<PAGE>
 
                             AMENDED AND RESTATED

                         BRUEGGER'S FRESH BAGEL BAKERY

                        AFFILIATE DEVELOPMENT AGREEMENT
<PAGE>
 
                             AMENDED AND RESTATED

                         BRUEGGER'S FRESH BAGEL BAKERY

                        AFFILIATE DEVELOPMENT AGREEMENT

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
Section                                                  Page
-------                                                  ----
<S>        <C>                                           <C>
 1.        DEVELOPMENT RIGHTS AND OBLIGATIONS.............. 2

 2         TERM............................................ 3

 3.        DEVELOPMENT FEE................................. 3

 4.        SITE SELECTION.................................. 3

 5.        TRAINING OF DEVELOPER EMPLOYEES................. 5

 6.        OPERATIONS MANUALS.............................. 5

 7.        CONFIDENTIAL INFORMATION........................ 6

 8.        CORPORATE REQUIREMENTS; FINANCIAL STATEMENTS.... 6

 9.        TRANSFER OF INTEREST............................ 8

10.        DEFAULT AND TERMINATION.........................14

11.        COVENANTS.......................................16

12.        NOTICES.........................................17

13.        INDEPENDENT CONTRACTOR AND INDEMNIFICATION......18

14.        APPROVALS AND WAIVERS...........................19

15.        SEVERABILITY AND CONSTRUCTION...................19

16.        ENTIRE AGREEMENT................................20

17.        APPLICABLE LAW; ARBITRATION.....................21

18.        ACKNOWLEDGMENTS.................................23
</TABLE>

           EXHIBIT A - PROPRIETARY MARKS
           EXHIBIT B - DEVELOPMENT AREA
           EXHIBIT C - BRUEGGER'S FRESH BAGEL BAKERY AFFILIATE
                    FRANCHISE AGREEMENT
<PAGE>

EXHIBIT 10-R

 
                             AMENDED AND RESTATED

                         BRUEGGER'S FRESH BAGEL BAKERY

                        AFFILIATE DEVELOPMENT AGREEMENT


     THIS AMENDED AND RESTATED AFFILIATE DEVELOPMENT AGREEMENT ("Agreement") is
entered into on December 8, 1995, between BRUEGGER'S FRANCHISE CORPORATION, a
Delaware corporation ("Franchisor"), and GOFER BAGELS, INC., a Minnesota
corporation and NORSTAR BAGEL BAKERIES, INC., a Minnesota corporation (together
the "Developer").

     WHEREAS, Franchisor and its affiliates have developed a system relating to
the preparation and promotion of distinctive bagels and cream cheese and the
establishment and operation of restaurants specializing in the sale of the
bagels, cream cheese, and other food and beverage items (the "System");

     WHEREAS, the distinguishing characteristics of the System include, without
limitation, the sale of bagels and cream cheese products prepared in accordance
with secret recipes and manufacturing processes owned by affiliates of
Franchisor; distinctive exterior and interior restaurant design, decor, color
scheme, fixtures, and furnishings; standards and specifications for ingredients,
food preparation, equipment, supplies, and restaurant operations; and
advertising and promotional programs; all of which may be changed, improved, and
further developed by Franchisor and its affiliates from time to time;

     WHEREAS, the System is identified by means of certain trade names, service
marks, trademarks, logos, emblems, and indicia of origin, including but not
limited to the mark "BRUEGGER'S", as set forth in Exhibit A to this Agreement,
and such other trade names, service marks, and trademarks as may hereafter be
designated by Franchisor in writing for use in the System (the "Proprietary
Marks");

     WHEREAS, Developer wishes to obtain the right to develop restaurants under
the System and the Proprietary Marks ("Bakeries") within the territory defined
in Exhibit B to this Agreement;

     WHEREAS, Michael J. Dressell and Nordahl L. Brue own interests in both
Franchisor and Developer;

     WHEREAS, on or about March 29, 1994, Franchisor and Developer entered
into an Affiliate Development Agreement to provide for the development of
Bakeries;

     WHEREAS, the parties now desire to modify and restate such Affiliate
Development Agreement;

     NOW, THEREFORE, the parties agree as follows:
<PAGE>
 
1.   DEVELOPMENT RIGHTS AND OBLIGATIONS

     1.1  Franchisor grants Developer the exclusive right (to the extent
described in Section 1.4), pursuant to the terms and conditions of this
Agreement, to develop Bakeries within the territory defined in Exhibit B to this
Agreement (the "Development Area"). The Bakeries shall be located only at the
specific locations approved in writing by Franchisor pursuant to Section 4.1
below.

     1.2  Developer shall exercise its development rights hereunder solely by
executing a separate Bruegger's Fresh Bagel Bakery Affiliate Franchise Agreement
("Franchise Agreement") for each Bakery already developed or to be developed
hereunder or by causing an affiliate of the Developer reasonably acceptable to
Franchisor to execute such separate Bruegger's Fresh Bagel Bakery Affiliate
Franchise Agreement. The Franchise Agreement for all Bakeries to be developed
during the term of this Agreement shall be in the form of Exhibit C to this
Agreement. The Franchise Agreement for each additional Bakery developed during
the period of any renewal of this Agreement, if any, shall be in the form being
offered by Franchisor to new franchisees at the time the first Bakery is
developed during such renewal period, the terms of which may differ from the
terms of Exhibit C. The Franchise Agreement for each Bakery shall be executed by
Developer upon Franchisor's approval of the site for the Bakery pursuant to
Section 4.1 below. Notwithstanding the foregoing, through any renewal term of
this Agreement, the transfer provisions set forth in Section 14 of the Franchise
Agreement attached as Exhibit C shall be included in and supersede such similar
provisions in the then current Franchise Agreement for Bakeries developed after
the initial term.

     1.3  During the initial term of this Agreement, Developer shall have no
obligation to develop Bakeries in  the Development Area, but shall be free to
develop as many as it chooses, consistent with the terms of this Agreement.

     1.4  During the term of this Agreement or any renewals hereof, Franchisor
and its affiliates shall not, anywhere within the Development Area, (1)
establish or operate (directly or through an affiliate) a Bakery, franchise
others to establish or operate a Bakery, (2) sell or distribute under the
"BRUEGGER'S" name any of the items designated as "Core Products" from time to
time in Franchisor's confidential operations manuals, or (3) sell or distribute
or license others to sell or distribute under any name or mark other than the
Proprietary Marks any items described as "Core Products" from time to time in
Franchisor's confidential operations manuals at any location inside the
Development Area, except that Franklin County Cheese Corporation, its
affiliates, successors and assigns may sell Direct Set Cream Cheese and other
bagel spreads anywhere inside or outside the Development Area under any name or
mark other than the Proprietary Marks. Franchisor and its affiliates retain the
rights, among others: (a) to establish, and franchise others to establish,
Bruegger's Fresh Bagel Bakeries in any location outside the Development Area;
and (b) to sell and distribute, and license others to sell and distribute, food
products including, but not limited to, cream cheese products and other bagel
spreads under the "BRUEGGER'S" name (or under any other name), directly or

                                       2
<PAGE>
 
indirectly, through supermarkets, delicatessens, specialty food stores,
convenience stores, and other wholesale and retail food stores, at any location
outside the Development Area.

     1.5  This Agreement does not grant Developer any right to use the
Proprietary Marks or the System.  All rights to use the Proprietary Marks and
the System are granted solely under the terms of the Franchise Agreement.
Developer acknowledges that it will have no right under this Agreement or under
any Franchise Agreement to subfranchise any other person or legal entity to use
the Proprietary Marks or the System.

2.   TERM

     2.1  Unless sooner terminated as provided herein, the term of this
Agreement shall expire March 29, 2024.

3.   DEVELOPMENT FEE

     3.1  In consideration of the development rights granted herein, Developer
shall pay Franchisor a Development Fee of One Dollar ($1.00), receipt of which
is hereby acknowledged.

4.   SITE SELECTION

     4.1  Developer, at its sole expense, shall identify and obtain a site for
each Bakery to be developed hereunder and, if applicable, for each bagel dough
manufacturing site. Before acquiring a site by lease or purchase, Developer
shall submit to Franchisor such information and materials as Franchisor may
reasonably request to evaluate the site.  After receipt of such information and
materials, Franchisor, in its reasonable discretion, shall approve or refuse to
approve the proposed site.  Franchisor shall either approve or reject a proposed
site not later than fifteen (15) Business Days after receipt of all information
and materials reasonably requested pursuant to this Section 4.1.  In evaluating
a proposed site, the Franchisor shall consider site standards established by
then existing Bakeries that, during the immediately preceding twelve month
period, have experienced sales volumes above the median for the System.  A site
shall be deemed to have received Franchisor's approval unless it has been
rejected in writing by Franchisor within such fifteen (15) Business Day period.
The site approved (or deemed approved) by Franchisor shall be the "Approved
Location" referred to in the Franchise Agreement.  Notwithstanding the
foregoing, any Bakeries operated in the Development Area by Developer as of the
date this Agreement is executed shall be deemed Approved Locations.  For
purposes of this Agreement, "Business Days" shall be any days except Saturday,
Sunday or the following national holidays:  New Year's Day, Washington's
Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving and Christmas.

     4.2  With respect to both Bakeries and bagel dough manufacturing sites,
Franchisor shall furnish to Developer the following:

                                       3
<PAGE>
 
          4.2.1     Site selection guidelines and criteria, and such site
selection counseling and assistance as Franchisor may deem advisable;

          4.2.2     Such on-site evaluations, if any, as Franchisor may deem
advisable in response to Developer's request for Franchisor's approval of a
proposed site; and

          4.2.3     Franchisor's representative plans and specifications for
construction of a Bakery and, if applicable, a bagel dough manufacturing site,
including exterior and interior design and layout plans.

     4.3  If Developer will occupy the premises of a Bakery and/or a bagel dough
manufacturing site (if separate from the Bakery) under a lease, Developer shall,
prior to the execution of the lease, submit the lease to Franchisor for its
written approval which shall not be unreasonably withheld.  Developer shall use
commercially reasonable efforts to negotiate a lease for the premises of each
Bakery that includes all of the following terms and conditions:

          4.3.1     That the lessor consents to Developer's use of such
Proprietary Marks and signage as Franchisor may prescribe for the Bakery or the
bagel dough manufacturing site, as the case may be;

          4.3.2     That the use of the premises be restricted solely to the
operation of the Bakery (or bagel dough manufacturing site, as the case may be)
and any ancillary uses connected to the operation of the Bakery (or dough
manufacturing site, as the case may be) during the term of the Franchise
Agreement, as it may be extended in accordance with its terms;

          4.3.3     That Developer be prohibited from subleasing or assigning
all or any part of its occupancy rights or from extending the term of or
renewing the lease without Franchisor's prior written consent which shall not be
unreasonably withheld; provided, however, such consent shall not be necessary to
extend the term or renew the lease so that it continues for a term not longer
than the then existing term of the Franchise Agreement for such location;

          4.3.4     That the lessor provide to Franchisor copies of all notices
of default given to Franchisee under the lease;

          4.3.5     That Franchisor have the right to enter the premises to make
modifications necessary to protect the Proprietary Marks or the System or to
cure any default under the applicable Franchise Agreement or under the lease;

          4.3.6     That Franchisor (or Franchisor's designee) have the option,
upon default, expiration, or termination of the applicable Franchise Agreement,
and upon notice to the lessor, to assume all of Developer's rights and
obligations under the lease, including any right to assign or sublease;
provided, however, that Franchisor shall not exercise any renewal 

                                       4
<PAGE>
 
options under the lease unless it obtains a release from the lessor of any
personal guarantees given by Nordahl L. Brue or Michael J. Dressell and of other
guaranties given by entities owned or controlled by Nordahl L. Brue or Michael
J. Dressell, for any renewal period; and

          4.3.7     That the tenant under the lease have the right to remodel
the premises without the prior approval of the lessor.

     4.4  Developer shall furnish Franchisor with a copy of each executed lease
within ten (10) days after its execution.

     4.5  Notwithstanding the terms of any Franchise Agreement executed pursuant
to this Agreement, Developer shall not be required to pay an initial franchisee
fee or a transfer fee to Franchisor based upon an approved request by Developer
for consent to change the location of an existing Bakery to a new location
within the Development Area.  In all other respects, such a request shall be
treated as a request for a new site pursuant to this Section 4.

5.   TRAINING OF DEVELOPER EMPLOYEES

     After the first Bakery developed hereunder opens for business, Developer
shall have the right to fulfill Franchisor's responsibility under each Franchise
Agreement to conduct training for each manager, assistant manager, and baker of
a Bakery, provided that the content and administration of Developer's training
program are at least equal to those of Franchisor's training program and are
approved in advance by Franchisor.  Franchisor shall have the right to review
Developer's training program periodically to ensure its quality and to verify
that managers, assistant managers, and bakers are being trained in a timely and
satisfactory manner.  Franchisor shall notify Developer of any deficiencies in
the training program.  If Developer fails to cure such deficiencies within a
reasonable time, Franchisor may revoke its approval of the training program and
require all Bakery managers, assistant managers, and bakers to attend training
conducted by Franchisor, until such time as the deficiencies in Developer's
program have been corrected to Franchisor's satisfaction.

6.   OPERATIONS MANUALS

     Franchisor shall provide to Developer, on loan, for each Bakery and bagel
dough manufacturing site developed hereunder, one set of Franchisor's
confidential Operations Manuals, as they exist from time to time (the
"Manuals").  The Manuals shall remain the sole property of Franchisor and shall
be kept in a secure place at all times.  Developer shall not photocopy,
duplicate, record, or otherwise reproduce the Manuals or any of their contents
without the prior written consent of Franchisor.

7.   CONFIDENTIAL INFORMATION
 
     7.1  Except as hereinafter provided, Developer shall not, during the term
of this Agreement or at any time thereafter, communicate, divulge, or use for
the benefit of any other 

                                       5
<PAGE>
 
person or entity any confidential information, knowledge, trade secrets, or 
know-how which may be communicated to Developer or of which Developer may be
apprised by virtue of Developer's activities under this Agreement. Developer may
divulge such confidential information only: (i) to such of its employees and
outside advisors as deemed necessary by Developer; and (ii) to Developer's
contractors and prospective landlords with the prior written approval of
Franchisor. All information, knowledge, trade secrets, know-how, techniques, and
other data of Franchisor or its affiliates which Franchisor designates in
writing as confidential shall be deemed confidential for purposes of this
Agreement, except information which Developer can demonstrate came to its
attention by lawful means prior to disclosure thereof by Franchisor, or which,
at or after the time of disclosure by Franchisor to Developer, had become or
later becomes a part of the public domain, through publication or communication
by others.

     7.2  At Franchisor's request, Developer shall require its managers, bakers,
assistant managers, commissary employees, administrative personnel and any other
person to whom Developer wishes to disclose any confidential information of
Franchisor to execute covenants that they will maintain the confidentiality of
such information.  Such covenants shall be in a form satisfactory to Franchisor,
including, without limitation, specific identification of Franchisor as a third-
party beneficiary with the independent right to enforce the covenants.

8.   CORPORATE REQUIREMENTS; FINANCIAL STATEMENTS

     8.1  If Developer is a corporation, Developer shall comply with the
following requirements during the term of this Agreement:

          8.1.1     Developer shall furnish Franchisor with a copy of its
Articles or Certificate of Incorporation, Bylaws, and any other corporate
governing documents Franchisor may reasonably request, and any amendments
thereto;

          8.1.2     Developer shall confine its activities, and its governing
documents or a shareholder's agreement shall at all times provide that its
activities are confined, exclusively to the development and operation of the
Bakeries and/or bagel dough manufacturing sites to be developed hereunder;
provided, hereunder, that such restriction shall automatically terminate at the
time Developer (or its parent or successor) files a registration statement with
the Securities and Exchange Commission covering sales of its shares to the
public.

          8.1.3     Until or unless Developer or a Holding Company (as defined
in Section 9.3.5) issues securities pursuant to a Public Offering (as defined in
Section 9.3.5) in accordance with the terms of this Agreement, Developer shall
maintain a current list of all owners of record and all beneficial owners of any
class of voting stock of Developer and shall furnish the list to Franchisor upon
request.

     The transfer of ownership of shares represented by this Certificate is
     subject to the terms and conditions of an Agreement with Bruegger's
     Franchise Corporation. 

                                       6
<PAGE>
 
     Reference is made to the provisions of the Development Agreement and to the
     Articles and Bylaws of the Corporation.

          8.1.4     Until such time as Developer or a Holding Company issues
securities pursuant to a Public Offering in accordance with the terms of this
Agreement, Developer shall maintain a current list of all owners of record and
all beneficial owners of any class of voting stock of Developer and shall
furnish the list to Franchisor upon request.

          8.1.5     If Developer operated Bakeries before the effective date of
this Agreement, then, notwithstanding the foregoing Sections 8.1.2 and 8.1.3,
Developer shall not be in violation of this Agreement so long as Developer
limits its activities exclusively to developing and operating Bakeries and
restricts the transfer of its shares of stock to only those transfers authorized
by this Agreement.

     8.2  If Developer is a partnership, Developer shall comply with the
following requirements during the term of this Agreement:

          8.2.1     Developer shall furnish Franchisor with a copy of its
partnership agreement and such other governing documents as Franchisor may
reasonably request, and any amendments thereto.

          8.2.2     Developer shall include in its partnership certificate, if
any, filed with the state in which Developer was formed a statement that the
transfer of ownership of a partnership interest is subject to the terms and
conditions of an Agreement with Bruegger's Franchise Corporation.

          8.2.3     Developer shall prepare and furnish to Franchisor, upon
request, a list of all general and limited partners in Developer.

     8.3  If Developer is a limited liability company, Developer shall comply
with the following requirements during the term of this Agreement:

          8.3.1     Developer shall furnish Franchisor with a copy of its
Certificate of Formation, limited liability company operating agreement, and any
other entity governing documents as Franchisor might reasonably request, and any
amendments thereto.

          8.3.2     Developer shall confine its activities, and its governing
documents shall at all times provide that its activities are confined,
exclusively to the development and operation of the Bakeries to be developed
hereunder;

          8.3.3     Developer's limited liability company operating agreement
shall include provisions that state that the transfer of shares is subject to
the terms and conditions of an Agreement with Franchisor.

                                       7
<PAGE>
 
          8.3.4     Until such time as Developer or a Holding Company issues
securities pursuant to a Public Offering in accordance with the terms of this
Agreement, Developer shall prepare and furnish to Franchisor, upon request, a
list of all members of Developer.

     8.4  Developer shall furnish to Franchisor, within ninety (90) days after
the end of each fiscal year of Developer, an income statement showing the
results of Developer's operations during such fiscal year and a balance sheet as
of the end of such fiscal year, both of which shall be prepared in accordance
with generally accepted accounting principles and reviewed by an independent
certified public accountant.  If, however, the foregoing income statements and
balance sheets are audited by an independent certified public accountant, then
Developer shall furnish the audited income statements and balance sheets rather
than the reviewed income statements and balance sheets.  Franchisor shall use
reasonable efforts to keep all such income statements and balance sheets
confidential except as required by law.

