - 20.00
   Exercised                                       -                -
   Canceled                                    (193,325)       5.00 - 15.00
                                             -------------------------------

   Outstanding, December 31, 1995               736,646       $5.00 - 20.00
                                             ===============================


11.      PROFIT SHARING PLAN:

During 1995,  the Company  implemented a 401(k) profit  sharing plan (the Plan).
Substantially  all employees are eligible to  participate  in the Plan once they
have  reached  the age of 21 and have  completed  one year of  service  with the
Company,  as  defined.   Participants  may  contribute  a  percentage  of  their
compensation  to the Plan, but not in excess of the maximum  allowed by law. The
Plan also  provides  for  matching  and other  additional  contributions  by the
Company  at its  discretion.  No  discretionary  contributions  were made by the
Company in 1995.
<PAGE>


12.      LICENSE AGREEMENT:

The Company has entered into a license  agreement  (Agreement)  which grants the
Company the exclusive  right to the name and marks of "The Italian  Oven." Terms
of the Agreement require the Company to pay the licensor $500 per annum for each
Company owned and  franchised  location in operation  through 2008.  The royalty
payment  will be higher  for some  locations  if the  Company  expands  to areas
protected by the  Agreement.  The  Agreement  guarantees  royalties  paid to the
licensor will increase at least $5,000 per year through September 30, 2005. Upon
expiration of the term of the  Agreement,  the right,  title and interest in the
marks will remain with the Company.  Amounts due under these  provisions  of the
Agreement are expensed when payable.  Total payments  under these  provisions of
the Agreement were $37,000 in 1994 and $47,500 in 1995.  Additional  payments of
$30,000 were made to the licensor  under other  provisions  of the Agreement and
have been capitalized as other long-term assets.  This amount is being amortized
over five years.

13.      COMMITMENTS AND CONTINGENT LIABILITIES:

The Company leases office  facilities and restaurant  space under  noncancelable
operating  leases.  The restaurant  leases contain options to renew for terms of
three to 10 years with  changes per  renewal  period  ranging  from (5)% to 73%.
Several of the lease  agreements  contain  provisions  which require  additional
rents based upon gross sales.  Following are the future  minimum lease  payments
relating to these lease obligations:

        Year Ending December -
        1996                         $  973,000
        1997                            890,000
        1998                            901,000
        1999                            883,000
        2000                            872,000
        Thereafter                    3,667,000
                                     -----------
                                     $8,186,000
                                     ===========

Rent expense,  consisting  solely of minimum  rents,  charged to operations  was
$664,000 in 1993, $867,000 in 1994 and $1,160,000 in 1995.

Generally,  all franchise agreements entered into before March 24, 1994, require
the Company to lease to the  franchisee  two ovens per  restaurant  for a fee of
$1.00 each per year.  As of March 24, 1994,  the Company  amended the  franchise
agreements  to require  each  franchisee  to purchase  its own ovens rather than
obtaining the ovens from the Company.  However,  certain agreements  continue to
require the Company to provide  ovens.  If  development  of franchise  locations
occurs  as  scheduled,  the  Company  is  committed  to  provide  50 ovens at an
estimated cost of $150,000 during the period 1996 through 2000.

In addition, certain claims, suits and complaints have been filed or are pending
against the Company from the ordinary course of its business.  In the opinion of
management,  all matters are adequately  covered by insurance or if not covered,
are without  merit or are of such kind,  or involve such  amounts,  as would not
have a material adverse effect on the financial position or operating results of
the Company.
<PAGE>


14.      INCOME TAXES:

The Company adopted SFAS 109,  "Accounting for Income Taxes," in 1990. There was
no  cumulative  effect  on the  Company's  financial  statements  at the time of
adoption,  because the  Company's  deferred  tax assets  exceeded  deferred  tax
liabilities,  and a valuation  allowance was recorded against the net assets due
to uncertainty regarding realization of the tax benefits.