     8.5  During the period that Nordahl L. Brue or Michael J. Dressell
continues to own an interest in Developer, the income statements and balance
statements provided pursuant to Section 8.3 of the Agreement may be audited or
reviewed (as the case may be) by a certified public accountant who is not
independent of the Developer, provided that Nordahl L. Brue or Michael J.
Dressell personally certifies that each such income statement and balance sheet
is complete, accurate and prepared in accordance with generally accepted
accounting principles.

9.   TRANSFER OF INTEREST

     9.1  Franchisor shall have the right to transfer or assign this Agreement
or any part of its rights or obligations herein to any person or legal entity.

     9.2  Developer understands and acknowledges that the rights and duties set
forth in this Agreement are granted in reliance on the business skill, financial
capacity, and personal character of Developer's present owners and management.
Accordingly, except as specifically provided in Section 9.3:  (i) neither
Developer nor any Holding Company may issue any capital stock of the Developer
or the Holding Company and (ii) no holders of any capital stock of the Developer
or the Holding Company (collectively the "Holders" and individually a "Holder"),
may sell, assign, transfer, convey, or give away any such capital stock, in each
case without receiving the prior written consent of the Franchisor.  In
addition, neither the Developer nor any Holding Company shall assign, transfer,
convey or give away any interest in this Agreement without the prior written
consent of Franchisor (except as specifically provided in Section 9.3).
Developer shall notify Franchisor in writing of any proposed transfer at least
thirty (30) days before any transfer is to take place, and shall provide such
information and documentation relating to the proposed transfer as Franchisor
may reasonably request.  Any purported assignment or transfer not effected in
compliance with this Agreement shall be null and void and shall constitute a
material breach of this Agreement, for which Franchisor may immediately
terminate this Agreement without opportunity to cure pursuant to Section 10.2 of
this Agreement; provided, however that failure to provide the notice referred to
above shall not give rise to termination if the other conditions of this 

                                       8
<PAGE>
 
Section 9 shall have been satisfied, unless Developer shall fail to give this
notice three (3) times during any twelve month period, or four (4) times during
the term of this Agreement.

     9.3  Notwithstanding any other provision of this Section 9:

          9.3.1     Franchisor acknowledges that Developer is currently party to
financing arrangements that require the pledge and assignment as collateral of
this Agreement, the leases for the Approved Locations, the Franchise Agreements
executed pursuant to this Agreement, other personal property assets, and any and
all interest of Developer therein, and some or all of the outstanding stock of
Developer, all as security for any loan, guarantee or other obligation;

          9.3.2     Franchisor hereby agrees that, without further consent from
Franchisor, Developer may pledge, assign as collateral with right of
reassignment, or otherwise encumber this Agreement, any and all Franchise
Agreements executed pursuant to this Agreement, the leases for any of the
Approved Locations, any and all other collateral of the Developer, and any
interest of Developer therein, as security for any loan, guarantee or other
obligation;

          9.3.3     Franchisor hereby agrees that, without further consent from
Franchisor, Developer or any individual, partnership, corporation or other legal
entity which directly or indirectly owns any interest in Developer, may pledge
or otherwise encumber any ownership interest in Developer as security for a
loan, guarantee or other obligation;

          9.3.4     No prior written consent under Section 9.2 shall be required
and no right of first refusal under Section 9.4 shall be available to Franchisor
with respect to (i) any transfers, assignments or sales of securities by any
Holder aggregating less than 20% of the securities held by Holder; provided no
such transferee shall be deemed a Holder for purposes of further transfers
pursuant to this subsection (i); (ii) any transfers, assignments or sales by a
Holder to spouses or lineal descendants or to trusts or other fiduciaries for
the benefit of spouses or lineal descendants of such Holder; (iii) any
transfers, assignments or sales of securities by any party who is a Holder as of
the date of this Agreement to any other Holder; (iv) any merger, acquisition or
other reorganization involving the Developer in which securities owned by a
Holder are in substantial part exchanged for or converted into securities of
another entity; (v) any transfers to persons or entities who are stockholders or
affiliates of a Holder as of the date of this Agreement (including other
entities controlled by persons or entities who are affiliates of the Holders as
of the date of this Agreement) or, if the Holder is a partnership, to existing
partners of such Holder; (vi) any transfers, assignments or sales to employees
of Developer pursuant to an incentive plan adopted by Developer, provided that
the securities authorized for issuance under such plan at any time shall not
exceed 25% of Developer's total outstanding securities; (vii) any transfers
mandated by federal or state law or regulation; or (viii) any bona fide
transaction not intended to avoid the provisions hereof in which any Holder
merges or consolidates with a person or sells all or substantially all of its
assets (including the shares of common stock owned by it at such time) to such a
person in exchange for securities of such person, or any transfer by a Holder to
a person which the 

                                       9
<PAGE>
 
Holder controls, is controlled by or is under common control with; provided,
however, that, except in the case of Section (vii) above, Nordahl L. Brue and
Michael J. Dressell, or either of them and their respective spouses or lineal
descendants, shall continue to own beneficially at least five percent (5%) of
the total outstanding securities of Developer, or of the entity that owns and
controls Developer, and further provided that, prior to the consummation of the
transfers described in Sections (i) through (vi) and (viii) and (ix) inclusive,
such transferees agree to be bound by the terms and conditions of this Agreement
by executing and delivering to each party hereto their agreements to that
effect.

          9.3.5     Either Developer or any partnership, corporation, or other
legal entity which directly or indirectly owns any interest in Developer (a
"Holding Company") may issue securities of either Developer or such Holding
Company by means of a registered public offering (a "Public Offering") at any
time after December 31, 1997.  In the event of a Public Offering, the Franchisor
shall reasonably cooperate with the Developer and/or the Holding Company in
connection with such Public Offering.  No prior written consent under Section
9.2 and no right of first refusal under Section 9.4 shall be available to
Franchisor in connection with a Public Offering.

          9.3.6     No prior written consent under Section 9.2 shall be required
and no right of first refusal under Section 9.4 shall be available to Franchisor
with respect to any sale, transfer, assignment or conveyance of securities of
the Developer or the Holding Company by either Developer or the Holding Company
or by any Holder which does not result in a Change of Control of Developer or
the Holding Company and which is not proposed to be made to a direct competitor
of Franchisor in the fresh bagel bakery business.

          9.3.6.1        As used in this Section 9.3.6, a "Change of Control"
shall mean the occurrence of any of the following: (i) a sale or other
disposition, in one or a series of transactions, of all or substantially all of
the assets of Developer or the Holding Company other than to an Affiliate of the
Developer or the Holding Company; (ii) any person, persons or entity (other than
a Permitted Holder) becomes the beneficial owner of 40% or more of the
outstanding equity of the Developer or the Holding Company; or (iii) any
transaction in which, after giving effect thereto, the Permitted Holders cease
to own at least 60% of the outstanding equity in Developer; (iv) the Developer
or the Holding Company engages in any merger, consolidation, sale of capital
stock or any other transaction with any other person or entity, with the effect
that after the transaction, the Permitted Holders own, directly or indirectly,
in the aggregate less than 60% of the outstanding equity of (x) the Developer or
the Holding Company, as applicable, if the Developer or the Holding Company, as
applicable, is the surviving entity, or (y) the surviving or resulting entity if
the Developer or the Holding Company is not the surviving entity, in each such
case immediately after the transaction; or (v) any transfer, assignment, sale or
disposition of the equity of Developer or the Holding Company that causes the
percentage ownership of an Operator or a successor Operator reasonably
satisfactory to Franchisor to be less than two percent (2%) of the total
outstanding securities of Developer or of the Holding Company.  As used in this
Section 9.3.6.1, "Affiliate" means with respect to any person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such person; 

                                      10
<PAGE>
 
"Permitted Holder" means any person, partnership, corporation or other legal
entity which as of the date of this Agreement directly or indirectly owns an
interest in Developer or the Holding Company and any of their Affiliates; and
"Operator" shall be the individual responsible for the operations of all
Bakeries developed pursuant to this Agreement.

          9.3.7     Except as provided in Section 9.3.3, neither Developer nor
Holding Company may offer or sell securities by means of a Public Offering;
provided, however,

          9.3.8     None of the transfers provided for in this Section 9.3 shall
trigger the right of first refusal set forth in Section 9.4 of this Agreement or
the transfer fee set forth in Section 9.6.5 of this Agreement;

          9.3.9     Franchisor shall, upon reasonable request from Developer,
execute and deliver to Developer such written approvals and acknowledgements
consistent with this Section 9.3 as shall be reasonably requested from time to
time for delivery to prospective assignees or transferees of Developer or its
owners.

     9.4  Franchisor shall have the right, exercisable within thirty (30) days
after receipt of written notice of a proposed transfer pursuant to Section 9.2,
but not including those transfers permitted without Franchisor's consent under
Section 9.3, to purchase the interest proposed to be transferred by sending
written notice to the transferor, as follows:

          9.4.1     If the transfer is proposed to be made pursuant to a sale of
the assets or equity of Developer or Holding Company to a third party,
Franchisor may purchase the interest on the same terms and conditions offered by
the third party.  Closing on such purchase shall occur within forty-five (45)
days from the date of notice to the seller of the election to purchase by
Franchisor.  If the consideration, terms and/or conditions offered by a third
party are such that Franchisor may not reasonably be required to furnish the
same consideration, terms, and/or conditions, then Franchisor may purchase the
interest proposed to be sold for the reasonable equivalent in cash.  If the
parties cannot agree within a reasonable time on the cash consideration, an
independent appraiser shall be designated by Franchisor, at Franchisor's
expense, and the determination of the appraiser shall be binding on both
parties. Any material change thereafter in the terms of the offer from a third
party shall constitute a new offer subject to the same rights of first refusal
by Franchisor as in the case of the third party's initial offer.

          9.4.2     If such transfer is proposed to be made for less than full
consideration, Franchisor shall designate an independent appraiser to determine
the fair market value of the interest proposed to be transferred.  Franchisor
shall pay the entire expense of the appraisal. Franchisor may purchase such
interest at the fair market value determined by the appraiser. Closing on such
purchase shall occur within forty-five (45) days after notice from Franchisor to
the transferor of the appraiser's determination of fair market value.

                                      11
<PAGE>
 
     9.5  Except as provided in Section 9.3, if Franchisor's right of first
refusal arises under Section 9.4, but Franchisor fails to exercise such right,
then the proposed transferor may complete the transfer after obtaining any
consent in writing from Franchisor required under Section 9.2.  Except as
hereinafter provided, Franchisor shall not unreasonably withhold its consent to
a proposed transfer.  Franchisor may, however, withhold consent, in its sole
discretion, to the transfer if such transfer is not made in conjunction with a
simultaneous transfer of all comparable interests held by the transferor in all
Franchise Agreements executed pursuant to this Agreement.

     9.6  In those instances in which Franchisor's consent is required for a
transfer, Franchisor may require any or all of the following conditions to such
consent:

          9.6.1     All of Developer's accrued monetary obligations to
Franchisor and its affiliates shall have been satisfied;

          9.6.2     Developer shall not at the time of transfer be in default of
any provision of this Agreement, any amendment hereof or successor hereto, or
any other agreement between Developer and Franchisor or its affiliates or any
Franchise Agreement executed pursuant to this Agreement;

          9.6.3     The transferor and Franchisor shall have executed mutual
general releases, in a form reasonably satisfactory to Franchisor, of any and
all claims against each other and the affiliates of each other, and the
respective and its officers, directors, shareholders, and employees of each
other, in their corporate and individual capacities;

          9.6.4     If the transfer is made by the Developer rather than a
person or entity owning an interest in the Developer, the transferee shall enter
into a written assignment, in a form satisfactory to Franchisor, assuming and
agreeing to discharge all of Developer's obligations under this Agreement;

          9.6.5     If a transfer, alone or together with previous,
simultaneous, or proposed transfers, would have the effect of changing control
of Developer or of the rights granted under this Agreement, Developer shall pay
a transfer fee of Five Thousand Dollars ($5,000) plus Franchisor's reasonable
expenses for outside services associated with reviewing the application to
transfer, including, but not limited to, reasonable attorneys' fees; provided,
however, no transfer fee or expense reimbursement shall be due in connection
with an assignment of any interest in Developer or this Agreement between
Michael J. Dressell and Nordahl L. Brue.  Notwithstanding any provision in the
Development Agreement or any Franchise Agreement, in the event Franchisor
approves of a simultaneous transfer of the Development Agreement and more than
one Franchise Agreement to a single transferee, or an affiliated group of
transferees or a sale of control of Developer or the Holding Company, Developer
shall pay a total transfer fee of $5,000.00 regardless of the number of
Franchise Agreements or Bakeries transferred, plus Franchisor's reasonable
expenses for outside services 

                                      12
<PAGE>
 
associated with reviewing the application to transfer, including but not limited
to, reasonable attorneys' fees.

     9.7  Except with respect to transfers allowable without Franchisor's
consent under Section 9.3, the executor or personal representative of a person
with an interest in Developer shall transfer such person's interest to a third
party approved by Franchisor within a reasonable time after the date of such
person's death or declaration of such person's mental incapacity.   Except as
provided in Section 9.3 above, such transfers shall be subject to Franchisor's
right of first refusal under Section 9.4, or if such right is not exercised, the
same conditions as any inter vivos transfer under Section 9.6.  In the case of
                       ----- -----                                            
transfer by bequest, if the beneficiaries are unable to meet the conditions of
this Section 9, the executor shall transfer the deceased's interest to another
party approved by Franchisor within a reasonable time, subject to all the terms
and conditions for transfers contained in this Section 9.  If the interest is
not disposed of within two (2) years from the date of death or appointment of a
personal representative, Franchisor may terminate this Agreement by written
notice.

     9.8  Franchisor's consent to a transfer shall not constitute a waiver of
any claims Franchisor may have against the transferring party, nor shall it be
deemed a waiver of Franchisor's right to demand exact compliance with any of the
terms of this Agreement by the transferor or transferee.

     9.9  In the event Developer or Holding Company shall attempt to obtain
funds by the sale of securities in Developer or Holding Company in accordance
with the provisions of this Agreement, Developer agrees to submit any written
information related to the System, the Bakeries, this Agreement or any other
aspect of the franchised business to Franchisor for review and approval prior to
its inclusion in any offering material, which approval may be withheld on any
reasonable basis; provided, however, Franchisor may not reject information that
must be included to comply with applicable state and federal securities laws.
Franchisor shall use reasonable efforts to respond promptly to any and all
requests for approval of such offering materials.  No offering by Developer or
the Holding Company shall imply in any way that Franchisor is participating in
an underwriting, issuance, or offering of securities of either Developer or
Franchisor.  Furthermore, Developer may not use the Proprietary Marks in
connection with the offering material, except that in limited circumstances as
approved by Franchisor, which consent shall not be unreasonably withheld,
Developer may use the "Bruegger's" name and the "Bruegger's" and "Bruegger's
Fresh Bagel Bakery" trademarks in such offering materials for the purpose of
identifying the business of Developer including use of a photograph of a Bakery,
subject to Franchisor's consent, which shall not be unreasonably withheld.  In
addition, neither Developer, nor the affiliated entity that seeks to offer
securities for sale, shall have a name that is substantially similar to
"Bruegger's" or otherwise creates a likelihood of confusion to the public
between Developer, or the affiliated entity who seeks to sell securities, and
Franchisor.  Franchisor's review of any offering material shall be limited to
the subject of the relationship between Developer and Franchisor and to the
compliance with this Section 9.9.  Developer must fully indemnify Franchisor in
connection with the offering.  For each proposed offering, Developer shall pay
to Franchisor a non-refundable fee 

                                      13
<PAGE>
 
of Five Thousand Dollars ($5,000) to reimburse Franchisor for its costs and
expenses associated with reviewing the proposed offering. Developer shall give
Franchisor written notice at least thirty (30) days prior to the date of
commencement of any offering.

     9.10 The restrictions on transfer and Franchisor's rights of first refusal
set forth in this Section 9 shall terminate upon the filing of a registration
statement with the Securities and Exchange Commission by Developer or a Holding
Company; provided such registration filing is effected in accordance with the
terms of this Agreement.

     9.11 Franchisor and Developer hereby agrees that the provisions set forth
in this Section 9 shall also apply with respect to any proposed transfer
otherwise subject to restriction under any Franchise Agreement executed pursuant
to this Agreement.  Consequently, the provisions of this Section 9 supersede any
conflicting or contrary provisions set forth in any Franchise Agreement executed
by Developer pursuant to this Agreement.

10.  DEFAULT AND TERMINATION

     10.1 Developer shall be in default under this Agreement, and all rights
granted herein shall automatically terminate without notice to Developer, if
Developer becomes insolvent or makes a general assignment for the benefit of
creditors; if a petition in bankruptcy is filed by Developer or such a petition
is filed against Developer and not opposed by Developer; if Developer is
adjudicated as bankrupt or insolvent; if a bill in equity or other proceeding
for the appointment of a receiver of Developer or other custodian for
Developer's business or assets is filed and consented to by Developer; if a
receiver or other custodian (permanent or temporary) of Developer's assets or
property, or any part thereof, is appointed by any court of competent
jurisdiction; if proceedings for a composition with creditors under any state or
federal law is instituted by or against Developer; if a final judgment remains
unsatisfied or of record for sixty (60) days or longer (unless supersedeas bond
is filed); if Developer is dissolved; if execution is levied against Developer's
business or property; if suit to foreclose any lien or mortgage against the
premises or equipment of any Bakery developed hereunder is instituted against
Developer and not dismissed within sixty (60) days (except a mechanic's or
materialman's lien with respect to which Developer has a good faith dispute
regarding the amount due, provided Developer has set aside sufficient funds to
satisfy the obligation); or if the real or personal property of any Bakery
developed hereunder is sold after levy thereupon by any sheriff, marshall, or
constable.

     10.2 Franchisor shall have the right to terminate this Agreement, effective
immediately upon the receipt of written notice by Developer, if any of the
following events occurs:

          10.2.1  In the event of any transfer of an interest in Developer or in
this Agreement which does not comply with Section 9 of this Agreement, or any
transfer of an interest in Developer by intestate succession to an heir who is
unable to meet the conditions of Section 9; or

                                      14
<PAGE>
 
          10.2.2  If Developer, or any entity which controls Developer, becomes
a publicly-held corporation in violation of the terms of Sections 9.3.5 or 9.9
of this Agreement.

     10.3 If Developer fails to cure any default of any other provision of this
Agreement within thirty (30) days after receiving written notice of default from
Franchisor, this Agreement shall terminate at the end of such thirty-day period
without further notice from Franchisor.  Except as provided in Sections 10.1 and
10.2, Franchisor may terminate this Agreement only in the event of a default by
Developer, and only by giving Developer written notice of termination stating
the nature of the default at least thirty (30) days prior to the effective date
of termination.  If the default is not cured to Franchisor's reasonable
satisfaction within the thirty-day period (or such longer period as applicable
law may require or as may be reasonably practical, provided Developer diligently
prosecutes such cure to completion), this Agreement shall terminate without
further notice to Developer, effective at the end of the thirty-day period (or
such longer period as this Section 10.3 shall provide).

     10.4 Upon termination of this Agreement, Developer shall have no right
under this Agreement to establish or operate any Bakery for which a Franchise
Agreement has not been executed by the parties prior to termination; and
Franchisor shall be entitled to establish, and to franchise others to establish,
Bakeries at any location in the Development Area except as may be otherwise
provided under the exclusivity provisions of any Franchise Agreement which
remains in effect between Franchisor and Developer.

     10.5 No right or remedy herein conferred upon or reserved to Franchisor is
exclusive of any other right or remedy provided or permitted by law or in
equity.

                                      15
<PAGE>
 
11.  COVENANTS

     11.1 Developer acknowledges that, pursuant to this Agreement, Developer
will receive valuable confidential  information, including, without limitation,
information regarding the site selection, marketing, and food preparation
techniques of Franchisor and the System. Developer covenants that, during the
term of this Agreement, Developer shall not, either directly or indirectly, for
itself, or through, on behalf of, or in conjunction with any person or legal
entity:

          11.1.1    Divert or attempt to divert any present or prospective
business or customer of any Bakery to any competitor, by direct or indirect
inducement or otherwise, or do or perform, directly or indirectly, any other act
injurious or prejudicial to the goodwill associated with the Proprietary Marks
and the System; provided, however, if this provision is violated by an employee
of Developer who does not own either equity or stock appreciation rights in
Developer, then this default shall be deemed cured if the employee's employment
with Developer is terminated;

          11.1.2    Employ or seek to employ any person who is at that time
employed by Franchisor or who was employed by Franchisor within the preceding
three (3) months, or otherwise directly or indirectly induce such person to
leave his or her employment with Franchisor; or

          11.1.3    Own, manage, operate, engage in, be employed by, provide any
assistance to, or have any interest in (as owner or otherwise) any other
business whose sales of fresh or packaged bagels and cream cheese are more than
five percent (5%) of its total sales by annual dollar value.

     11.2 Developer covenants that, except as otherwise approved in writing by
Franchisor, Developer shall not, for one (1) year after the expiration or
termination of this Agreement or the approved transfer of this Agreement to a
new developer, either directly or indirectly, for itself or through, on behalf
of, or in conjunction with any person or legal entity, own, maintain, operate,
engage in, be employed by, provide assistance to, or have any interest in any
business (i) whose sales of fresh or packaged bagels and cream cheese are more
than five percent (5%) of its total sales by annual dollar volume, and (ii)
which is, or is intended to be, located within the Development Area, except
pursuant to a Franchise Agreement with Franchisor.

     11.3 Sections 11.1.3 and 11.2 shall not apply to ownership by Developer of
a less than five percent (5%) beneficial interest in the outstanding equity
securities of any publicly-held corporation or to operation of one or more
Bakeries pursuant to Franchise Agreements with Franchisor.

     11.4 Developer understands and acknowledges that Franchisor shall have the
right, in its sole discretion, to reduce the scope of any covenant set forth in
Sections 11.1 and 11.2 

                                      16
<PAGE>
 
of this Agreement, or any portion thereof, without Developer's consent,
effective immediately upon receipt by Developer of written notice thereof; and
Developer agrees that it shall comply forthwith with any covenant as so
modified, which shall be fully enforceable notwithstanding the provisions of
Section 16.1 hereof.

     11.5 Developer agrees that the existence of any claims it may have against
Franchisor, whether or not arising from this Agreement, shall not constitute a
defense to the enforcement by Franchisor of the covenants in this Section 11.
Developer agrees to pay all costs and expenses incurred by Franchisor in
enforcing this Section 11, including, but not limited to, reasonable attorneys
fees.

     11.6 Developer acknowledges that Developer's violation of the terms of this
Section 11 would result in irreparable injury to Franchisor for which no
adequate remedy at law may be available, and Developer accordingly consents to
the issuance of an injunction prohibiting any conduct by Developer in violation
of the terms of this Section 11.  Such injunctive relief shall be in addition to
any other remedies Franchisor may have.

     11.7 At Franchisor's request, Developer shall obtain and furnish to
Franchisor executed covenants similar in substance to those set forth in this
Section 11 (including covenants applicable upon the termination of an
individual's relationship with Developer) from any or all officers and directors
of Developer.  Every covenant required by this Section 11.7 shall be in a form
reasonably satisfactory to Franchisor, including, without limitation, specific
identification of Franchisor as a third party beneficiary with the independent
right to enforce the covenant.

     11.8 Franchisor covenants that, during the term of this Agreement,
Franchise shall not, directly or indirectly, or through or on behalf of, or in
conjunction with any person or legal entity, employ or seek to employ any person
who is at that time employed by Developer or who was employed by Developer
within the preceding six (6) months, or otherwise directly or indirectly induce
such person to leave his or her employment with Developer.

     11.9 Franchisor covenants that it possesses all corporate power necessary
to enter into this Agreement, to grant Developer the rights granted herein and
to perform the transactions contemplated hereunder.

12.  NOTICES

     All notices pursuant to this Agreement shall be in writing and shall be
personally delivered, sent by registered mail, or delivered or sent by another
method which affords the sender evidence of receipt or attempted delivery, to
the respective parties at the following addresses, unless and until a different
address has been designated by written notice to the other party:

                                      17
<PAGE>
 
     Notices to Franchisor:        Bruegger's Franchise Corporation
                                   159 Bank Street
                                   P.O. Box 374                        
                                   Burlington, Vermont 05402          
                                   Attn: Vice President of Development 

     With a copy to:               Nordahl L. Brue, Esq.
                                   Sheehey Brue Gray & Furlong P.C.
                                   119 South Winooski Avenue       
                                   P.O. Box 66                     
                                   Burlington, Vermont 05402        

     Notices to Developer:         Mr. J. Krut Schreck
                                   NORSTAR BAGEL BAKERIES, INC.  
                                   1433 E. Franklin Avenue, Suite 3B
                                   Minneapolis, MN 55404

     With a copy to:               Mr. Steven P. Schonberg
                                   Champlain Management Services, Inc.
                                   159 Bank Street                    
                                   P.O. Box 1082                      
                                   Burlington, Vermont 05402           

Any notice sent or delivered which affords the sender evidence of receipt or
attempted delivery shall be deemed to have been given and received at the date
and time of receipt or attempted delivery.

13.  INDEPENDENT CONTRACTOR AND INDEMNIFICATION

     13.1 It is understood and agreed by the parties that this Agreement does
not create a fiduciary relationship between them; that Developer is an
independent contractor; and that nothing in this Agreement is intended to make
either party an agent, legal representative, subsidiary, joint venturer,
partner, employee, or servant of the other for any purpose whatsoever.

     13.2 Developer shall hold itself out to the public to be an independent
contractor operating pursuant to this Agreement.  Developer agrees to take such
actions as shall be necessary to that end.

     13.3 Nothing in this Agreement authorizes Developer to make any contract,
agreement, warranty, or representation on Franchisor's behalf, or to incur any
debt or other obligation in Franchisor's name.  Franchisor shall in no event
assume liability for, or be deemed liable hereunder as a result of, any such
action, nor shall Franchisor be liable by reason of any act or omission of
Developer or any claim or judgment arising therefrom 

                                      18
<PAGE>
 
against Developer or Franchisor. Developer shall hold harmless and indemnify
Franchisor, its affiliates, and their respective officers, directors,
shareholders, and employees against any claim arising directly or indirectly
from, as a result of, or in connection with Developer's activities hereunder, as
well as the costs of defending against any such claim, except to the extent the
claim is caused by Franchisor's breach of its obligations under this Agreement.

14.  APPROVALS AND WAIVERS

     14.1 Whenever this Agreement requires the prior approval or consent of
Franchisor, Developer shall make a timely written request to Franchisor
therefor, and, except as may be otherwise expressly provided herein, such
approval or consent must be obtained in writing and signed by an officer of
Franchisor.  Franchisor shall respond to each such request in writing not later
than thirty (30) days after receipt of the request for such approval or consent.

     14.2 Franchisor makes no warranties or guarantees upon which Developer may
rely and assumes no liability or obligation to Developer by providing any
waiver, approval, consent, or suggestion to Developer in connection with this
Agreement, or by reason of any neglect, delay, or denial of any request
therefor.

     14.3 No delay or failure of either party to exercise any right reserved to
it in this Agreement or to insist upon strict compliance by the other party with
any obligation or condition in this Agreement, and no custom or practice of the
parties at variance with the terms hereof, shall constitute a waiver of either
party's right to exercise such right or to demand exact compliance by the other
party with any of the terms hereof.  Waiver by either party of any particular
default by the other shall not affect or impair said party's rights with respect
to any subsequent default of the same, similar, or different nature.  Subsequent
acceptance by Franchisor of any payments due to it hereunder shall not be deemed
to be a waiver by Franchisor of any preceding breach by Developer of any of the
terms, covenants, or conditions of this Agreement.

15.  SEVERABILITY AND CONSTRUCTION

     15.1 If, for any reason, any provision of this Agreement is determined to
be invalid and contrary to, or in conflict with, any existing or future law or
regulation by a court or agency having valid jurisdiction, such invalidity shall
not impair the operation of, or have any other effect upon, such other
provisions of this Agreement as may remain otherwise intelligible.  The latter
shall continue to be given full force and effect and bind the parties hereto,
and the invalid provision(s) shall be deemed not to be a part of this Agreement.

     15.2 Except as expressly provided to the contrary herein, nothing in this
Agreement is intended, nor shall be deemed, to confer upon any person or legal
entity other than Developer, Franchisor, and such of their successors and
assigns as may be contemplated by Section 9 above, any rights or remedies under
or by reason of this Agreement.

                                      19
<PAGE>
 
     15.3 Any provision or covenant of this Agreement which expressly or by
reasonable implication imposes obligations after the expiration or termination
of this Agreement shall survive such expiration or termination.

     15.4 Developer and Franchisor agree to be bound by any promise or covenant
imposing the maximum duty permitted by law which is subsumed within the terms of
any provision of this Agreement, as though it were separately articulated in and
made a part of this Agreement, that may result (i) from striking from any of the
provisions hereof any portion or portions which a court or agency having valid
jurisdiction may hold to be unreasonable and unenforceable in an unappealed
final decision to which either Franchisor or Developer is a party, or (ii) from
reducing the scope of any promise or covenant to the extent required to comply
with such a court or agency order.

16.  ENTIRE AGREEMENT

     16.1 This Agreement, the documents referred to herein, and the Exhibits
attached hereto constitute the entire agreement between Franchisor and Developer
concerning the subject matter hereof and supersede all prior agreements,
negotiations, representations, and correspondence concerning the same subject
matter.  Except for those permitted to be made unilaterally by Franchisor
hereunder, no amendment, change, or variance from this Agreement shall be
binding on either party unless agreed to in writing by the parties and executed
by their authorized officers or agents.

     16.2 This Agreement shall be governed by the laws of the state in which
Franchisor has its principal place of business from time to time.  In the event
of any conflict of law, the laws of such state shall prevail, without regard to
the application of such state's conflict of law rules.

     16.3 Any action (whether or not arising out of this Agreement) brought by
Developer against Franchisor in any court, whether federal or state, shall be
brought, and any action brought by Franchisor against Developer may be brought,
within the judicial district in which Franchisor has its principal place of
business.  The parties hereby waive all questions of personal jurisdiction or
venue for the purpose of carrying out this provision.

     16.4 No right or remedy conferred upon or reserved to Franchisor or
Developer by this Agreement is intended to be, nor shall be deemed, exclusive of
any other right or remedy herein or by law or equity provided or permitted, but
each shall be cumulative of every other right or remedy.

     16.5 Nothing herein contained shall bar either party's right to obtain
injunctive relief against threatened conduct that will cause it loss or damages,
under the usual equity rules, including the applicable rules for obtaining
restraining orders and preliminary injunctions.

                                      20
<PAGE>
 
     16.6 Any and all claims and actions arising out of or relating to this
Agreement or the relationship of Developer and Franchisor, brought by either
party against the other, shall be commenced within one year from the occurrence
of the facts giving rise to such claim or action, or such claim or action shall
be barred.

     16.7 Developer and Franchisor irrevocably waive trial by jury in any
action, proceeding, or counterclaim brought by either of them against the other.
Developer and Franchisor hereby waive to the fullest extent permitted by law any
right to, or claim of, any punitive or exemplary damages against the other and
agree that, in the event of a dispute between them, each shall be limited to the
recovery of any actual damages sustained by it.

17.  APPLICABLE LAW; ARBITRATION

     17.1 This Agreement shall be governed by the laws of the state in which
Franchisor has its principal place of business from time to time.  In the event
of any conflict of law, the laws of such state shall prevail, without regard to
the application of such state's conflict-of-law rules.

     17.2 Except as provided in Sections 17.3 and 17.9, any claim or controversy
arising out of or related to this Agreement (including but not limited to any
claim that the Agreement or any of its provisions is invalid, illegal, or
otherwise voidable or void), the relationship between Franchisor and Developer,
or Developer's operation of the Bakery shall be submitted to arbitration
pursuant to the then-prevailing rules of the American Arbitration Association,
except as such rules may be modified by the following:

          17.2.1    Franchisor and Developer shall each select one arbitrator.
The arbitrators selected by Franchisor and Developer shall jointly select a
neutral third arbitrator, who shall chair the panel and shall be an attorney in
good standing with substantial expertise and experience in commercial disputes
involving franchising or trade regulation.

          17.2.2    The arbitrators shall determine, consistent with the
parties' objectives to avoid undue expense and delay, the types, amount, and
timing of discovery to be provided by the parties.

          17.2.3    The arbitrators shall not entertain or permit any class or
consolidated proceeding.

          17.2.4    The arbitrators' fees shall be borne equally by the parties.
Except as provided in Section 17.2.5, all other costs and expenses in connection
with the arbitration shall be borne by the party who incurs such expense or who
requests a service (such as, but not limited to, a transcript of the arbitration
proceeding).

          17.2.5    The decision of a majority of the arbitrators shall be final
and binding on the parties, and the arbitrators' award shall be the exclusive
remedy between the parties 

                                      21
<PAGE>
 
with respect to all claims, counterclaims, and issues presented or pled to the
panel. The arbitrators may award injunctive relief as well as damages, but they
shall have no authority to award punitive or exemplary damages. Any monetary
award shall be paid promptly, without deduction or offset. Judgment upon the
award may be entered in any court having jurisdiction thereof. If the award is
upheld by a court of competent jurisdiction in a proceeding by either party to
enforce the award or to challenge the award, the party challenging the award or
resisting its enforcement shall pay, to the extent permitted by law, all
reasonable costs, legal fees, and expenses incurred by the party defending the
award or seeking its enforcement.

          17.2.6    The decision of the arbitrators shall have no collateral
estoppel effect with respect to any person or entity who is not a party to the
arbitration proceeding.

     17.3 Unless otherwise agreed by Franchisor and Developer at the time of the
dispute, Section 17.2 shall not apply to: (i) any claim or dispute involving
actual or threatened disclosure or misuse of the contents of the Manuals, the
Bagel Production Manual, or any other confidential information or trade secrets
of Franchisor and its affiliates; (ii) any claim or dispute involving the
ownership, validity, use of, or right to use or license the Proprietary Marks;
(iii) any action by Franchisor to enforce the covenants set forth in Section 11
of this Agreement; or (iv) any action by Franchisor to stop or prevent any
threat or danger to public health or safety resulting from the construction,
maintenance, or operation of the Bakery or any facility in which Developer
manufactures bagel dough.

     17.4 Any issue regarding arbitrability or the enforcement of Section 17.2
shall be governed by the Federal Arbitration Act and the federal common law of
arbitration.

     17.5 Any arbitration proceeding or other action, whether or not arising out
of this Agreement, brought by Developer against Franchisor shall be brought, and
any arbitration proceeding or other action brought by Franchisor against
Developer may be brought, in the judicial district in which Franchisor has its
principal place of business.  The parties hereby waive all questions of personal
jurisdiction and venue for the purpose of carrying out this provision.

     17.6 Except as otherwise provided in this Section 17, no right or remedy
conferred upon or reserved to Franchisor or Developer by this Agreement is
exclusive of any other right or remedy provided herein or permitted by law or
equity, but each shall be cumulative of every other right or remedy.

     17.7 Any and all claims and actions arising out of or relating to this
Agreement, the relationship of Developer and Franchisor, or Developer's
operation of the Bakery brought by either party against the other, whether in
arbitration or any other proceeding, shall be commenced within eighteen months
from the occurrence of the facts giving rise to such claim or action, or such
claim or action shall be barred.

                                      22
<PAGE>
 
     17.8 Franchisor and Developer irrevocably waive trial by jury in any
action, proceeding, or counterclaim brought by either of them against the other.
Franchisor and Developer hereby waive to the fullest extent permitted by law any
right to, or claim of, any punitive or exemplary damages against the other and
agree that, in the event of a dispute between them, each shall be limited to the
recovery of any actual damages sustained by it.

     17.9 Nothing in this Agreement shall bar Franchisor's right to obtain
injunctive relief against threatened conduct that will cause it loss or damage,
under the usual equity rules, including the applicable rules for obtaining
specific performance, restraining orders, and preliminary injunctions.

     17.10     This Agreement shall supersede and replace any prior Agreement
between Franchisor and Developer relating to the development of Bakeries in the
Development Area.

18.  ACKNOWLEDGMENTS

     18.1 ACKNOWLEDGMENT OF ARBITRATION:

          I understand that this agreement contains an agreement to arbitrate
          certain specific issues.  After signing this document, I understand
          that I will not be able to bring a lawsuit concerning any dispute that
          may arise which is covered by one of these arbitration agreements,
          unless it involves a question of constitutional or civil rights.
          Instead, I agree to submit any such dispute to an impartial arbitrator
          as set forth in this Agreement.

     IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.

BRUEGGER'S FRANCHISE CORPORATION        GOFER BAGELS, INC. 