The provision for income taxes consists of the following:

                                         1993        1994        1995
                                    ----------- ----------- -----------
         Current taxes -
         Federal                        $    -      $    -      $    -
         State                           1,410      10,727       1,191
                                    ----------- ----------- -----------

                                         1,410      10,727       1,191
         Deferred taxes -
         Federal                             -           -           -
         State                               -           -           -
                                    ----------- ----------- -----------
         Total                        $  1,410    $ 10,727    $  1,191
                                    =========== =========== ===========

The provision for income taxes differs from the amounts computed by applying the
federal statutory rate as follows (in percentages):

                                                  1993     1994      1995
                                             -----------------------------

    Income tax at federal statutory rate         (34.0)%  (34.0)%   (34.0)%
    State income taxes, 
      net of federal benefit                      (8.0)    (8.0)     (6.6)
    Book expenses not deductible 
      for tax purposes                               -        -      17.0
    Other                                          2.3      1.5      (5.4)
    Net operating loss                            39.7     40.9      29.0
                                             -----------------------------
    Effective tax rate                             -   %    0.4%     -   %
                                             =============================

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  amounts  used for income  tax  purposes.  The tax  effects of
significant items comprising the Company's  deferred tax asset and liability are
as follows (in thousands):
<PAGE>


                                                       1994           1995
                                                  -------------- --------------
      Deferred tax liabilities -
      Tax basis depreciation                            $     -       $   (36)
                                                  -------------- --------------
      Total deferred tax liability                            -           (36)
      Deferred tax assets-
      Deferred revenue                                    1,414          1,230
      Net operating loss carryforward                     1,493          2,955
      Tax basis depreciation                                 62              -
      Reserve for store closing                               -            188
      Other                                                   -             46
      Valuation allowance                               (2,969)        (4,383)
                                                  -------------- --------------
      Total deferred tax asset                                -             36
                                                  -------------- --------------

      Net deferred tax liability (asset)                $     -         $    -
                                                  ============== ==============

The Company has recorded a valuation  allowance for the net  potential  deferred
tax asset at December 31, 1994 and 1995,  since  realization  is not  considered
more likely than not.

At December 31, 1995, the Company had approximately  $6,159,000 in net operating
loss  carryforwards  to offset future federal  taxable  income through  December
2010.  Ownership changes that have occurred,  including those in connection with
the initial  public  offering,  limit the  utilization of the net operating loss
carryforward in any year. Based upon a preliminary  estimate,  the net operating
loss that can be  utilized  in any year will not exceed  $980,000.  The  Company
anticipates  that  this  limitation  will  not  prevent  the  utilization  of  a
substantial portion of its net operating loss carryforwards;  however,  there is
no assurance that the Company will generate future taxable income  sufficient to
allow for such utilization.

15.      RELATED PARTY TRANSACTIONS:

One of the  principal  shareholders  of the  Company  provided  advances  to the
Company throughout 1994 and 1995. The Company pays interest on these advances at
a rate of prime plus 2%. As of December 31, 1995, these advances had been repaid
by the Company.

During 1995,  this  shareholder  periodically  borrowed  from the  Company.  The
Company  receives  interest on these  borrowings by the shareholder at a rate of
prime plus 2%. As of December  31,  1995,  the  shareholder  owed $94,799 to the
Company.

These  borrowings  by the  shareholder  and the  loans to the  Fund  (net of the
portion  expensed by the Company) are reflected as notes receivable from related
parties in the accompanying consolidated balance sheets (see Note 4).

16.      DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following  table presents the carrying  amounts and estimated fair values of
the Company's financial  instruments at December 31, 1994 and 1995. Statement of
Financial  Accounting  Standards  No.  107,  "Disclosure  About  Fair  Value  of
Financial  Instruments," defines the fair value of a financial instrument as the
amount at which  the  instrument  could be  exchanged  in a current  transaction
between willing parties.
<PAGE>

<TABLE>
<CAPTION>

                                                           1994                        1995
                                                -------------------------   -------------------------
                                                  Carrying        Fair        Carrying         Fair
                                                   Amount        Value         Amount         Value
                                                -----------   -----------   -----------   -----------

Financial assets -
<S>                                             <C>           <C>           <C>           <C>       
   Cash and cash equivalents                    $   349,620   $   349,620   $11,425,916   $11,425,916
   Notes receivable from related
     parties                                           --            --         442,249       442,249

Financial liabilities -
   Notes payable                                       --            --         423,032       423,032
   Long-term debt                                   666,724       627,819       357,399       360,493
   Subordinated debt                                500,000       476,664          --            --
   Mandatory redeemable preferred
     stock                                        3,675,999     3,675,999          --            --

</TABLE>

The following  methods and  assumptions  were used to estimate the fair value of
each financial instrument:

Cash and Cash Equivalents and Notes Payable

The carrying  amounts  approximate  fair value because of the short  maturity of
these instruments.