By: /s/   ????                          By: /s/ Steven P. Schuberg  
   ------------------------                ------------------------

Title::_____________________            Title:_____________________    


                                        NORSTAR BAGEL BAKERIES, INC

                                        By: /s/ Steven P. Schuberg  
                                           ------------------------

                                        Title:VP Finance & Treasurer
                                              ----------------------

                                      23
<PAGE>
 
                                   EXHIBIT A

                                      to

                              AMENDED AND RESTATED
                         BRUEGGER'S FRESH BAGEL BAKERY
                        AFFILIATE DEVELOPMENT AGREEMENT



                               PROPRIETARY MARKS
                               -----------------

<TABLE>
<CAPTION>
                                        Date
Registered Marks           Type      Registered        Reg. No.
----------------           ----      ----------        --------
<S>                        <C>       <C>               <C>
BRUEGGER'S                 TM          11/22/88        1,513,741

THE BEST THING ROUND       SM          6/15/93         1,776,884

BRUEGGEROONS               TM          7/13/93         1,781,622

BRUEGGER'S LAST NIGHT'S
BAGELS AND DESIGN          TM          7/13/93         1,781,629

BRUEGGER'S BAGEL BAKERY
FRESH BAGELS AND DESIGN    SM          8/31/93         1,790,827

BRUEGGER'S FRESH BAGEL
BAKERY AND DESIGN          SM          8/31/93         1,790,828

BRUEGGER'S                 SM          9/7/93          1,792,050
</TABLE>
<PAGE>
 
                                   EXHIBIT B

                                       to

                              AMENDED AND RESTATED
                         BRUEGGER'S FRESH BAGEL BAKERY
                        AFFILIATE DEVELOPMENT AGREEMENT



                                DEVELOPMENT AREA
                                ----------------


     The Development Area shall be the following:

          The entire State of Minnesota.
<PAGE>
 
                                   EXHIBIT C

                                       to

                              AMENDED AND RESTATED
                         BRUEGGER'S FRESH BAGEL BAKERY
                        AFFILIATE DEVELOPMENT AGREEMENT



                         AFFILIATE FRANCHISE AGREEMENT
                         -----------------------------



     The form of Affiliate Franchise Agreement for all Bakeries to be developed
during the term of this Agreement is attached.
<PAGE>
 
                         BRUEGGER'S FRESH BAGEL BAKERY

                         AFFILIATE FRANCHISE AGREEMENT
<PAGE>
 
                         BRUEGGER'S FRESH BAGEL BAKERY

                         AFFILIATE FRANCHISE AGREEMENT



                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
     Section                                                  Page
     -------                                                  ----
<S>  <C>                                                      <C>
1.   GRANT...................................................... 2
2.   TERM AND RENEWAL........................................... 2
3.   DUTIES OF FRANCHISOR....................................... 4
4.   FEES....................................................... 4
5.   CONSTRUCTING AND OPENING THE BAKERY AND BAGEL DOUGH
     MANUFACTURING SITE......................................... 5
6.   TRAINING................................................... 6
7.   DUTIES OF FRANCHISEE....................................... 7
8.   PROPRIETARY MARKS..........................................11
9.   OPERATIONS MANUALS.........................................13
10.  CONFIDENTIAL INFORMATION...................................14
11.  ACCOUNTING AND RECORDS.....................................14
12.  ADVERTISING AND PROMOTION..................................16
13.  INSURANCE..................................................19
14.  TRANSFER OF INTEREST.......................................20
15.  DEFAULT AND TERMINATION....................................26
16.  OBLIGATIONS UPON TERMINATION OF EXPIRATION.................29
17.  COVENANTS..................................................31
18.  ORGANIZATION OF FRANCHISEE.................................33
19.  TAXES, PERMITS, AND INDEBTEDNESS...........................35
20.  INDEPENDENT CONTRACTOR AND INDEMNIFICATION.................35
21.  APPROVALS AND WAIVER.......................................36
22.  NOTICES....................................................36
23.  ENTIRE AGREEMENT...........................................37
24.  SEVERABILITY AND CONSTRUCTION..............................37
25.  APPLICABLE LAW; ARBITRATION................................38
26.  ACKNOWLEDGEMENTS...........................................40
</TABLE>


     EXHIBIT A  -  PROPRIETARY MARKS
<PAGE>
 
                         BRUEGGER'S FRESH BAGEL BAKERY
                         AFFILIATE FRANCHISE AGREEMENT


     THIS AFFILIATE FRANCHISE AGREEMENT is entered into as of ________________,
_____ by and between BRUEGGER'S FRANCHISE CORPORATION, a Delaware corporation
("Franchisor"), and ______________________________________________
("Franchisee").

     WHEREAS, Franchisor and its affiliates have developed a system relating to
the preparation and promotion of distinctive bagels and cream cheese and the
establishment and operation of restaurants specializing in the sale of the
bagels, cream cheese, and other food and beverage items (the "System");

     WHEREAS, the distinguishing characteristics of the System include, without
limitation, the sale of bagels and cream cheese products prepared in accordance
with secret recipes and manufacturing processes owned by affiliates of
Franchisor; distinctive exterior and interior restaurant design, decor, color
scheme, fixtures, and furnishings; standards and specifications for ingredients,
food preparation, equipment, supplies, and restaurant operations; and
advertising and promotional programs; all of which may be changed, improved, and
further developed by Franchisor and its affiliates from time to time;

     WHEREAS, the System is identified by means of certain trade names, service
marks, trademarks, logos, emblems, and indicia of origin, including but not
limited to the mark "BRUEGGER'S", as set forth in Exhibit A to this Agreement,
and such other trade names, service marks, and trademarks as may hereafter be
designated by Franchisor in writing for use in the System (the "Proprietary
Marks");

     WHEREAS, Franchisee wishes to obtain the right to establish and operate a
Bruegger's Fresh Bagel Bakery at the location specified in this Agreement;

     WHEREAS, Franchisor and Franchisee are parties to a Development Agreement
dated _______________ ("Development Agreement") under which Franchisee has the
right to develop Bruegger's Fresh Bagel Bakeries within a specific geographic
territory that includes the location specified in this Agreement, and pursuant
to which the parties are entering into this Agreement;

     WHEREAS, Michael J. Dressell and Nordahl L. Brue own interests in both
Franchisor and Franchisee;

     NOW, THEREFORE, the parties agree as follows:

                                     - 1 -
<PAGE>
 
1.   GRANT
     -----

     1.1     Franchisor grants to Franchisee the exclusive right (to the extent
described in Section 1.3), and Franchisee undertakes the obligation, on the
terms and conditions set forth in this Agreement, to establish and operate one
Bruegger's Fresh Bagel Bakery at the location specified in Section 1.2 below
(the "Bakery") and to use the Proprietary Marks and the System solely in
connection therewith.  Franchisor further grants to Franchisee, subject to
Section 7.5 below, the right to use certain trade secrets of Franchisor's
affiliates to manufacture bagel dough, solely for use in the Bakery.

     1.2     Franchisee shall operate the Bakery only at______________________
__________________________ (the "Approved Location").

     1.3     Neither Franchisor nor any of its affiliates shall establish or
operate (directly or through an affiliate) a Bruegger's Fresh Bagel Bakery or
franchise others to establish or operate a Bruegger's Fresh Bagel Bakery within
an area determined by drawing a circle around the Bakery, which circle shall
have the Bakery as its center, and which circle shall be the smaller of the
following (the "Exclusive Area"):

             1.3.1    A circle with a one and one half (1.5) mile radius; or

             1.3.2       A circle that contains a population of thirty thousand
persons, the radius of which circle shall be determined at such time or times as
Franchisor communicates to Franchisee an intent to establish a Bruegger's Fresh
Bagel Bakery or franchise others to establish a Bruegger's Fresh Bagel Bakery
within one and one half (1.5) miles of the Bakery.  For purposes of this Section
1.3.2, the population shall be the greater of the daytime population or the
residential population.

     1.4     Franchisee acknowledges that, except as provided in Section 1.3
hereof, this Agreement does not grant or imply any protected area or territory
for Franchisee or the Bakery.  Except as set forth in the Development Agreement,
so long as it remains in full force and effect, Franchisor and its affiliates
retain the rights, among others: (a) to establish, and franchise others to
establish, Bruegger's Fresh Bagel Bakeries in any location, outside the
Exclusive Area; and (b) to sell and distribute, and license others to sell and
distribute, food products (including, but not limited to, cream cheese products
and other bagel spreads) under the "BRUEGGER'S" name (or under any other name),
directly or indirectly, through supermarkets, delicatessens, specialty food
stores, convenience stores, and other wholesale and retail food stores, at any
location, outside of the Exclusive Area.

2.   TERM AND RENEWAL
     ----------------

     2.1     Unless sooner terminated as provided herein, the initial term of
this Agreement shall expire on the earlier of:


                                     - 2 -
<PAGE>
 
             2.1.1    Twenty (20) years from the date first written above; or

             2.1.2    The final expiration of Franchisee's lease for the
premises of the Bakery.

     2.2     Franchisee shall be entitled to renew the rights granted hereunder
for additional terms of the lesser of ten (10) years or the remaining term
(including any extensions) of the lease for the premises of the Bakery (the
"Premises"), subject to the following conditions:

             2.2.1    Franchisee shall have given Franchisor written notice of
Franchisee's election to renew not less than three (3) months nor more than nine
(9) months before the end of the then current term;

             2.2.2    Franchisee shall not be in default of any provision of
this Agreement, any amendment hereof or successor hereto, or any other agreement
between Franchisee and Franchisor or its affiliates, and Franchisee shall have
substantially complied with such agreements throughout their respective terms;

             2.2.3    Franchisee shall have satisfied all monetary obligations
owed by Franchisee to Franchisor and its affiliates, and shall have timely met
those obligations throughout the initial term and all renewal terms of this
Agreement;

             2.2.4    Franchisee shall execute the form of franchise agreement
required by the Development Agreement, or if the term of the Development
Agreement has expired, then Franchisee shall execute Franchisor's then-current
form of renewal franchise agreement, which shall supersede this Agreement in all
respects;

             2.2.4    Franchisee shall execute Franchisor's then-current form of
renewal franchise agreement, which shall supersede this Agreement in all
respects; provided, that the transfer provisions set forth in Section 14 of this
Agreement shall be included in an shall supersede any similar provisions in the
then-current form of renewal franchise agreement.

             2.2.5    Franchisee shall execute a general release, in a form
prescribed by Franchisor, of any and all claims against Franchisor, its
affiliates, and their respective officers, directors, shareholders, and
employees, in their corporate and individual capacities relating to or arising
out of the Bakery or this Agreement, about which Franchisee has knowledge or
should have knowledge; and

             2.2.6    Franchisee shall comply with Franchisor's then-current
qualification and training requirements for new franchisees.

                                     - 3 -
<PAGE>
 
3.   DUTIES OF FRANCHISOR
     --------------------

     3.1     Franchisor shall provide to Franchisee one set of Franchisor's
representative plans for the construction and layout of a Bruegger's Fresh Bagel
Bakery.

     3.2     Franchisor shall provide to Franchisee, on loan, one set of
Franchisor's confidential operations manuals (the "Manuals").

     3.3     Franchisor shall provide to Franchisee, on loan, only upon written
request pursuant to Section 7.5.2 below, one copy of Franchisor's confidential
Bagel Production Manual.

     3.4     Franchisor shall provide a training program prescribed by
Franchisor, for the persons required or permitted to attend training under
Section 6 of this Agreement.

     3.5     Franchisor shall provide such pre-opening and opening supervision
and assistance as Franchisor deems advisable.

     3.6     Franchisor shall designate at least one supplier of Bruegger's
Direct Set Cream Cheese and license such supplier or suppliers to use the secret
recipes necessary to produce Bruegger's Direct Set Cream Cheese.  If Franchisor
obtains any agreements for the supply of Bruegger's Direct Set Cream Cheese for
the benefit of the owners of all Bakeries in the System, Franchisee shall also
be eligible to participate on a basis equivalent to other franchisees.

     3.7     In addition to the advertising and promotional materials produced
by the advertising fund established by Franchisor for the System (the "Fund," as
further described in Section 12 of this Agreement), Franchisor shall make
available to Franchisee such advertising and promotional materials as Franchisor
may elect to produce with Franchisor's own funds. Franchisor may charge a
purchase price for such non-Fund materials equal to the costs to produce them.

     3.8     Franchisor shall provide to Franchisee from time to time, as
Franchisor deems appropriate, advice and written materials concerning techniques
of managing and operating the Bakery.

4.   FEES
     ----

     4.1     In consideration of the rights granted herein, Franchisee has paid
to Franchisor an initial franchise fee of One Dollar ($1.00), receipt of which
is hereby acknowledged, which is fully earned and non-refundable in
consideration of the administrative and other expenses incurred by Franchisor
and Franchisor's lost or deferred opportunity to enter into similar arrangements
with others.

                                     - 4 -
<PAGE>
 
     4.2     Franchisee shall pay Franchisor a weekly royalty fee in an amount
equal to four percent (4%) of the Gross Sales of the Bakery.  As used in this
Agreement, "Gross Sales" means all revenue from the sale of all products and all
other income of every kind related to the Bakery whether for cash or credit, and
regardless of collection in the case of credit.  Gross Sales shall not include
any sales taxes or other taxes collected from customers by Franchisee and paid
directly to the appropriate taxing authority and shall not include any bona fide
refunds.  For purposes of this Agreement, unless otherwise designated by
Franchisor in writing, a week begins on Wednesday and ends on the following
Tuesday.

     4.3     Franchisee shall contribute weekly to the Fund the amount specified
in Section 12.1 below.

     4.4     Franchisee shall designate an account at a commercial bank of its
choice (the "Account") for the payment of weekly royalty fees and advertising
fund contributions. Franchisee shall furnish the bank with such authorizations
as may be necessary to permit Franchisor to make withdrawals from the Account by
electronic funds transfer.  On Monday of each week, Franchisor shall transfer
from the Account an amount equal to the royalty fees and advertising
contributions due from Franchisee based on Gross Sales for the preceding week.
Franchisor shall furnish Franchisee with a written confirmation of each such
transfer. Franchisee agrees to maintain sufficient funds in the Account to cover
all royalty fees and advertising contributions payable to Franchisor at all
times that such amounts become due and payable.  If funds in the Account are
insufficient to cover the amounts payable at the time Franchisor makes its
weekly electronic funds transfer, the amount of the shortfall shall be deemed
overdue, and Franchisee shall pay Franchisor, on demand, in addition to the
overdue amount, daily interest on such amount from the date it was due until
paid, at the rate of eighteen percent (l8%) per annum or the maximum rate
permitted by law, whichever is less. Entitlement to such interest shall be in
addition to any other remedies Franchisor may have.

     4.5     Franchisee shall pay all customary costs and fees associated with
establishing the Account and authorizing Franchisor to access the Account for
electronic transfers in accordance with this Agreement; provided, however, that
Franchisor shall pay fees, if any, charged for each such electronic transfer and
any extraordinary fees charged to establish the Account solely because the
Account is accessible to electronic transfers.

5.   CONSTRUCTING AND OPENING THE BAKERY AND BAGEL DOUGH MANUFACTURING SITE
     ----------------------------------------------------------------------

     5.1     Franchisee shall construct and equip the Bakery and any facility in
which Franchisee manufactures bagel dough pursuant to Section 7.5.2 below at
Franchisee's own expense.  Before commencing construction of the Bakery or any
bagel dough manufacturing site, Franchisee, at its expense, shall employ a
qualified architect and, if required by applicable governmental codes and
regulations, a qualified engineer, to prepare architectural and engineering
drawings and specifications for the Premises consistent with Franchisor's

                                     - 5 -
<PAGE>
 
representative plans for a Bruegger's Fresh Bagel Bakery or a bagel dough
manufacturing site, as the case may be.   As requested by the Franchisor, the
drawings and specifications shall be submitted to Franchisor for approval.  If
Franchisor has not approved or rejected the drawings and specifications within
fifteen (15) days after receipt of a complete set of drawings and
specifications, then Franchisor's approval shall be deemed received.  Once
approved by Franchisor, the drawings and specifications shall not be changed or
modified in any significant or material way without the prior written consent of
Franchisor.  For purposes of this Section 5.1, "Business Days" shall be any days
except Saturday, Sunday or the following national holidays:  New Year's Day,
Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veteran's Day, Thanksgiving and Christmas.

     5.2     Franchisee shall obtain, at Franchisee's expense, all zoning
classifications, permits, and clearances (including, but not limited to,
certificates of occupancy and mall or strip center clearances) which may be
required by federal, state, or local laws, ordinances, or regulations.
Franchisee shall not be responsible for obtaining any approvals or registrations
needed by Franchisor to enable Franchisor to offer franchises for sale.

     5.3     During the entire period of construction of the Bakery, Franchisee
shall permit Franchisor and its agents to inspect the site at all reasonable
times.  Franchisee shall complete construction and installation of all
furniture, fixtures, equipment, and signs in accordance with the final plans and
specifications approved by Franchisor under Section 5.1 above, and shall notify
Franchisor of the anticipated construction completion date.

     5.4     Franchisee shall open the Bakery within one (1) year after the date
of this Agreement.  If, however, through no fault of Franchisee, the Premises
are damaged or destroyed prior to opening by an event such that repairs or
reconstruction cannot be completed within sixty (60) days thereafter, then
Franchisee shall have thirty (30) days after the event in which to apply for
Franchisor's approval to relocate and/or reconstruct the Bakery, which approval
shall not be unreasonably withheld, and if such period extends beyond the one
(1) year period described in this Section 5.4, then the one (1) year period
shall be extended accordingly.  The parties agree that time is of the essence in
the opening of the Bakery.

     5.5     If a Bakery is already in existence at the Approved Location as of
the date of this Agreement, the provisions in Section 5.1 through 5.4 inclusive
shall be deemed satisfied.

6.   TRAINING
     --------

     6.1     Within sixty (60) days before the Bakery opens for business, the
manager, and two or more bakers designated by Franchisee, together with an owner
or officer of Franchisee satisfactory to Franchisor (if one such owner or
officer has not already completed such training to Franchisor's satisfaction),
shall attend and complete Franchisor's training program to Franchisor's
satisfaction, or, if applicable, shall attend and complete a training 

                                     - 6 -
<PAGE>
 
program conducted by Franchisee and approved by Franchisor pursuant to the
Development Agreement.

     6.2     After the Bakery opens for business, any person employed by
Franchisee to serve as a manager or baker of the Bakery, or as manager of a
bagel dough manufacturing site, before commencing his or her duties, shall
attend and satisfactorily complete the training program referred to in Section
6.1.

     6.3     All training conducted by Franchisor shall be held in either
Burlington, Vermont or Chicago, Illinois unless Franchisor designates a
different location by written notice to Franchisee.  Franchisor shall provide
instructors, training facilities, and training materials for all such training
at no charge to Franchisee.  Franchisee shall be responsible for all other
expenses for training of its employees, including, but not limited to, the costs
of transportation, lodging, meals, and wages.

7.   DUTIES OF FRANCHISEE
     --------------------

     7.1     In order to protect the reputation and goodwill of Franchisor and
to maintain high standards of operation under the System, Franchisee shall
operate the Bakery in strict conformance with the methods, standards, and
specifications relating to the Bakery prescribed by Franchisor from time to time
in the Manuals or otherwise in writing; provided that the Manuals and such
written instructions shall be generally applicable throughout the System.  If
Franchisee, pursuant to Section 7.5.2 below, produces its own bagel dough for
the Bakery, Franchisee shall manufacture such bagel dough in strict conformance
with the methods, standards, and specifications prescribed by Franchisor from
time to time in the Bagel Production Manual.  Franchisee shall not deviate from
such standards, specifications, and procedures without Franchisor's prior
written consent.

     7.2     Franchisee shall use the Premises solely for the operation of the
Bakery, shall keep the Bakery open and in normal operation for the minimum hours
and days specified in the Manuals, and shall refrain from using or permitting
the use of the Premises for any other purpose or activity at any time without
first obtaining the written consent of Franchisor.  Notwithstanding the
foregoing, Franchisee may use a portion of the Premises for training, office
space and storage without the Franchisor's consent, provided such uses are
related to the operation of the Bakery.

     7.3     Franchisee shall be solely responsible for all employment decisions
and functions of the Bakery, including, without limitation, those related to
hiring, firing, training, wage and hour requirements, recordkeeping,
supervision, and discipline of employees. Franchisee shall maintain a competent,
trained staff with sufficient members to operate the Bakery in an efficient and
competent manner.  Franchisee shall take such steps as are necessary to ensure
that its employees preserve good customer relations; render competent, 

                                     - 7 -
<PAGE>
 
prompt, courteous, and knowledgeable service; and meet such minimum standards as
Franchisor may establish from time to time in the Manuals.

     7.4     Franchisee shall offer for sale in the Bakery all products and
services which are designated as core products by Franchisor from time to time
in the Manuals (the "Core Products").  Franchisee may also offer for sale any
non-Core Products and services which have been approved by Franchisor in the
Manuals for sale in a Bruegger's Fresh Bagel Bakery, but Franchisee shall not
offer or sell any other products or services without Franchisor's prior written
consent.  All products shall be sold only in the weights, sizes, forms, and
packages approved by Franchisor.  Franchisee shall discontinue selling or
offering for sale any products or services which Franchisor, in its sole
discretion, disapproves in writing at any time.  Franchisee shall have sole
discretion as to the prices of all products and services offered and sold by it
to its customers.

     7.5     A principal purpose of the relationship created by this Agreement
is to enable Franchisee to sell bagels prepared from dough made in accordance
with the secret recipe and manufacturing process owned by Bruegger's
Corporation, an affiliate of Franchisor ("Bruegger's Bagels"), and to sell
varieties of a special cream cheese product ("Bruegger's Direct Set Cream
Cheese") made in accordance with secret recipes owned by Bruegger's Corporation
and a secret manufacturing process owned by Franklin County Cheese Corporation,
another affiliate of Franchisor.  In order to protect the ownership interests of
Franchisor's affiliates in the secret recipes and processes and to ensure the
quality, uniformity, and distinctiveness of Bruegger's Bagels and Bruegger's
Direct Set Cream Cheese, Franchisee agrees that:

          7.5.1       All of Franchisee's requirements of Bruegger's Direct Set
Cream Cheese shall be purchased by Franchisee from a supplier designated by
Franchisor; and

          7.5.2       All of Franchisee's requirements of bagel dough shall
either be: (i) manufactured by Franchisee in strict conformance with the
standards and procedures set forth by Franchisor from time to time in the Bagel
Production Manual; or (ii) purchased by Franchisee from a supplier designated by
Franchisor.  Franchisor shall furnish one (1) copy of the Bagel Production
Manual to Franchisee within one (1) week after receipt of written notification
from Franchisee that Franchisee intends to produce its own bagel dough for the
Bakery, unless Franchisee has previously received a copy of the Bagel Production
Manual pursuant to another Bruegger's Fresh Bagel Bakery Franchise Agreement, in
which case Franchisor shall have no obligation to furnish an additional copy.
Franchisee's written notice shall explicitly acknowledge Franchisee's obligation
to hold the Bagel Production Manual and its contents in strict confidence at all
times pursuant to Section 9 of this Agreement.

     7.6     Except for bagel dough and Bruegger's Direct Set Cream Cheese, as
provided in Section 7.5, Franchisee shall purchase all products and services for
the Bakery that are subject to Franchisor's review, standards or specifications
solely from suppliers who 

                                     - 8 -
<PAGE>
 
demonstrate to Franchisor's continuing reasonable satisfaction the ability to
meet Franchisor's standards and specifications, who possess adequate quality
controls and capacity to supply Franchisee's needs promptly and reliably, and
who have been approved by Franchisor in the Manuals or otherwise in writing. For
purposes of Sections 7.5 and 7.6, "supplier" means any source of products or
services, including, but not limited to, manufacturers, wholesalers, and
distributors. If Franchisee desires to purchase products or services from an
unapproved supplier, Franchisee shall submit to Franchisor a written request to
approve the proposed supplier, together with such information as Franchisor may
reasonably require. Franchisor shall have the right to require that its
representatives be permitted to inspect the supplier's facilities, and that
samples from the supplier be delivered for evaluation and testing either to
Franchisor or to an independent testing facility designated by Franchisor.
Franchisee and Franchisor shall each pay on-half of the reasonable cost of the
evaluation and testing if Franchisor chooses to evaluate and test or cause the
evaluation and testing of the supplier, whether or not the supplier is approved.
Within thirty (30) days after its receipt of Franchisee's request and completion
of evaluation and testing (if required by Franchisor), Franchisor shall notify
Franchisee in writing of its approval or disapproval of the proposed supplier.
Approval shall not be unreasonably withheld. Franchisee shall not purchase,
sell, or offer for sale any products or services of the proposed supplier until
Franchisor's written approval of the proposed supplier is received. Franchisor
may revoke its approval of particular suppliers from time to time if Franchisor
determines, in its sole judgment, that such suppliers or their products or
services no longer meet Franchisor's standards. Upon receipt of written notice
of revocation, Franchisee shall cease to purchase from the disapproved supplier
and, in the case of revocation based on failure of products to meet Franchisor's
standards, Franchisee shall dispose of its remaining inventory of such products
as directed by Franchisor.

     7.7     Franchisee shall acquire and install in the Bakery, at Franchisee's
expense, point of sale equipment and software that is compatible with
Franchisor's data collection systems and that Franchisor approves in writing
prior to installation and use.  Franchisee shall maintain electronic connection
of its point of sale systems with those of Franchisor; shall use the point of
sale systems in accordance with the policies and operational procedures issued
by Franchisor from time to time; shall transmit data to Franchisor or permit
Franchisor to poll Franchisee's systems at the times specified by Franchisor;
shall maintain its point of sale systems in good working order at all times; and
shall ensure that Franchisee's employees are adequately trained in the use of
such systems and the related policies and procedures of Franchisor.  Franchisee
shall bear all costs of installation, operation, and maintenance of the point of
sale systems, except for toll charges incurred by Franchisor in accessing
Franchisee's systems.  If Franchisor requires collection of additional data
after installation of conforming equipment, and the collection of such
additional data requires replacement of existing equipment by Franchisee, then
Franchisor shall, at Franchisee's option, purchase from Franchisee the obsolete
equipment at Franchisee's depreciated cost for such items, which cost shall be
reduced according to a five year straight line depreciation schedule.

                                     - 9 -
<PAGE>
 
     7.8     In addition to the requirements of Section 7.7, Franchisee shall
acquire and install in the Bakery and any facility in which Franchisee
manufactures bagel dough, at Franchisee's expense, such Fixtures, furnishings,
equipment, decor, and signs as Franchisor may reasonably direct from time to
time to remain competitive in the marketplace. Franchisee shall not install or
permit to be installed on or about the Premises, without Franchisor's prior
written consent, any Fixtures, furnishings, equipment, decor, signs, or other
items not previously approved by Franchisor.  For purposes of this paragraph
"Fixtures" shall mean those items of equipment that are affixed to the real
estate constituting the Bakery in such a way that damage shall be done to the
Premises to remove such items from the Premises.

     7.9     Franchisee shall permit Franchisor and its agents to enter the
Bakery and any facility in which Franchisee manufactures bagel dough at any time
during normal business hours to conduct inspections; shall cooperate with such
inspections by rendering such assistance as Franchisor's representatives may
reasonably request; and, upon notice from Franchisor or its agents, shall
immediately begin such steps as may be necessary to correct any deficiencies
noted during any such inspection.

     7.10    Franchisee shall maintain the Premises (including adjacent public
areas to the fullest extent Franchisee is permitted to maintain such areas) in a
clean, orderly condition and in excellent repair.  Franchisee, at its own
expense, shall make such additions, alterations, repairs, and replacement as may
be required for that purpose (but no others without Franchisor's prior written
consent).

     7.11    At Franchisor's request, but not more often than once every seven
(7) years, Franchisee shall refurbish the Bakery to conform to the then-current
design and service system, trade dress, and color schemes for a new Bruegger's
Fresh Bagel Bakery.  Such refurbishment may require expenditures by Franchisee
on, among other things, structural changes, installation of new equipment,
remodeling, redecoration, and modifications to existing improvements.
Franchisor shall consider the useful life of the capital improvements in
developing its standards for regular refurbishment.

     7.12    Franchisee shall participate in special promotional activities
which Franchisor may prescribe generally for the System, including but not
limited to an annual "Bruegger's Birthday" promotion, provided that Franchisee
shall always have sole discretion as to the prices charged to its customers.  If
Franchisor prescribes any such activities, Franchisee shall bear its own costs
of conducting such activities for the Bakery.

     7.13    Franchisee shall not implement any change in the System without the
prior written consent of Franchisor.  Franchisee shall notify Franchisor in
writing of any change in the System which Franchisee desires to implement, and
shall provide to Franchisor such information as Franchisor requests regarding
the proposed change.  Franchisee acknowledges and agrees that Franchisor shall
have the right to incorporate the change into the System and 

                                    - 10 -
<PAGE>
 
thereupon obtain all right, title, and interest of Franchisee therein, without
compensation to Franchisee.

     7.14    Franchisee acknowledges that the System may be unilaterally
supplemented, improved, and otherwise modified from time to time by Franchisor.
Franchisee agrees to comply with all reasonable requirements of Franchisor in
that regard, including, without limitation, offering and selling new types of
products or services as specified by Franchisor, provided bagels continue to
constitute an essential component of the System.

     7.15    Franchisee shall comply with all terms of its lease or sublease for
the Premises and all other agreements affecting the operation of the Bakery.

     7.16    Franchisee shall operate the Bakery in full compliance with all
applicable material municipal, county, state and federal laws, rules,
regulations and ordinances, including, without limitation, all government
regulations relating to occupational hazard and health, worker's compensation
insurance, unemployment insurance and withholding and payment of federal and
state income taxes, social security taxes and sales taxes.  Within ten (10) days
after receipt thereof by Franchisee, Franchisee shall forward copies of any and
all reports, warnings, notices of violation or other evidence reflecting less
than full compliance by Franchisee with any applicable material laws, rules,
regulations or ordinances.

8.   PROPRIETARY MARKS
     -----------------

     8.1     Franchisor represents that Bruegger's Corporation has granted
Franchisor a license to use, and to license others to use, the Proprietary
Marks; that, subject to any common law rights of others, Franchisor has the
right to license Franchisee to use the Proprietary Marks; and that Franchisor
has taken and will take all steps reasonably necessary to preserve and protect
the validity of the Proprietary Marks and its right to license others to use
them.

     8.2     Franchisee agrees that:

             8.2.1    Franchisee shall use only the Proprietary Marks designated
by Franchisor and shall use them only in the manner authorized by Franchisor;

             8.2.2    Franchisee shall use the Proprietary Marks only for the
operation of the Bakery and only at the Approved Location or in advertising for
the Bakery;

             8.2.3    Unless otherwise authorized or required by Franchisor,
Franchisee shall operate and advertise the Bakery only under the name
"BRUEGGER'S FRESH BAGEL BAKERY", shall use all Proprietary Marks without prefix
or suffix, and shall not use the Proprietary Marks as part of its corporate or
legal name;

                                    - 11 -
<PAGE>
 
             8.2.4    Franchisee shall ensure that all advertising and
promotional materials, packaging, signs, decorations, and other items which may
be specified by Franchisor bear the Proprietary Marks in the form, color, size,
and location prescribed by Franchisor;

             8.2.5     Franchisee, as directed by Franchisor, shall identify
itself as the owner of the Bakery in conjunction with any use of the Proprietary
Marks, including, but not limited to, on invoices, order forms, receipts, and
business stationery, as well as at such conspicuous locations on the Premises as
Franchisor may designate in writing;

             8.2.6    Franchisee's right to use the Proprietary Marks is limited
to such uses as are authorized under this Agreement, and any unauthorized use
shall constitute an infringement of Franchisor's rights and the rights of
Bruegger's Corporation;

             8.2.7    Franchisee shall not use the Proprietary Marks to incur
any obligation or indebtedness on behalf of Franchisor or Bruegger's
Corporation;

             8.2.8    Franchisee shall comply with Franchisor's reasonable
instructions in filing and maintaining any requisite trade name or fictitious
name registrations, and shall execute any documents deemed necessary by
Franchisor to obtain protection for the Proprietary Marks or to maintain their
continued validity and enforceability; and

             8.2.9    During the term of this Agreement and after its expiration
or termination, Franchisee shall not directly or indirectly contest the validity
of, or take any other action which tends to jeopardize the rights of Franchisor
or its affiliates to the ownership of or right to use and to license others to
use the Proprietary Marks.

     8.3     Franchisee acknowledges that:

             8.3.1    The Proprietary Marks serve to identify the System and
those who are authorized to operate under the System;

             8.3.2    Franchisee's use of the Proprietary Marks pursuant to this
Agreement does not give Franchisee any ownership interest in the Proprietary
Marks;

             8.3.3    Any and all goodwill arising from Franchisee's use of the
Proprietary Marks shall inure exclusively to the benefit of Franchisor and
Bruegger's Corporation, and upon expiration or termination of this Agreement, no
monetary amount shall be assigned as attributable to any goodwill associated
with Franchisee's use of the System or the Proprietary Marks; and

             8.3.4    The license to use the Proprietary Marks granted hereunder
is nonexclusive.

                                    - 12 -
<PAGE>
 
     8.4     Franchisee shall promptly notify Franchisor, to the extent any of
the same are known or suspected by Franchisee, of any unauthorized use of the
Proprietary Marks, any challenge to the validity of the Proprietary Marks, or
any challenge to the ownership by Franchisor or Bruegger's Corporation of the
Proprietary Marks, Franchisor's right to use and to license others to use, or
Franchisee's right to use the Proprietary Marks.  Franchisee acknowledges that
Franchisor and Bruegger's Corporation have the right to direct and control any
administrative proceeding or litigation involving the Proprietary Marks,
including any settlement thereof.  Franchisor and Bruegger's Corporation have
the right, but not the obligation, to take action against uses by others that
may constitute infringement of the Proprietary Marks.  Franchisor shall defend
Franchisee against any third-party claim, suit, or demand arising out of
Franchisee's use of the Proprietary Marks.  Franchisor shall bear the cost of
such defense (including reasonable attorney's fees and the cost of any judgment
or settlement) if Franchisee has used the Proprietary Marks in accordance with
this Agreement, but otherwise Franchisee shall bear the cost of such defense
(including the cost of any judgment or settlement).  Franchisee shall execute
any and all documents and do such acts as Franchisor deems necessary to carry
out the defense or prosecution of any litigation involving the Proprietary
Marks, including, but not limited to, becoming a nominal party to any legal
action.  Except to the extent that such litigation is the result of Franchisee's
use of the Proprietary Marks in a manner inconsistent with the terms of this
Agreement, Franchisor agrees to reimburse Franchisee for its out-of-pocket costs
in doing such acts.

     8.5     Franchisor reserves the right to modify the Proprietary Marks
and/or to substitute different proprietary marks for use in identifying the
System and the businesses operating thereunder.  Franchisee shall implement
promptly any such modification or substitution.  Franchisor shall bear the costs
of modifying Franchisee's signs (up to the depreciated book value, based on a
five year straight line depreciation, for the signs to be replaced) to conform
to the new Proprietary Marks, unless Franchisor has previously required
refurbishment of the Bakery pursuant to Section 7.11 and the refurbishment has
not been completed.  Franchisor shall otherwise have no obligation or liability
to Franchisee as a result of such modification or substitution.

9.   OPERATIONS MANUALS
     ------------------

     9.1     Franchisee shall treat the Manuals, the Bagel Production Manual,
any other manuals approved by Franchisor for use in connection with the Bakery,
and all information contained therein as confidential, and shall maintain such
information in strict secrecy except that Franchisee may divulge such
information to such employees who must have access to the information in order
to operate the Bakery, provided each such employee shall first execute a
confidentiality agreement in accordance with Section 10.2 of this Agreement.
Franchisee shall not copy, duplicate, record, or otherwise reproduce the
foregoing materials, in whole or in part, or otherwise make them available to
any unauthorized person, except as necessary to fulfill its obligations under
this Agreement.

                                    - 13 -
<PAGE>
 
     9.2     The Manuals and the Bagel Production Manual shall remain the sole
property of Franchisor and shall at all times be kept in a secure place in the
Bakery or, in the case of the Bagel Production Manual, in the facility where
Franchisee manufactures bagel dough.

     9.3     Franchisor may from time to time revise the contents of the Manuals
and the Bagel Production Manual.  Franchisee agrees to comply with each
reasonable new or reasonably changed standard upon reasonable notice thereof
from Franchisor.

10.  CONFIDENTIAL INFORMATION
     ------------------------

     10.1    Franchisee shall not, during the term of this Agreement or at any
time thereafter, communicate, divulge, or use for the benefit of any other
person or entity any confidential information, knowledge, trade secrets, or
know-how which may be communicated to Franchisee or of which Franchisee may be
apprised by virtue of Franchisee's activities under this Agreement.  Franchisee
may divulge such confidential information only:  (i) to such of its employees as
must have access to it in order to operate the Bakery; and (ii) to Franchisee's
contractors and the landlord of the Premises with the prior written approval of
Franchisor.  All information, knowledge, trade secrets, know-how, techniques,
and other data which Franchisor designates in writing as confidential shall be
deemed confidential for purposes of this Agreement, except information which
Developer can demonstrate came to its attention by lawful means prior to
disclosure thereof by Franchisor, or which, at or after the time of disclosure
by Franchisor to Franchisee, had become or later becomes a part of the public
domain, through publication or communication by others.

     10.2    At Franchisor's request, Franchisee shall require its managers,
assistant managers, and bakers and any other person to whom Franchisee wishes to
disclose any confidential information of Franchisor to execute covenants that
they will maintain the confidentiality of such information.  Franchisor shall
not require such covenants from employees to whom such confidential information
is not disclosed.  Such covenants shall be in a form satisfactory to Franchisor,
including, without limitation, specific identification of Franchisor as a third-
party beneficiary with the independent right to enforce the covenants.

11.  ACCOUNTING AND RECORDS
     ----------------------

     11.1    Franchisee shall prepare, and shall preserve for at least three (3)
years from the dates of their preparation, complete and accurate books, records,
and accounts, in accordance with generally accepted accounting principles.

     11.2    All Gross Sales and all sales tax and other charges collected on
behalf of third parties shall be recorded by Franchisee in accordance with the
procedures prescribed in the Manuals on such point of sale systems as Franchisor
may specify pursuant to Section 7.7 above.

                                    - 14 -
<PAGE>
 
     11.3    Franchisee shall submit to Franchisor, at Franchisee's expense, in
the form prescribed by Franchisor:

             11.3.1  By no later than Monday of each week, a complete and
accurate report of Gross Sales for the preceding week, and such other weekly
data as Franchisor may reasonably require;

             11.3.2  Within ninety (90) days after the end of each fiscal year
of Franchisee, an income statement showing the results of Franchisee's
operations during such fiscal year and a balance sheet as of the end of such
fiscal year, both of which shall be prepared in accordance with generally
accepted accounting principles and reviewed by an independent certified public
accountant. If, however, the foregoing income statements and balance sheets are
audited by an independent certified public accountant, then Franchisee shall
furnish the audited income statements and balance sheets rather than the
reviewed income statements and balance sheets. In either such case, the
Franchisor shall use reasonable efforts to keep the income statement and balance
sheet confidential except to the extent required by law; and

             11.3.3  Interim unaudited income statements and balance sheets, not
less often than quarterly, within forty-five (45) days after the end of the
period to which the statements relate.