Notes Receivable from Related Parties

The fair  value of notes  receivable  from  related  parties  is based  upon the
Company's estimate of the net realizable value of the investment.

Long-Term and Subordinated Debt

The fair value of the  Company's  long-term and  subordinated  debt is estimated
using discounted cash flow analysis,  based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.

Mandatory Redeemable Preferred Stock

The fair value of the Series A preferred stock outstanding at December 31, 1994,
was estimated at carrying  value as such stock was not traded in the open market
and a market price was not readily available.

17.      INITIAL PUBLIC OFFERING:

In  November  1995,  the  Company  completed  an initial  public  offering  (the
Offering)  of its common stock at a price of $8.00 per share.  Of the  2,700,000
shares of common  stock sold as a part of the  Offering,  2,214,885  shares were
sold by the Company and 485,115 shares were sold by Armstrong. The resulting net
proceeds to the Company (after deducting  issuance costs) were $15,255,195.  The
Company  used a portion of the  proceeds to repay a  $1,000,000  line of credit,
which expired upon the Company's receipt of the proceeds from the Offering.  The
Company  intends to use the remaining  proceeds from the Offering to finance the
development  of additional  Company owned  restaurants  and for working  capital
purposes. 
<PAGE>

In  connection  with the Offering by the  Company,  the  following  transactions
occurred:

(i)          The preferred stock warrant for 50,000 preferred shares of Series A
             stock was exercised at $10.00 per share by discharging the $500,000
             subordinated debenture (see Note 7).

(ii)         Pursuant to an  agreement  with the Company,  all of the  Company's
             preferred stock  (including  that acquired  through the exercise of
             the  preferred  stock  warrant),  accretion and  cumulative  unpaid
             dividends at the date of  conversion  was converted by Armstrong to
             common stock at the Offering  price.  The  agreement  also provided
             Armstrong  with four  warrants  to  purchase  additional  shares of
             common stock:

                  Shares            Exercise Price          Expiration Date
              -------------        ---------------         ------------------- 

                 100,000              $10.50                November 27, 1997
                 100,000               13.00                November 27, 1998
                 110,000                9.00                November 27, 2005
                 170,000                5.00                December 31, 2002

             In connection with this agreement, the Chairman and Chief Executive
             Officer  surrendered for  cancellation  options to purchase 170,000
             shares at an exercise  price of $5.00 per share  expiring  December
             17, 2002. The Company and Armstrong had agreed that Armstrong would
             receive  $4,032,288  in net proceeds  from the sale of a portion of
             its shares in connection with the Offering. This agreement required
             a cash  payment of $271,664  and the  purchase of 18,921  shares of
             common  stock from  Armstrong  at $8.00  (see Note 9). The  Company
             financed these payments  through the issuance of a promissory  note
             in the  amount of  $423,032  (see Note 5).  The fair value of these
             inducements  was  $2,008,664,  which  was  expensed  in the  fourth
             quarter  of 1995 when the  conversion  occurred.  In  addition,  an
             underwriter  was  issued a warrant  to  purchase  75,000  shares of
             common stock at $9.60 per share  expiring  December  30, 2000.  The
             fair value of this  warrant of  $238,000  was also  expensed in the
             fourth quarter of 1995 and is included in inducement expense.