     11.4    During the period that Nordahl L. Brue or Michael J. Dressell
continues to own an interest in Franchisee, the income statements and balance
statements that shall be provided pursuant to Section 11.3 of the Agreement may
be audited or reviewed (as the case may be) by a certified public accountant who
is not independent of the Franchisee, provided that Nordahl L. Brue or Michael
J. Dressell personally certifies that each such income statement and balance
sheet is complete, accurate and prepared in accordance with generally accepted
accounting principals.

     11.5    Franchisor and its designated agents shall have the right to
examine and copy, at Franchisor's expense, on reasonable notice and during
normal business hours, the books, records, accounts, and sales tax returns of
Franchisee.  Franchisor shall also have the right, at any time, but not more
than four times each calendar year, to have an independent audit made of the
books of Franchisee.  If an inspection or audit reveals that any payment to
Franchisor has been understated, Franchisee shall immediately pay to Franchisor
the amount owed, together with daily interest from the date such amount was due
until paid at the rate of eighteen percent (l8%) per annum or the maximum rate
permitted by law, whichever is less. If an inspection or audit reveals any
underpayment by Franchisee of two percent (2%) or more, Franchisee shall, in
addition to payment of monies owed with interest, reimburse Franchisor for all
costs connected with the inspection or audit (including, without limitation,
expenses for travel, lodging and wages, and reasonable accounting and legal
costs).  The foregoing remedies shall be in addition to any other remedies
Franchisor may have. 

                                    - 15 -
<PAGE>
 
Franchisor shall use reasonable efforts to hold confidential information
obtained in connection with this Section 11.5. If an inspection or audit reveals
that Franchisee has overpaid the amount due, then Franchisor shall promptly
refund the amount of the overpayment to the extent that such amount exceeds the
amount of any monies then due to Franchisor.

12.  ADVERTISING AND PROMOTION
     -------------------------

     Recognizing the value of advertising and promotion and the importance of
the standardization of advertising and promotion to the furtherance of the
goodwill and public image of the System, the parties agree as follows:

     12.1    Franchisee shall contribute weekly to an advertising fund
established by Franchisor for the System (the "Fund") two percent (2%) of the
weekly Gross Sales of the Bakery.  Contributions shall be made by electronic
funds transfer, as specified in Section 4.4. For the first year after the date
the Bakery opens for business, Franchisor will use one-half of the Fund monies
received from Franchisee to pay for (or to reimburse Franchisee for) the cost of
implementing a first-year advertising and promotion plan developed by Franchisee
and approved by Franchisor.  Thereafter, Franchisor shall use all Fund monies
received from Franchisee in any manner consistent with Section 12.3 below.
Franchisor, or its affiliates, shall contribute a like percentage for each
Bruegger's Fresh Bagel Bakery that Franchisor, or its affiliates, operates.

     12.2    In addition to its contributions to the Fund, Franchisee shall
spend monthly for local advertising and promotion two percent (2%) of the
monthly Gross Sales of the Bakery.  All local advertising and promotion must be
approved by Franchisor pursuant to Section 12.6 below.

     12.3    The Fund shall be maintained and administered by Franchisor as
follows:

             12.3.1   A National Advertising Council ("NAC") shall administer
the portion of the Fund not returned to individual Franchisees pursuant to
Section 12.1 (or an analogous provision in a successor agreement) of the
Franchise Agreement.  The NAC shall operate as follows:

                      12.3.1.1     The NAC shall be comprised of two groups of
members.  Group A shall consist of three or more persons selected by Franchisor.
Franchisor shall determine, in its sole discretion, the timing and methods for
selection of the members of Group A.  Group B shall consist of a number of
persons equal to the number of members of Group A.  The members of Group B shall
be chosen annually by election by all Franchisees under the System based upon a
voting system of one vote per one eligible Bakery.

                      12.3.1.2     The NAC shall be charged with review and
approval of marketing plans that shall be developed and submitted to the NAC
from time to 

                                    - 16 -
<PAGE>
 
time by Franchisor. After a marketing plan has been approved by the NAC,
Franchisor shall implement the plan without further review by the NAC.

                      12.3.1.3     Franchisor reserves the right, in its sole
discretion, to establish and modify, from time to time, the duties,
organization, form, manner of operation, authority, membership, methods of
member selection, eligibility for voting and all other aspects of the NAC
pursuant to such governing documents as Franchisor may prepare; provided,
however, that Franchisees shall continue to have representation on the NAC.

             12.3.2   Franchisee acknowledges that the Fund is intended to
maximize general public recognition, acceptance, and use of the System, and that
Franchisor is not obligated, in administering the Fund, to make expenditures for
Franchisee which are equivalent or proportional to Franchisee's contribution, or
to ensure that any particular franchisee benefits directly or pro rata from
                                                              --- ----     
expenditures by the Fund.

             12.3.3   The Fund, all contributions thereto, and any earnings
thereon shall be used exclusively to meet any and all costs of maintaining,
administering, directing, conducting, and preparing advertising, marketing,
public relations, and/or promotional programs and materials and any other
activities which Franchisor or the NAC, as the case may be, believes will
enhance the image of the System, including, but not limited to, the costs of
preparing and conducting media advertising campaigns; direct mail advertising;
marketing surveys; employing advertising and/or public relations agencies to
assist therein; purchasing promotional items; conducting and administering in-
store promotions; and providing promotional and other marketing materials and
services to the businesses operating under the System.

             12.3.4   All sums received for the Fund shall be maintained in an
account separate from the other monies of Franchisor and shall be used only as
provided in Sections 12.1 and 12.3.3 above.  Franchisor shall maintain separate
bookkeeping accounts for the Fund.

             12.3.5   Franchisor shall employ an independent certified public
accountant to conduct an annual audit of the Fund.  The cost of the annual audit
shall be paid from the Fund.

     12.4    In addition to its contributions to the Fund and its monthly
expenditure for local advertising and promotion, Franchisee shall spend a
minimum of Five Thousand Dollars ($5,000) for grand opening  marketing pursuant
to a grand opening marketing plan developed by Franchisee and approved by
Franchisor.

     12.5    Franchisor shall have the right, in its sole discretion, to
designate geographic areas for purposes of establishing local or regional
advertising cooperatives 

                                    - 17 -
<PAGE>
 
("Cooperatives"). Such geographic areas shall consist of one or more areas of
dominant influence ("ADI"), as defined from time to time by Arbitron Company. If
the Bakery is within the territory of an existing Cooperative at the time the
Bakery opens for business, Franchisee shall immediately become a member of the
Cooperative. If a Cooperative applicable to the Bakery is established during the
term of this Agreement, Franchisee shall become a member no later than thirty
(30) days after the date approved by Franchisor for the Cooperative to commence
operation. In no event shall Franchisee be required to be a member of more than
one Cooperative for the Bakery. Franchisor (or its affiliate, as the case may
be,) shall become a member in any Cooperatives established for a geographic
region that includes a Bruegger's Fresh Bagel Bakery owned by Franchisor (or its
affiliate). The following provisions shall apply to each Cooperative:

             12.5.1   Each Cooperative shall be organized and governed in a form
and manner, and shall commence operations on a date, approved in advance by
Franchisor in writing.  No changes in the bylaws or other governing documents of
a Cooperative shall be made without Franchisor's prior written consent.

             12.5.2   Each Cooperative shall be organized for the exclusive
purpose of administering regional advertising programs and developing, subject
to Franchisor's approval, promotional materials for use by the members in local
advertising.

             12.5.3   No advertising or promotional plans or materials may be
used by a Cooperative or furnished to its members without prior approval of
Franchisor pursuant to Section 12.6 below.

             12.5.4   Franchisee and each other member of the Cooperative shall
contribute every fourth Monday to the Cooperative, commencing with the first
Monday after the Cooperative commences operations, the amount determined by the
membership.  Said amount may not exceed two percent (2%) of the Gross Sales of
each Bakery operated by the members unless approved by a unanimous vote of
eligible members.  Franchisee's obligation to make local advertising
expenditures under Section 12.2 above shall be reduced by the amount of
Franchisee's contributions to the Cooperative.  Each required contribution shall
be based on Gross Sales for the preceding four week period, and shall be
submitted together with such statements or reports as may be required by
Franchisor, or by the Cooperative with Franchisor's prior written approval.

             12.5.5   Franchisor, in its sole discretion, may grant to any
franchisee an exemption for any length of time from the requirement of
membership in a Cooperative, and/or from the obligation to contribute thereto
(including a reduction, deferral or waiver of such contribution), upon written
request of such franchisee stating sufficient reasons to support such exemption.
Franchisor's decision concerning any request for exemption shall be final.  If
an exemption is granted to a franchisee, the franchisee shall be required to
spend on 

                                    - 18 -
<PAGE>
 
local advertising the amount the franchisee otherwise would have been required
to contribute to the Cooperative.

     12.6    All advertising and promotion by Franchisee and by Cooperatives
shall be in such media and of such type and format as Franchisor may approve,
shall be conducted in a dignified manner, and shall conform to such standards
and requirements as Franchisor may specify.  Franchisee or the Cooperative shall
submit written samples of all proposed advertising and promotional plans and
materials to Franchisor for its approval (except with respect to prices to be
charged) at least thirty (30) days before their intended use, unless such plans
and materials were prepared by Franchisor or have been approved by Franchisor
within the last twelve (12) months.  Proposed advertising plans or materials
shall be deemed to have been approved if they have not been disapproved by
Franchisor within fifteen (15) days after their receipt by Franchisor.

     12.7    At Franchisor's request, Franchisee shall furnish Franchisor with
copies of invoices and other appropriate documentation of Franchisee's
compliance with Sections 12.2 and 12.4 above.

     12.8    Franchisee, at its own expense, shall obtain listings in the white
pages and yellow pages of local telephone directories.

13.  INSURANCE
     ---------

     13.1    Before commencing any activities under this Agreement, Franchisee
shall procure, and thereafter shall maintain in full force and effect at all
times during the term of this Agreement, at Franchisee's expense, an insurance
policy or policies protecting Franchisee, Franchisor, Franchisor's affiliates,
and their respective officers, directors, shareholders, and employees against
any demand or claim with respect to personal injury, death, or property damage,
or any loss, liability, or expense whatsoever arising or occurring at or in
connection with the Bakery or any bagel dough manufacturing site, including, but
not limited to, comprehensive general liability insurance, property and casualty
insurance, statutory workers' compensation insurance, employer's liability
insurance, product liability insurance, and business interruption insurance.
Such policy or policies shall be written by a responsible carrier or carriers
acceptable to Franchisor, shall name Franchisor as an additional insured as
specified by Franchisor, and shall provide at least the types and minimum
amounts of commercially reasonable coverage specified in the Manuals.

     13.2    Franchisee's obligation to obtain and maintain the policy or
policies in the amounts specified in the Manuals shall not be limited in any way
by reason of any insurance which may be maintained by Franchisor, nor shall
Franchisee's performance of that obligation relieve it of liability under the
indemnity in Section 20.2 of this Agreement.

                                    - 19 -
<PAGE>
 
     13.3    All public liability and property damage policies shall contain a
provision that Franchisor, although named as an insured, shall nevertheless be
entitled to recover under such policies on any loss occasioned to Franchisor or
its servants, agents, or employees by reason of the negligence of Franchisee or
its servants, agents, or employees.

     13.4    Before commencing any operations under this Agreement, and
thereafter prior to the expiration of any policy, Franchisee shall deliver to
Franchisor certificates of insurance evidencing the proper types and at least
the minimum amounts of coverage specified in the Manuals.  All such certificates
shall expressly provide that no less than ten (10) days' prior written notice
shall be given Franchisor in the event of material alteration to or cancellation
of the coverage evidenced by such certificates.

     13.5    Should Franchisee, for any reason, fail to procure or maintain the
insurance required by this Agreement, as such requirements may be revised from
time to time by Franchisor in the Manuals or otherwise in writing, but which
requirements shall in all cases by commercially reasonable, Franchisor shall
have the right (but not the obligation) to procure such insurance and to charge
its cost to Franchisee, which charges, together with a reasonable fee for
Franchisor's services, shall be payable by Franchisee immediately upon demand.
The foregoing remedies shall be in addition to any other remedies Franchisor may
have.

14.  TRANSFER OF INTEREST
     --------------------

     14.1    Franchisor shall have the right to transfer or assign this
Agreement or any part of its rights or obligations herein to any person or legal
entity.  Franchisee agrees that Franchisor shall have no liability after the
effective date of such transfer or assignment for the performance of any
obligations hereunder.

     14.2    Franchisee understands and acknowledges that the rights and duties
set forth in this Agreement are granted in reliance on the business skill,
financial capacity, and personal character of Franchisee's present owners and
management.  Accordingly, except as specifically provided in Section 14.3:  (i)
neither Franchisee nor any Holding Company may issue any capital stock of the
Franchisee or the Holding Company, and (ii) no holders of any capital stock in
either Franchisee or a Holding Company (collectively the "Holders" and
individually a "Holder"), may sell, assign, transfer, convey, or give away any
such capital stock, in each case without receiving the prior written consent of
the Franchisor.  In addition, neither the Franchisee or any Holding Company
shall assign, transfer convey or give away any interest in this Agreement
without the prior written consent of Franchisor (except as specifically provided
in Section 14.3 below).  Franchisee shall notify Franchisor in writing of any
proposed transfer at least thirty (30) days before any transfer is to take
place, and shall provide such information and documentation relating to the
proposed transfer as Franchisor may reasonably request.  Any purported
assignment or transfer not effected in compliance with this Agreement shall be
null and void and shall constitute a material breach of this Agreement, for
which Franchisor may immediately terminate this Agreement without 

                                    - 20 -
<PAGE>
 
opportunity to cure pursuant to Section 15.2. of this Agreement; provided,
however that failure to provide the notice referred to above shall not give rise
to termination if the other conditions of this Section 14 shall have been
satisfied, unless Franchisee shall fail to give this notice three (3) times
during any twelve month period, or four (4) times during the term of this
Agreement.

     14.3    Notwithstanding any other provision of this Section 14:

             14.3.1   Franchisor acknowledges that Franchisee is currently party
to financing arrangements that require the pledge and assignment as collateral
of this Agreement, the lease for the Approved Location, other personal property
assets, and any and all interest of Franchisee therein, and some or all of the
outstanding stock of Franchisee, all as security for any loan, guarantee or
other obligation;

             14.3.2   Franchisor hereby agrees that, without further consent
from Franchisor, Franchisee may pledge, assign as collateral with right of
reassignment, or otherwise encumber this Agreement, the lease for the Approved
Location, any and all other collateral of the Franchisee, and any interest of
Franchisee therein, as security for any loan, guarantee or other obligation;

             14.3.3   Franchisor hereby agrees that, without further consent
from Franchisor, Franchisee or any individual, partnership, corporation or other
legal entity which directly or indirectly owns any interest in Franchisee, may
pledge or otherwise encumber any ownership interest in Franchisee as security
for a loan, guarantee or other obligation;

            14.3.4    No prior written consent under Section 14.2 shall be
required and no right of first refusal under Section 14.4 shall be available to
Franchisor with respect to (i) any transfers, assignments or sales of securities
by any Holder aggregating less than 20% of the securities held by Holder;
provided no such transferee shall be deemed a Holder for purposes of further
transfers pursuant to this subsection (i); (ii) any transfers, assignments or
sales by a Holder to spouses or lineal descendants or to trusts or other
fiduciaries for the benefit of spouses or lineal descendants of such Holder;
(iii) any transfers, assignments or sales of securities by any party who is a
Holder as of the date of this Agreement to any other Holder; (iv) any merger,
acquisition or other reorganization involving the Franchisee in which securities
owned by a Holder are in substantial part exchanged for or converted into
securities of another entity; (v) any transfers to persons or entities who are
stockholders or affiliates of a Holder as of the date of this Agreement
(including other entities controlled by persons or entities who are affiliates
of the Holders as of the date of this Agreement) or, if the Holder is a
partnership, to existing partners of such Holder; (vi) any transfers,
assignments or sales to employees of Franchisee pursuant to an incentive plan
adopted by Franchisee, provided that the securities authorized for issuance
under such plan at any time shall not exceed 25% of Franchisee's total
outstanding securities; (vii) any transfers mandated by federal or state law or
regulation; or (viii) any bona fide transaction not intended to avoid the
provisions hereof in 

                                    - 21 -
<PAGE>
 
which any Holder merges or consolidates with a person or sells all or
substantially all of its assets (including the shares of common stock owned by
it at such time) to such a person in exchange for securities of such person, or
any transfer by a Holder to a person which the Holder controls, is controlled by
or is under common control with; provided, however, that Nordahl L. Brue and
Michael J. Dressell, or either of them and their respective spouses or lineal
descendants, shall continue to own beneficially at least five percent (5%) of
the total outstanding securities of Franchisee, or of the entity that owns and
controls Franchisee, and further provided that, prior to the consummation of the
transfers described in Sections (i) through (viii) inclusive, such transferees
agree to be bound by the terms and conditions of this Agreement by executing and
delivering to each party hereto their agreements to that effect.

             14.3.5   Either Franchisee or any partnership, corporation, or
other legal entity which directly or indirectly owns any interest in Franchisee
(a "Holding Company") may issue securities of either Franchisee or such Holding
Company by means of a registered public offering (a "Public Offering") at any
time after December 31, 1997.  In the event of a Public Offering, the Franchisor
shall reasonably cooperate with the Franchisee and/or the Holding Company in
connection with such Public Offering.  No prior written consent under Section
14.2 and no right of first refusal under Section 14.2 shall be available to
Franchisor in connection with a Public Offering.

             14.3.6   No prior written consent under Section 14.2 shall be
required and no right of first refusal under Section 14.4 shall be available to
Franchisor with respect to any sale, transfer, assignment, or conveyance of
securities of the Franchisee or the Holding Company by either Franchisee or the
Holding Company or by any Holder which does not result in a Change of Control of
Franchisee or the Holding Company and which is not proposed to be made to a
direct competitor of Franchisor in the fresh bagel bakery business.

                      14.3.6.1     As used in this Section 14.3.6, a "Change of
Control" shall mean the occurrence of any of the following: (i) a sale or other
disposition, in one or a series of transactions, of all or substantially all of
the assets of Franchisee or the Holding Company other than to an Affiliate of
the Franchisee or the Holding Company;  (ii) any person, persons or entity
(other than a Permitted Holder) becomes the beneficial owner of 40% or more of
the outstanding equity of the Franchisee or the Holding Company; or (iii) any
transaction in which, after giving effect thereto, the Permitted Holders cease
to own at least 60% of the outstanding equity in Developer; (iv) the Franchisee
or the Holding Company engages in any merger, consolidation, sale of capital
stock or any other transaction with any other person or entity, with the effect
that after the transaction, the Permitted Holders own, directly or indirectly,
in the aggregate less than 60% of the outstanding equity of (x) the Franchisee
or the Holding Company, as applicable, if the Franchisee or the Holding Company,
as applicable, is the surviving entity, or (y) the surviving or resulting entity
if the Franchisee or the Holding Company is not the surviving entity, in each
such case immediately after the transaction; or (v) any transfer, assignment,
sale or disposition of the equity of Franchisee or the Holding Company that
causes the percentage ownership of an Operator or successor 

                                    - 22 -
<PAGE>
 
Operator reasonably satisfactory to Franchisor to be less than two percent (2%)
of the total outstanding securities of Franchisee or of the Holding Company. As
used in this Section 14.3.6.1, "Affiliate" means with respect to any person, any
other person directly or indirectly controlling or controlled by or under direct
or indirect common control with such person; "Permitted Holder" means any
person, partnership, corporation or other legal entity which as of the date of
this Agreement directly or indirectly owns an interest in Developer or the
Holding Company and any of their Affiliates; and "Operator" shall be the
individual responsible for the operations of all Bakeries developed pursuant to
the Development Agreement.

             14.3.7   Except as provided in Section 14.3.3, neither Franchisee
nor Holding Company may offer or sell securities by means of a Public Offering;

             14.3.8   None of the transfers provided for in this Section 14.3
shall trigger the right of first refusal set forth in Section 14.4 of this
Agreement or the transfer fee set forth in Section 14.6.5 of this Agreement;

             14.3.9   Franchisor shall, upon reasonable request from Franchisee,
execute and deliver to Franchisee such written approvals and acknowledgements
consistent with this Section 14.3 as shall be reasonably requested from time to
time for delivery to prospective assignees or transferees of Franchisee or its
owners.

     14.4    Franchisor shall have the right, exercisable within thirty (30)
days after receipt of written notice of a proposed transfer pursuant to Section
14.2, but not including those transfers permitted without Franchisor's consent
in Section 14.3, to purchase the interest proposed to be transferred by sending
written notice to the transferor, as follows:

             14.4.1   If the transfer is proposed to be made pursuant to a sale
of the assets or equity of Franchisee or Holding Company to a third party,
Franchisor may purchase the interest on the same terms and conditions offered by
the third party.  Closing on such purchase shall occur within forty-five (45)
days from the date of notice to the seller of the election to purchase by
Franchisor.  If the consideration, terms, and/or conditions offered by a third
party are such that Franchisor may not reasonably be required to furnish the
same consideration, terms, and/or conditions, then Franchisor may purchase the
interest proposed to be sold for the reasonable equivalent in cash.  If the
parties cannot agree within a reasonable time on the cash consideration, an
independent appraiser shall be designated by Franchisor, at Franchisor's
expense, and the determination of the appraiser shall be binding on both
parties. Any material change thereafter in the terms of the offer from a third
party shall constitute a new offer subject to the same rights of first refusal
by Franchisor as in the case of the third party's initial offer;

                                    - 23 -
<PAGE>
 
             14.4.2   If such transfer is proposed to be made for less than full
consideration, Franchisor shall designate an independent appraiser to determine
the fair market value of the interest proposed to be transferred.  Franchisor
shall pay the entire expense of the appraisal.  Franchisor may purchase such
interest at the fair market value determined by the appraiser.  Closing on such
purchase shall occur within forty-five (45) days after notice from Franchisor to
the transferor of the appraiser's determination of fair market value.

     14.5    Except as provided in Section 14.3, if Franchisor's right of first
refusal arises under Section 9.4, but Franchisor fails to exercise such right,
then the proposed transferor may complete the transfer after obtaining any
consent in writing from Franchisor required under Section 14.2.  Franchisor
shall not unreasonably withhold its consent to a proposed transfer.  Franchisor
may, however, withhold consent, in its sole discretion, to the transfer if such
transfer is not made in conjunction with a simultaneous transfer of all
comparable interests held by the transferor in the Development Agreement and all
Franchise Agreements executed pursuant to the Development Agreement.

     14.6    In those instances in which Franchisor's consent is required for a
transfer, Franchisor may require any or all of the following conditions to such
consent:

             14.6.1   All of Franchisee's accrued monetary obligations to
Franchisor and its affiliates shall have been satisfied;

             14.6.2   Franchisee shall not at the time of transfer be in default
of any provision of this Agreement, any amendment hereof or successor hereto, or
any other agreement between Franchisee and Franchisor or its affiliates or any
Franchise Agreement executed pursuant to this Agreement;

             14.6.3   The transferor and Franchisor shall have executed mutual
general releases, in a form reasonably satisfactory to Franchisor, of any and
all claims against each other and the affiliates of each other, and the
respective and its officers, directors, shareholders, and employees of each
other, in their corporate and individual capacities;

             14.6.4   If the transfer is made by the Franchisee rather than a
person or entity owning an interest in the Franchisee, the transferee shall
enter into a written assignment, in a form satisfactory to Franchisor, assuming
and agreeing to discharge all of Franchisee's obligations under this Agreement;

             14.6.5   If a transfer, alone or together with previous,
simultaneous, or proposed transfers, would have the effect of changing control
of Franchisee or of the rights granted under this Agreement, Franchisee shall
pay a transfer fee of Five Thousand Dollars ($5,000) plus Franchisor's
reasonable expenses for outside services associated with reviewing the
application to transfer, including, but not limited to, reasonable attorneys'
fees; provided, however, no transfer fee or expense reimbursement shall be due
in connection with an

                                    - 24 -
<PAGE>
 
assignment of any interest in Franchisee or this Agreement between Michael J.
Dressell and Nordahl L. Brue. Notwithstanding any provision in the Development
Agreement or any Franchise Agreement, in the event Franchisor approves of a
simultaneous transfer of the Development Agreement and more than one Franchise
Agreement to a single transferee or an affiliated group of transferees or a sale
of control of Developer or the Holding Company, Franchisee shall pay a total
transfer fee of $5,000.00 regardless of the number of Franchise Agreements or
Bakeries transferred, plus Franchisor's reasonable expenses for outside services
associated with reviewing the application to transfer, including but not limited
to, reasonable attorneys' fees.

     14.7    Except with respect to the transfers allowable without Franchisor's
consent under Section 14.3, the executor or personal representative of a person
with an interest in Franchisee shall transfer such person's interest to a third
party approved by Franchisor within a reasonable time after the date of such
person's death or declaration of such person's mental incapacity.   Except as
provided in Section 14.3 above, such transfers shall be subject to Franchisor's
right of first refusal under Section 14.4, or if such right is not exercised,
the same conditions as any inter vivos transfer under Section 14.6.  In the case
                           ----- -----                                          
of transfer by bequest, if the beneficiaries are unable to meet the conditions
of this Section 14, the executor shall transfer the deceased's interest to
another party approved by Franchisor within a reasonable time, subject to all
the terms and conditions for transfers contained in this Section 14.  If the
interest is not disposed of within two (2) years from the date of death or
appointment of a personal representative, Franchisor may terminate this
Agreement by written notice.

     14.8    Franchisor's consent to a transfer shall not constitute a waiver of
any claims Franchisor may have against the transferring party, nor shall it be
deemed a waiver of Franchisor's right to demand exact compliance with any of the
terms of this Agreement by the transferor or transferee.

     14.9    In the event Franchisee or Holding Company shall attempt to obtain
funds by the sale of securities in Franchisee or Holding Company in accordance
with the provisions of this Agreement, Franchisee agrees to submit any written
information related to the System, the Bakeries, this Agreement or any other
aspect of the franchised business to Franchisor for review and approval prior to
its inclusion in any offering material, which approval may be withheld on any
reasonable basis; provided, however, Franchisor may not reject information that
must be included to comply with applicable state and federal securities laws.
Franchisor shall use reasonable efforts to respond promptly to any and all
requests for approval of such offering materials.  No offering by Franchisee or
the Holding Company shall imply in any way that Franchisor is participating in
an underwriting, issuance, or offering of securities of either Franchisee or
Franchisor.  Furthermore, Franchisee may not use the Proprietary Marks in
connection with the offering material, except that in limited circumstances as
approved by Franchisor, which consent shall not be unreasonably withheld.
Franchisee may use the "Bruegger's" name and the "Bruegger's" and "Bruegger's
Fresh Bagel Bakery" trademarks in 

                                    - 25 -
<PAGE>
 
such offering materials for the purpose of identifying the business of
Franchisee, including use of a photograph of a Bakery, subject to Franchisor's
consent, which shall not be unreasonably withheld. In addition, neither
Franchisee, nor the affiliated entity that seeks to offer securities for sale,
shall have a name that is substantially similar to "Bruegger's" or otherwise
creates a likelihood of confusion to the public between Franchisee, or the
affiliated entity who seeks to sell securities, and Franchisor. Franchisor's
review of any offering material shall be limited to the subject of the
relationship between Franchisee and Franchisor and to the compliance with this
Section 14.9. Franchisee must fully indemnify Franchisor in connection with the
offering. For each proposed offering, Franchisee shall pay to Franchisor a non-
refundable fee of Five Thousand Dollars ($5,000) to reimburse Franchisor for its
costs and expenses associated with reviewing the proposed offering. Franchisee
shall give Franchisor written notice at least thirty (30) days prior to the date
of commencement of any offering.

     14.10   The restrictions on transfer and Franchisor's rights of first
refusal set forth in this Section 14 shall terminate upon the filing of a
registration statement with the Securities and Exchange Commission by Franchisee
or a Holding Company; provided such registration filing is effected in
accordance with the terms of this Agreement.

15.  DEFAULT AND TERMINATION
     -----------------------

     15.1    Franchisee shall be deemed to be in default under this Agreement,
and all rights granted to Franchisee herein shall automatically terminate
without notice to Franchisee, if Franchisee becomes insolvent or makes a general
assignment for the benefit of creditors; if a petition in bankruptcy is filed by
Franchisee or is filed against and not opposed by Franchisee; if Franchisee is
adjudicated a bankrupt or insolvent; if a bill in equity or other proceeding for
the appointment of a receiver of Franchisee or other custodian for Franchisee's
business or assets is filed and consented to by Franchisee; if a receiver or
other custodian (permanent or temporary) of Franchisee's assets or property, or
any part thereof, is appointed by any court of competent jurisdiction; if
proceedings for a composition with creditors under any state or federal law are
instituted by or against Franchisee; if a final judgment against Franchisee
remains unsatisfied or of record for sixty (60) days or longer (unless
supersedeas bond is filed); if Franchisee is dissolved; if execution is levied
against Franchisee's business or property; if suit to foreclose any lien or
mortgage against the Premises or equipment of the Bakery is instituted against
Franchisee and not dismissed within sixty (60) days (except a mechanic's or
materialman's lien with respect to which Franchisee has a good faith dispute
regarding the amount due, provided Developer has set aside sufficient funds to
satisfy the obligation); or if the real or personal property of the Bakery is
sold after levy thereupon by any sheriff, marshal, or constable.

     15.2    If any of the following events of default occurs, Franchisor, at
its option, may terminate this Agreement without affording Franchisee any
opportunity to cure the default, effective immediately upon receipt of written
notice by Franchisee:

                                    - 26 -
<PAGE>
 
             15.2.1   If Franchisee fails to construct and open the Bakery
within the time specified in Section 5.4 of this Agreement;

             15.2.2   If Franchisee or any principal officer (president, vice
president, treasurer, controller, any financial officer or the Operator, or any
area manager) of Franchisee is convicted of a non-vehicular felony, a crime
involving moral turpitude, or any other crime or offense that Franchisor
believes is reasonably likely to have an adverse effect on the System, the
Proprietary Marks, the goodwill associated therewith, or Franchisor's interest
therein;

             15.2.3   If a substantial threat or danger to public health or
safety results from the construction, maintenance, or operation of the Bakery or
any facility in which Franchisee manufactures bagel dough and the Franchisee
knew or should have known of the threat or danger to public health or safety
resulting from the construction, maintenance, or operation of the Bakery;

             15.2.4   If any person or entity with an interest referred to in
Section 14 purports to transfer such interest other than in accordance with
Section 14;

             15.2.5   To the extent required by Section 14.6, if an approved
transfer is not effected within two (2) years following death or mental
incapacity, or if any transfer by intestate succession is made to an heir who is
unable to meet the conditions of Section 14;

             15.2.6   If Franchisee fails to comply with the covenants in
Section 17.1 below;

             15.2.7   If Franchisee discloses or divulges any material contents
of the Manuals, the Bagel Production Manual, or other confidential information
of Franchisor, except as permitted under Section 10 hereof;

             15.2.8   If Franchisee knowingly maintains false books or records
or knowingly submits any false reports to Franchisor; provided, however, the
conduct of a single employee of Franchisee, who shall be neither an officer nor
a director of Franchisor, shall not constitute such knowing conduct if
Franchisee exercises reasonable prudence in monitoring the conduct of its
employees and promptly cures any defaults arising from such fraudulent conduct;

             15.2.9   If Franchisee refuses to permit Franchisor to inspect the
premises, books, records, or accounts of the Bakery or of any facility in which
Franchisee manufactures bagel dough, as provided herein;

                                    - 27 -
<PAGE>
 
             15.2.10  If Franchisee, after curing a material default pursuant to
Section 15.5 hereof, commits the same material default on two additional
occasions within one (1) year, whether or not cured after notice; or

             15.2.11  If Franchisee is in default under a material provision of
the Agreement to which Section 15.5 is applicable three (3) times within any
nine-month period, whether such material defaults are of a similar or different
nature and whether or not any of them is cured after notice.

     15.3    If Franchisee fails, refuses, or neglects to pay any monies owing
to Franchisor or its affiliates, or fails to submit financial or other
information required under this Agreement, within seven (7) days after receipt
of notice of default from Franchisor, this Agreement shall terminate at the end
of such seven-day period without further notice from Franchisor.

     15.4    If Franchisee at any time ceases to operate or otherwise abandons
the Bakery, loses the right to possession of the Premises, or otherwise forfeits
the right to do or transact business in the jurisdiction where the Bakery is
located, within seven (7) days after receipt of notice of said default from
Franchisor, this Agreement shall terminate at the end of such seven (7) day
period without further notice from Franchisor.  However, if, through no fault of
Franchisee, the Premises are damaged or destroyed by an event such that repairs
or reconstruction cannot be completed within sixty (60) days thereafter, then
Franchisee shall have thirty (30) days after the event in which to apply for
Franchisor's approval to relocate and/or reconstruct the Bakery, which approval
shall not be unreasonably withheld.

     15.5    Except as provided in Sections 15.1 through 15.4, Franchisor may
terminate this Agreement only in the event of a default by Franchisee, and only
by giving Franchisee written notice of termination stating the nature of the
default at least thirty (30) days prior to the effective date of termination.
If the default is not cured to Franchisor's reasonable satisfaction within the
thirty-day period (or such longer period as applicable law may require or as may
be reasonably practical, provided Franchisee diligently prosecutes such cure to
completion), this Agreement shall terminate without further notice to
Franchisee, effective at the end of the thirty-day period (or such longer period
as applicable law may require).  Any material failure to comply with the
requirements imposed by this Agreement (as it may from time to time reasonably
be supplemented by the Manuals) shall be a default under this Section 15.5
including, but not limited to, the following events:

             15.5.1   If Franchisee sells any unapproved products or otherwise
materially fails to maintain or observe any of the standards or procedures
prescribed by Franchisor in this Agreement, the Manuals, or otherwise in
writing;

                                    - 28 -
<PAGE>
 
             15.5.2   If Franchisee misuses or makes any unauthorized use of the
Proprietary Marks or any other identifying characteristics of the System, or
otherwise materially impairs the goodwill associated therewith or Franchisor's
rights therein; or

             15.5.3   If Franchisee fails, refuses, or neglects to obtain
Franchisor's prior written approval or consent as required by this Agreement
(other than consent to a transfer under Section 14, the breach of which is
addressed in Section 15.2.5).

     15.6    Notwithstanding anything else in this Agreement, Franchisor agrees
not to assert any claim for future royalty payments or advertising fees under
this Agreement if:  (i) this Agreement is terminated prior to conclusion of its
term; and (ii) prior to such termination, Franchisor (who shall not unreasonably
withhold its agreement) and Franchisee agree that the sole reason for
termination of the Agreement is that the Approved Location is not appropriate
for a Bruegger's Fresh Bagel Bakery.  All other rights and remedies available to
Franchisor under this Agreement arising out of the termination of the Agreement
shall remain in full force and effect, all post-term covenants imposed upon
Franchisee.

16.  OBLIGATIONS UPON TERMINATION OR EXPIRATION
     ------------------------------------------

     Upon termination or expiration of this Agreement, all rights granted
hereunder to Franchisee shall immediately terminate, and:

     16.1    Franchisee shall immediately cease to operate the Bakery; shall not
thereafter, directly or indirectly, represent itself to the public or hold
itself out as a present or former franchisee of Franchisor with respect to the
Bakery; and, if applicable, shall immediately cease production of any bagel
dough using trade secrets or know-how furnished by Franchisor not lawfully in
the public domain, except pursuant to another Franchise Agreement with
Franchisor..

     16.2    Franchisee shall immediately and permanently cease to use in any
manner whatsoever the confidential methods, procedures, and techniques
associated with the System; the "BRUEGGER'S" mark; the "BRUEGGER'S FRESH BAGEL
BAKERY" name; and all other Proprietary Marks, distinctive forms, slogans,
signs, symbols, and devices associated with the System; provided that this
provision shall not affect any rights granted to Franchisee pursuant to any
other Franchise Agreements.

     16.3    Franchisee shall take such action as may be necessary to cancel any
assumed name registration or equivalent registration obtained by Franchisee in
connection with the Bakery which contains the name "BRUEGGER'S" or any other
Proprietary Marks, and shall furnish evidence satisfactory to Franchisor of
compliance with this obligation within five (5) business days after termination
or expiration of this Agreement.  Franchisee hereby appoints Franchisor its
attorney-in-fact to carry out the requirements of this Section 16.3, if
Franchisee fails to do so within such five-day period.

                                    - 29 -
<PAGE>
 
     16.4    At Franchisor's option, Franchisee shall assign to Franchisor, at
fair market value, Franchisee's interest in the lease or sublease for the
Premises and, also at Franchisor's option, if Franchisee will retain fewer
Bakeries within a fifty-mile radius of the bagel dough manufacturing site than
the Franchisor, Franchisee's interest in the lease or sublease for the property
in which Franchisee manufactures bagel dough.  If the parties cannot agree on
fair market value within a reasonable time, each party shall designate an
independent appraiser. These two appraisers shall designate a third appraiser.
Franchisor and Franchisee shall pay for the appraiser that they designate and
one-half of the expense of the third appraiser.  The three (3) appraisers shall
determine the fair market value of the property.  If Franchisor elects not to
exercise its option to acquire either or both of such leases or subleases,
Franchisee shall make such modifications or alterations to the Premises and
bagel dough manufacturing site (including, without limitation, changing or
assigning the telephone number to Franchisor) immediately upon termination or
expiration of this Agreement as may be necessary to distinguish the Premises and
bagel dough manufacturing site from those of a Bruegger's Fresh Bagel Bakery or
related facility, and shall make such specific additional changes as Franchisor
may reasonably request for that purpose.  If Franchisee fails or refuses to
comply with the requirements of this Section 16.4, Franchisor shall have the
right to enter the Premises and bagel dough manufacturing site, without being
guilty of trespass or any other tort, for the purpose of making or causing to be
made such changes as may reasonably be required, at the expense of Franchisee,
which expense Franchisee agrees to pay on demand.