(iii)        An employment  agreement was signed by the Chief Executive Officer.
             The agreement  provides for annual  compensation  of $175,000 for a
             term of one year subject to  automatic  one-year  renewals,  unless
             either  the  Chief  Executive  Officer  or the  Company  elects  to
             terminate the agreement.  If the Company  terminates the agreement,
             other than for "just cause" or fails to renew the agreement,  or if
             the Chief  Executive  Officer  terminates  the  agreement for "good
             reason," the Chief Executive  Officer is entitled to receive salary
             for the balance of the current  term, a severance  payment equal to
             2.99 year's salary and bonus,  and medical benefits for three years
             (or until he  receives  similar  benefits  from other  employment).
             "Just cause" includes  willful  misconduct and conduct  damaging to
             the  Company's  reputation.  "Good  reason"  includes  a change  in
             control of the Company and the Company's breach of the terms of the
             agreement,   including  any  purported  termination  of  the  Chief
             Executive  Officer's  employment  other than in accordance with the
             agreement.

18.      RESTAURANT CLOSING:

As of  December  31,  1995,  it was  determined  that one  joint  venture  owned
restaurant  would  be  closed  or sold in early  1996.  As  such,  a  charge  to
operations  of  $464,143  was  recorded  by the  Company  to  accrue  for  costs
associated with the closing.
<PAGE>

19.      SUBSEQUENT EVENTS:

During  the first six months of 1996,  the  Company  has  suffered  losses  from
operations of $1,982,000,  (unaudited). The Company has also utilized all of the
cash proceeds from the Initial  Public  Offering in November  1995, and have not
been able to obtain alternate sources of financing to cover immediate and future
needs for general operating  purposes.  The first six months of 1996 has shown a
decrease in cash and cash equivalents of approximately  $11,500,000 (unaudited).
The significant uses of cash in the six months ended June 30, 1996, included:

          o    The opening of seven Company-owned  stores (four of which were in
               process  at  December  31,  1995)  at  a  cost  of  approximately
               $4,746,000;  this  includes  preopening  expenditures  and  costs
               incurred for restaurants still under construction;

          o    The purchase of Blackeyed Pea restaurants in the Kansas City area
               for $3,069,000;

          o    The  acquisition  of the  operating  assets  of  four  franchised
               restaurants  in the Western  Pennsylvania  market for  $2,524,000
               (cash portion of acquisition price); and

          o    An increase in loans to the Company's  Chairman of  approximately
               $236,000.

These  factors,  among others,  create a  substantial  doubt about the Company's
ability to continue as a going concern.

Management is attempting to resolve the current shortage of operating capital by
selling  certain  assets,   seeking   alternate  sources  of  financing  and  by
restructuring  the  corporate  functions  in an  effort to  reduce  general  and
administrative  costs. There can be no assurance that the Company's efforts will
be sufficient to enable the Company to continue as a going concern.
<PAGE>


                             THE ITALIAN OVEN, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                   FOR THE THREE YEARS ENDED DECEMBER 31, 1995

                             (Dollars in Thousands)


<TABLE>
<CAPTION>


                                                Balance at       Additions         Deductions        Balance
                                                Beginning       Charged to            from           at End
         Description                             of Year         Earnings           Reserves         of Year
         -----------                             -------         --------           --------         -------
<S>        <C>                                  <C>             <C>                <C>               <C>    

Reserves deducted from
  assets to which they apply-

    Allowance for doubtful
      accounts receivable-

           1995                                 $     35        $      50          $    -            $    85
                                                ========        =========          =========         =======

           1994                                 $     10        $      25          $    -            $    35
                                                ========        =========          =========         =======

           1993                                 $      3        $       7          $    -            $    10
                                                ========        =========          =========         =======

Other reserves-

  Reserve for store closing-

           1995                                 $   -           $    464           $    -            $   464
                                                ========        ========           ========          =======

</TABLE>
<PAGE>


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

(a)     Documents filed as a part of this Report:

          (1)  A list of the financial statements filed as a part of this Report
               on Form 10-K/A is set forth on page 10 hereof.

          (2)  See  Item  14(d)  below,  for  a  description  of  the  financial
               statement schedule filed as a part of this Report on Form 10-K/A.

          (3)  The  following  Exhibits  are  included  as a part of the  Annual
               Report on Form 10-K or are incorporated herein by reference:

3.1       Articles of Incorporation of the Registrant,  as amended,  filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

3.2       Certificate  of  Designation  of Rights  and  Preferences  of Series A
          Convertible Preferred Stock of the Registrant,  filed as an exhibit to
          Registrant's  Regulation A Offering  Statement of Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.

3.3       By-laws  of  the  Registrant,  filed  as an  exhibit  to  Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

4.1       Stock,  Debenture and Warrant  Purchase  Agreement dated September 24,
          1993 between the Registrant and Armstrong Holdings,  Inc., filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

4.2       $500,000  Debenture  dated  September 24, 1993 from the  Registrant in
          favor of Armstrong Holdings, Inc., filed as an exhibit to Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

4.3       Registration  Rights  Agreement  dated  September  24, 1993  Agreement
          between the  Registrant  and  Armstrong  Holdings,  Inc.,  filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.
<PAGE>

4.4       Stock  Option  Plan  dated  March  11,  1993  filed as an  exhibit  to
          Registrant's  original Form 10-K on March 30, 1996 and incorporated by
          reference herein.

4.5       1993  Executive  Stock Option Plan dated February 11, 1993 filed as an
          exhibit  to  Registrant's  original  Form 10-K on March  30,  1996 and
          incorporated by reference herein.

10.1      Form of the Registrant's  Franchise Agreement,  filed as an exhibit to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.

10.2      Form of the Registrant's Development Agreement, filed as an exhibit to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.

10.3      Security  Agreement  dated  September 24, 1993 from the  Registrant in
          favor of Armstrong Holdings, Inc., filed as an exhibit to Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

10.4      Preferred  Stock  Purchase  Warrant dated  September 24, 1993 from the
          Registrant in favor of Armstrong  Holdings,  Inc., filed as an exhibit
          to   Registrant's   Regulation  A  Offering   Statement  on  Form  1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.5      Common  Stock  Purchase  Warrant  dated  September  24,  1993 from the
          Registrant in favor of Armstrong  Holdings,  Inc., filed as an exhibit
          to   Registrant's   Regulation  A  Offering   Statement  on  Form  1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.6      Assignment  and  Assumption  of  Lease  between  South  Italian,  Inc.
          Pembroke  Pines,  as  assignor,  and  the  Registrant,   as  assignee,
          respecting the assignment of Lease dated May 7, 1992 between assignor,
          as tenant, and University  Marketplace,  Ltd., as landlord,  regarding
          premises  located in Pembroke Pines,  Florida,  filed as an exhibit to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No. 24-3506-HQ) filed November 301, 1994 and incorporated  herein
          by reference.
<PAGE>

10.7      Lease Agreement dated as of September 29, 1992 between  Charter-Miller
          Limited  Partnership  #1,  as  landlord,   and  The  Italian  Oven  of
          Charlotte, a Pennsylvania Joint Venture, as tenant, regarding premises
          located  in  Pineville,   North  Carolina,  filed  as  an  exhibit  to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.

10.8      Shopping  Center  Lease dated  September  27, 1993 between LPZ Limited
          Partnership,  as  landlord,  and  The  Italian  Oven of  Charlotte,  a
          Pennsylvania Joint Venture,  as tenant,  regarding premises located in
          Charlotte,  North  Carolina,  filed  as  an  exhibit  to  Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

10.9      Lease dated May 11, 1991  between S&R Sunseri,  as  landlord,  and The
          Italian  Ovens of the  Strip,  Inc.,  as  tenant,  regarding  premises
          located at 1700 Penn  Avenue,  Pittsburgh,  Pennsylvania,  filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.10     Lease  Agreement  dated  February  1, 1989  between  Paul E. Gary,  as
          landlord,  and  Somerset-BFF,  Inc., James A. Frye and Janice M. Frye,
          collectively  as  tenant,  regarding  premises  located  in  Somerset,
          Pennsylvania,  filed  as  an  exhibit  to  Registrant's  Regulation  A
          Offering  Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
          November 30, 1994 and incorporated herein by reference.

10.11     Lease  Agreement   dated  August  3,  1991  between   Ellsworth  Plaza
          Associates,  as  landlord,  and  Ellsworth  Ovens,  Inc.,  as  tenant,
          regarding  premises  located  at 5859  Ellsworth  Avenue  (Shadyside),
          Pittsburgh,   Pennsylvania,   filed  as  an  exhibit  to  Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

10.12     Lease dated  December 19, 1990 between RAK  Enterprises,  as landlord,
          and The  Italian  Oven of  Steubenville,  Inc.,  as tenant,  regarding
          premises  located  in  Steubenville,  Ohio,  filed  as an  exhibit  to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.
<PAGE>

10.13     Lease  dated  June  26,  1991  between   Raceway  Plaza  1989  Limited
          Partnership,  as  landlord,  and The  Italian  Oven of  Heidelberg,  a
          Pennsylvania Joint Venture,  as tenant,  regarding premises located in
          Heidelberg,   Pennsylvania,   filed  as  an  exhibit  to  Registrant's
          Regulation  A  Offering  Statement  on Form 1-A  (Commission  File No.
          24-3506-HQ)  filed  November  30,  1994  and  incorporated  herein  by
          reference.

10.14     Lease  Agreement  dated May 16, 1991  between  Armstrong  Developers &
          Associates, as landlord, and The Italian Oven of Station Square, Inc.,
          as tenant, regarding premises located at Station Square in Pittsburgh,
          Pennsylvania,  filed  as  an  exhibit  to  Registrant's  Regulation  A
          Offering  Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
          November 30, 1994 and incorporated herein by reference.

10.15     Assignment of Lease between The Italian Oven of  Westmoreland  County,
          Inc., as assignor,  and the  Registrant,  as assignee,  respecting the
          assignment  of Lease  Agreement  dated  May 1, 1990  between  Peter S.
          Piazza,  Jr.,  Betty Piazza and James A Piazza,  as landlord,  and The
          Italian  Oven of  Westmoreland  County,  Inc.,  as  tenant,  regarding
          premises located in Greensburg,  Pennsylvania,  filed as an exhibit to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.

10.16     Ground Lease dated October 10, 1991 between Parkway Union  Development
          Corp., as landlord, and Edgewood Towne Center Italian Oven, as tenant,
          regarding  premises  located in  Edgewood,  Pennsylvania,  filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.17     Lease Agreement dated September 26, 1991 between  Continental  Sawmill
          Limited  Partnership,  as landlord,  and  Fornello  U.S.A.,  Inc.,  as
          tenant,  regarding  premises  located  in  Dublin,  Ohio,  filed as an
          exhibit to  Registrant's  Regulation A Offering  Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.18     Lease  Agreement  dated  May 5,  1994  between  Derby  Square  Limited
          Partnership,  as landlord,  and the Registrant,  as tenant,  regarding
          premises  located  in  Grove  City,  Ohio,  filed  as  an  exhibit  to
          Registrant's  Regulation A Offering  Statement on Form 1-A (Commission
          File No.  24-3506-HQ) filed November 30, 1994 and incorporated  herein
          by reference.
<PAGE>

10.19     Employment Agreement dated October 10, 1994 between the Registrant and
          Janice Frye, filed as an exhibit to Registrant's Regulation A Offering
          Statement on Form 1-A (Commission File No.  24-3506-HQ) filed November
          30, 1994 and incorporated herein by reference.

10.20     Employment  Agreement  dated July 23, 1993 between the  Registrant and
          Ralph J.  Guarino,  filed as an exhibit to  Registrant's  Regulation A
          Offering  Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
          November 30, 1994 and incorporated herein by reference.

10.21     Employment  Agreement dated October 8, 1994 between the Registrant and
          Jeffrey  Fields,  filed as an exhibit  to  Registrant's  Regulation  A
          Offering  Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
          November 30, 1994 and incorporated herein by reference.

10.22     Employment Agreement dated October 13, 1994 between the Registrant and
          Alex Gionta, filed as an exhibit to Registrant's Regulation A Offering
          Statement on Form 1-A (Commission File No.  24-3506-HQ) filed November
          30, 1994 and incorporated herein by reference.

10.23     Employment Agreement dated October 10, 1994 between the Registrant and
          Richard  Kessler,  filed as an exhibit to  Registrant's  Regulation  A
          Offering  Statement on Form 1-A (Commission File No. 24-3506-HQ) filed
          November 30, 1994 and incorporated herein by reference.

10.24     Employment Agreement dated October 10, 1994 between the Registrant and
          Gary Steib, filed as an exhibit to Registrant's  Regulation A Offering
          Statement on Form 1-A (Commission File No.  24-3506-HQ) filed November
          30, 1994 and incorporated herein by reference.

10.25     Shareholders  Agreement dated September 24, 1993 among the Registrant,
          Armstrong  Holdings,  Inc., James A. Frye and Janice M. Frye, filed as
          an exhibit to Registrant's Regulation A Offering Statement on Form 1-A
          (Commission  File  No.   24-3506-HQ)   filed  November  30,  1994  and
          incorporated herein by reference.

10.26     Employment  Agreement  dated July 1, 1995 between the  Registrant  and
          James A.  Frye,  filed as an  exhibit  to  Registrant's  Regulation  A
          Offering  Statement on Form 1-A (Commission  File No.  33-97496) filed
          September 28, 1995 and incorporated herein by reference.
<PAGE>

10.27     Employment  Agreement  dated  February 20, 1995 between the Registrant
          and Stephen Wayhart, filed as an exhibit to Registrant's  Regulation A
          Offering  Statement on Form 1-A (Commission  File No.  33-97496) filed
          September 28, 1995 and incorporated herein by reference.

10.28     Employment  Agreement  dated July 20, 1995 between the  Registrant and
          Thomas P. McMullan,  filed as an exhibit to Registrant's  Regulation A
          Offering  Statement on Form 1-A (Commission  File No.  33-97496) filed
          September 28, 1995 and incorporated herein by reference.

10.29     Employment  Agreement  dated July 20, 1995 between the  Registrant and
          Michael B. Understein,  filed as an exhibit to Registrant's Regulation
          A Offering  Statement on Form 1-A (Commission File No. 33-97496) filed
          September 28, 1995 and incorporated herein by reference.

10.30     Agreement  dated  September 28, 1995 among the  Registrant,  Armstrong
          Holdings, Inc. and James A. Frye, filed as an exhibit to Amendment No.
          1 to Registrant's Registration statement on Form S-1 (Commission Filed
          No.  33-97496)  filed  November  2,  1995 and  incorporated  herein by
          reference.

10.31     Amendment to Credit Facility dated October 31, 1995 between Registrant
          and PNC Bank, National  Association,  filed as an exhibit to Amendment
          No. 1 to Registrant's  Registration  statement on Form S-1 (Commission
          Filed No. 33-97496) filed November 2, 1995 and incorporated  herein by
          reference.

10.32     Agreement  dated February 22, 1996 by and among the Company,  Ovens of
          Cranberry, Ltd., Ovens of Erie One, Ltd., Ovens of Monroeville,  Ltd.,
          Ovens of North Hills, Ltd., David S. Gallatin,  Marc B. Robertshaw and
          William J. Rosa filed as an exhibit to the Registrant's  original Form
          1-K and incorporated by reference herein.

10.33     Leasehold and Asset Purchase and Sale  Agreement,  as amended by First
          Amendment dated March 22, 1996, by and among the Company,  Mid America
          Restaurant  Group,  Inc.  and Mid America  Restaurant  Group of Kansas
          filed  as an  exhibit  to  the  Registrant's  original  Form  1-K  and
          incorporated by reference herein.

11.1      Calculation  of Pro Forma Net  Income  Per  Common  Share  filed as an
          exhibit to the  Registrant's  original  Form 1-K and  incorporated  by
          reference herein.

16.1      Letter  from  Alpern  Rosenthal  &  Company,  filed as an  exhibit  to
          Amendment  No. 1 to  Registrant's  Registration  Statement on Form S-1
          (Commission File No. 33-97496) filed November 2, 1995 and incorporated
          herein by reference.

27.1*     Financial Data Schedule.


*Filed herewith
<PAGE>


(b)     Reports on Form 8-K

                    None.

(c)     Exhibits

          The  exhibits  listed under Item  14(a)(3)  are filed  herewith or are
incorporated by reference herein.

(d)     Financial Statement Schedules

          Schedule II - Valuation and Qualifying Accounts is filed herewith.


<PAGE>


                                   SIGNATURES

          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                         THE ITALIAN OVEN, INC.

                                         By:   /s/ Gary L. Steib
                                               _________________   
                                                   Gary L. Steib
                                                   Chief Financial Officer

                                                   Date:  October 11 , 1996