             16.4.1   If Franchisor exercises its option to acquire any lease of
Franchisee, then Franchisor and Franchisee shall enter into an assignment and
assumption agreement  that shall include provisions under which Franchisor
agrees to indemnify and hold harmless Franchisee from any claims for defaults
under such lease that may occur after the assignment, and under which Franchisee
shall indemnify Franchisor from any claims for defaults under such lease that
occurred prior to the assignment.  In addition, Franchisor shall use
commercially reasonable efforts to obtain a release of any personal guarantees
made of Franchisee's obligations under such lease.

     16.5    Franchisee shall not use any reproduction, counterfeit, copy, or
colorable imitation of the Proprietary Marks, either in connection with such
other business or the promotion thereof, which in Franchisor's sole discretion
is likely to cause confusion, mistake, or deception or to dilute Franchisor's
rights in and to the Proprietary Marks.  Franchisee shall not use any
designation of origin or description or representation which, in Franchisor's
sole discretion, falsely suggests or represents an association or connection
with Franchisor.

     16.6    Franchisee shall promptly pay all sums owing to Franchisor and its
affiliates.  In the event of termination for default by Franchisee, such sums
shall include all damages, costs, and expenses incurred by Franchisor as a
result of the default, including, but not limited to, reasonable attorneys'
fees.

                                    - 30 -
<PAGE>
 
     16.7    Franchisee shall pay to Franchisor all damages, costs, and expenses
(including, but not limited to, reasonable attorneys' fees) incurred by
Franchisor subsequent to the termination or expiration of this Agreement in
obtaining injunctive or other relief for the enforcement of any provisions of
this Section 16.

     16.8    Franchisee shall immediately deliver to Franchisor the Manuals, the
Bagel Production Manual, and all other records, correspondence, and instructions
containing confidential information relating to the System or the operation of a
Bruegger's Fresh Bagel Bakery, all of which are acknowledged to be the property
of Franchisor.

     16.9    Franchisor shall have the right, exercisable by written notice
within thirty (30) days after expiration or termination, but not the obligation,
to purchase from Franchisee any or all of the furnishings, equipment, signs, and
fixtures of the Bakery and of the facility in which Franchisee manufactures
bagel dough, if any, at fair market value and to purchase any or all inventory
and supplies of the Bakery at fair market wholesale value.  If the parties
cannot agree on the price of any such items within a reasonable time, each party
shall designate an independent appraiser.  These two appraisers shall designate
a third appraiser, Franchisor and Franchisee shall each pay for the appraiser
that they designate and one-half of the third appraiser.  The three (3)
appraisers shall determine the applicable fair market value of the property.  If
Franchisor exercises any option to purchase provided herein, Franchisor shall
have the right to set off all amounts due from Franchisee against any payment.

     16.10   Franchisee shall comply with the post-term covenants contained in
Section 17.2 of this Agreement.

17.  COVENANTS
     ---------

     17.1    Franchisee specifically acknowledges that Franchisee will receive
valuable, specialized training and confidential information regarding the
manufacturing, operational, sales, promotional, and marketing methods and
techniques of Franchisor and the System. Franchisee covenants that, during the
term of this Agreement, except as otherwise approved in writing by Franchisor,
Franchisee shall not, either directly or indirectly, for itself or through, on
behalf of, or in conjunction with any person or legal entity:

             17.1.1   Divert or attempt to divert any present or prospective
business or customer to any competitor, by direct or indirect inducement or
otherwise, or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with the Proprietary Marks and the
System;

             17.1.2   Employ or seek to employ any person who is at that time
employed by Franchisor, or who has been employed by Franchisor within the
preceding three (3) months, or otherwise directly or indirectly induce such
person to leave his or her employment with Franchisor; or

                                    - 31 -
<PAGE>
 
             17.1.3   Own, maintain, operate, engage in, be employed by, provide
any assistance to, or have any interest in any other business whose sales of
fresh or packaged bagels and cream cheese are more than five percent (5%) of its
total sales by annual dollar volume, except pursuant to another Franchise
Agreement with Franchisor.

     17.2    Franchisee covenants that, except pursuant to another Franchise
Agreement with Franchisor, or as otherwise approved in writing by Franchisor,
Franchisee shall not, for two (2) years after the expiration or termination of
this Agreement or the approved transfer of this Agreement to a new franchisee,
either directly or indirectly, for itself or through, on behalf of, or in
conjunction with any person or legal entity, own, maintain, operate, engage in,
be employed by, provide assistance to, or have any interest in any business
whose sales of bagels and cream cheese are more than five percent (5%) of its
total sales by annual dollar volume, and which is, or is intended to be, located
(i) within ten (10) miles of the Approved Location, or (ii) within five (5)
miles of any other Bruegger's Fresh Bagel Bakery.

     17.3    Sections 17.1.3 and 17.2 shall not apply to ownership by Franchisee
of less than five percent (5%) beneficial interest in the outstanding equity
securities of any publicly-held corporation.

     17.4    Franchisor shall have the right, in its sole discretion, to reduce
the scope of any covenant set forth in Sections 17.1 and 17.2, or any portion
thereof, without Franchisee's consent, effective immediately upon receipt by
Franchisee of written notice thereof. Franchisee agrees to comply with any
covenant as so modified, which shall be fully enforceable notwithstanding the
provisions of Section 23 hereof.

     17.5    Franchisee agrees that the existence of any claims it may have
against Franchisor, whether or not arising from this Agreement, shall not
constitute a defense to the enforcement by Franchisor of the covenants in this
Section 17.  Franchisee agrees to pay all costs and expenses incurred by
Franchisor in enforcing this Section 17, including, but not limited to
reasonable attorneys' fees.

     17.6    Franchisee acknowledges that Franchisee's violation of the terms of
this Section 17 would result in irreparable injury to Franchisor for which no
adequate remedy at law may be available, and Franchisee accordingly consents to
the issuance of an injunction prohibiting any conduct by Franchisee in violation
of the terms of this Section 17.  Such injunctive relief shall be in addition to
any other remedies Franchisor may have.

     17.7    At Franchisor's request, Franchisee shall obtain and furnish to
Franchisor executed covenants similar in substance to those set forth in this
Section 17 (including covenants applicable upon the termination of a person's
relationship with Franchisee) from any or all of the following persons: (a) all
personnel employed by Franchisee who have received or will receive training from
Franchisor; and (b) all officers, directors, and holders of a direct or indirect
beneficial interest of five percent (5%) or more of the securities of

                                    - 32 -
<PAGE>
 
Franchisee.  Each covenant required by this Section 17.7 shall be in a form
approved by Franchisor, including, without limitation, specific identification
of Franchisor as a third party beneficiary with the independent right to enforce
the covenant.

     17.8    Franchisor agrees that it shall not employ or seek to employ any
person who is at the time employed by Franchisee or who was employed by
Franchisee within the preceding six (6) months, or otherwise directly or
indirectly induce such person to leave his or her employment with Franchisee.

18.  ORGANIZATION OF FRANCHISEE
     --------------------------

     18.1    If Franchisee is a corporation, Franchisee shall comply with the
following requirements:

             18.1.1   Franchisee's charter or organizational documents shall at
all times provide that its activities are confined exclusively to developing and
operating Bruegger's Fresh Bagel Bakeries and/or bagel dough manufacturing
sites; provided, however that such restriction shall automatically terminate at
the time Franchisee (or its parent or successor) files a registration statement
with the Securities and Exchange Commission covering sales of its shares to the
public.

             18.1.2   Franchisee shall promptly furnish to Franchisor copies of
its articles of incorporation, bylaws, and other governing documents, and any
amendments thereto, including the resolution of Franchisee's board of directors
authorizing entry into this Agreement.

             18.1.3   Until or unless Franchisee or its parent or success
corporation begins offering its shares for sale to the public pursuant to a
registration statement filed with the Securities and Exchange Commission,
Franchisee shall maintain stop-transfer instructions against the transfer on its
records of any equity securities.  Each stock certificate of Franchisee shall
conspicuously display on its face the following printed legend:

             The transfer of ownership of shares represented by this
             certificate is subject to the terms and conditions of an
             Agreement with Bruegger's Franchise Corporation.
             Reference is made to the provisions of the Agreement and
             to the Articles and Bylaws of the Corporation.

             18.1.4   Until such time as Franchisee issues securities pursuant
to a Public Offering (as defined in Section 14.3.3) in accordance with the terms
of this Agreement, Franchisee shall maintain a current list of all owners of
record and all beneficial owners of any class of voting securities of Franchisee
and shall furnish the list to Franchisor upon request.

                                    - 33 -
<PAGE>
 
             18.1.5      If Franchisee began operating a Bakery at the Approved
Location before the execution of this Agreement, then, notwithstanding the
foregoing Sections 18.1.1 and 18.1.3, Franchisee shall not be in violation of
this Agreement so long as Franchisee limits it activities exclusively to
developing and operating Bakeries and restricts the transfer of its shares of
stock to only those transfers authorized by this Agreement.

     18.2    If Franchisee is a partnership, Franchisee shall comply with the
following requirements:

             18.2.1      Franchisee shall furnish Franchisor with a copy of its
partnership agreement and such other governing documents as Franchisor may
reasonably request, and any amendments thereto.

             18.2.2   Franchisee shall include in its partnership certificate,
if any, filed with the state in which Franchisee was formed a statement that the
transfer of ownership of a partnership interest is subject to the terms and
conditions of an Agreement with Bruegger's Franchise Corporation.

             18.2.3   Franchisee shall prepare and furnish to Franchisor from
time to time, upon request, a list of all general and limited partners in
Franchisee.

     18.3    If Franchisee is a limited liability company, Franchisee shall
comply with the following requirements during the term of this Agreement:

             18.3.1   Franchisee shall furnish Franchisor with a copy of its
Certificate of Formation, limited liability company operating agreement, and any
other entity governing documents as Franchisor might reasonably request, and any
amendments thereto.

             18.3.2   Franchisee shall confine its activities, and its governing
documents shall at all times provide that its activities are confined,
exclusively to the development and operation of the Bakeries to be developed
hereunder;

             18.3.3   Franchisee's limited liability company operating agreement
shall include provisions that states that the transfer of shares is subject to
the terms and conditions of an Agreement with Bruegger's Franchise Corporation.

             18.3.4   Until such time as Franchisee issues securities pursuant
to a Public Offering (as defined in Section 14.3.3) in accordance with the terms
of this Agreement, Franchisee shall prepare and furnish to Franchisor, upon
request, a list of all members of Franchisee.

                                    - 34 -
<PAGE>
 
19.  TAXES, PERMITS, AND INDEBTEDNESS
     --------------------------------

     19.1    Franchisee shall promptly pay when due all taxes levied or
assessed, including, without limitation, unemployment and sales taxes, and all
accounts and other indebtedness of every kind incurred by Franchisee in the
operation of the Bakery.  Franchisee shall pay to Franchisor an amount equal to
any sales tax, gross receipts tax, or similar tax (other than income tax)
imposed on Franchisor with respect to any payments to Franchisor required under
this Agreement.

     19.2    In the event of any bona fide dispute as to Franchisee's liability
for taxes assessed or other indebtedness, Franchisee may contest the validity or
the amount of the tax or indebtedness in accordance with procedures of the
taxing authority or applicable law, but in no event shall Franchisee permit a
tax sale or seizure by levy or execution or similar writ or warrant, or
attachment by a creditor, to occur against the Bakery.

     19.3    Franchisee shall comply with all federal, state, and local laws,
rules, and regulations and shall timely obtain any and all permits,
certificates, or licenses necessary for the proper conduct of the Bakery,
including, without limitation, licenses to do business, fictitious name
registrations, sales tax permits, and fire clearances.

     19.4    Franchisee shall immediately notify Franchisor in writing of its
knowledge of the commencement of any action, suit, or proceeding and of the
issuance of any order, writ, injunction, award, or  decree of any court, agency,
or other governmental instrumentality which may materially adversely affect the
operation or financial condition of the Bakery.

20.  INDEPENDENT CONTRACTOR AND INDEMNIFICATION
     ------------------------------------------

     20.1    It is understood and agreed by the parties that this Agreement does
not create a fiduciary relationship between them, that Franchisee shall be an
independent contractor, and that nothing in this Agreement is intended to make
either party an agent, legal representative, subsidiary, joint venturer,
partner, employee, or servant of the other for any purpose whatsoever.  During
the term of this Agreement, Franchisee shall hold itself out to the public as an
independent contractor operating the Bakery pursuant to a franchise agreement
from Franchisor.  Franchisee agrees to take such action as may be necessary to
do so, including, without limitation, exhibiting a notice, the content of which
Franchisor reserves the right to specify, in a conspicuous place at the
Premises.

     20.2    Nothing in this Agreement authorizes Franchisee to make any
contract, agreement, warranty, or representation on Franchisor's behalf or to
incur any debt or other obligation in Franchisor's name.  Franchisor shall in no
event assume liability for or be deemed liable as a result of any such action,
nor shall Franchisor be liable by reason of any act or omission of Franchisee in
its operation of the Bakery, or for any claim or judgment arising therefrom
against Franchisee or Franchisor.  Franchisee shall hold harmless and 

                                    - 35 -
<PAGE>
 
indemnify Franchisor, its affiliates, and their respective officers,
directors, and employees against any claims, losses, costs, expenses,
liabilities, and damages arising directly or indirectly from, as a
result of, or in connection with Franchisee's operation of the Bakery,
as well as the costs of defending against such claims (including
reasonable attorneys' fees), except to the extent the claims, losses,
costs, expenses, liabilities and damages arise from Franchisor's
breach of its obligations under this Agreement.

21.  APPROVALS AND WAIVERS
     ---------------------

     21.1    Whenever this Agreement requires the prior approval or consent of
Franchisor, Franchisee shall make a timely written request to Franchisor
therefor, and such approval or consent must be obtained in writing and signed by
an officer of Franchisor. Franchisor shall respond to each such request in
writing not later than thirty (30) days after receipt of the request for such
approval or consent.

     21.2    Franchisor makes no warranties or guarantees upon which Franchisee
may rely and assumes no liability or obligation to Franchisee by providing any
waiver, approval, consent, or suggestion to Franchisee in connection with this
Agreement, or by reason of any neglect, delay, or denial of any request
therefor.

     21.3    No delay or failure of either party to exercise any right reserved
to it in this Agreement or to insist upon strict compliance by the other party
with any obligation or condition in this Agreement, and no custom or practice of
the parties at variance with the terms hereof, shall constitute a waiver of
either party's right to exercise such right or to demand exact compliance by the
other party with any of the terms hereof.  Waiver by either party of any
particular default by the other shall not affect or impair either party's rights
with respect to any  subsequent default of the same, similar, or a different
nature.  Subsequent acceptance by Franchisor of any payments due to it hereunder
shall not be deemed to be a waiver by Franchisor of any preceding breach by
Franchisee of any of the terms, covenants, or conditions of this Agreement.

22.  NOTICES
     -------

     All notices pursuant to this Agreement shall be in writing and shall be
personally delivered, sent by registered mail, or sent by other means which
affords the sender evidence of delivery or attempted delivery, to the respective
parties at the following addresses unless and until a different address has been
designated by written notice to the other party:

     Notices to Franchisor:    Bruegger's Franchise Corporation
                               P.O. Box 374
                               159 Bank Street
                               Burlington, Vermont 05402
                               Attn:  Vice President of Development

                                    - 36 -
<PAGE>
 
     With a copy to:           Nordahl L. Brue, Esq.
                               Sheehey Brue Gray & Furlong P.C.
                               P.O. Box 66
                               119 South Winooski Avenue
                               Burlington, Vermont 05402

     Notices to Franchisee:    _____________________________________
                               _____________________________________     
                               _____________________________________     
                               _____________________________________    
                               _____________________________________    

     With a copy to:           Mr. Steven P. Schonberg
                               P.O. Box 1082
                               159 Bank Street
                               Burlington, Vermont 05402

Any notice by a means which affords the sender evidence of delivery or attempted
delivery shall be deemed to have been given and received at the date and time of
receipt or attempted delivery.

23.  ENTIRE AGREEMENT
     ----------------

     This Agreement and the documents referred to herein constitute the entire
Agreement between Franchisor and Franchisee concerning the subject matter hereof
and supersede all prior agreements, negotiations, representations, and
correspondence concerning the same subject matter.  Except for those permitted
to be made unilaterally by Franchisor hereunder, no amendment, change, or
variance from this Agreement shall be binding on either party unless agreed to
by the parties in a writing executed by their authorized officers or agents.

24.  SEVERABILITY AND CONSTRUCTION
     -----------------------------

     24.1    If, for any reason, any provision of this Agreement is determined
to be invalid or in conflict with any existing or future law or regulation by a
court or agency having valid jurisdiction, such invalidity shall not impair the
operation of or have any other effect upon such other provisions as may remain
otherwise intelligible.  The latter shall continue to be given full force and
effect, and the invalid provisions shall be deemed not to be a part of this
Agreement.

     24.2    All covenants and obligations which expressly or by reasonable
implication are to be performed, in whole or in part, after the expiration or
termination of this Agreement shall survive such expiration or termination.

                                    - 37 -
<PAGE>
 
     24.3    Except as explicitly provided to the contrary herein, nothing in
this Agreement is intended or shall be deemed to confer upon any person or legal
entity other than Franchisee, Franchisor, Franchisor's officers, directors, and
employees, and such of Franchisor's and Franchisee's successors and assigns as
may be contemplated by Section 14 hereof, any rights or remedies under or by
reason of this Agreement.

     24.4    Franchisee and Franchisor agree to be bound by any promise or
covenant imposing the maximum duty permitted by law which is subsumed within the
terms of any provision hereof, as though it were separately articulated in and
made a part of this Agreement, that may result from (i) striking from any
provision of this Agreement any portion or portions which a court or agency
having valid jurisdiction may hold to be unreasonable and unenforceable in an
unappealed final decision to which either Franchisor or Franchisee is a party,
or (ii) reducing the scope of any promise or covenant to the extent required to
comply with such a court or agency order.

25.  APPLICABLE LAW; ARBITRATION
     ---------------------------

     25.1    This Agreement shall be governed by the laws of the state in which
Franchisor has its principal place of business from time to time.  In the event
of any conflict of law, the laws of such state shall prevail, without regard to
the application of such state's conflict-of-law rules.

     25.2    Except as provided in Sections 25.3 and 25.9, any claim or
controversy arising out of or related to this Agreement (including but not
limited to any claim that the Agreement or any of its provisions is invalid,
illegal, or otherwise voidable or void), the relationship between Franchisor and
Franchisee, or Franchisee's operation of the Bakery shall be submitted to
arbitration pursuant to the then-prevailing rules of the American Arbitration
Association, except as such rules may be modified by the following:

             25.2.1   Franchisor and Franchisee shall each select one
arbitrator. The arbitrators selected by Franchisor and Franchisee shall jointly
select a neutral third arbitrator, who shall chair the panel and shall be an
attorney in good standing with substantial expertise and experience in
commercial disputes involving franchising or trade regulation.

             25.2.2   The arbitrators shall determine, consistent with the
parties' objectives to avoid undue expense and delay, the types, amount, and
timing of discovery to be provided by the parties.

             25.2.3   The arbitrators shall not entertain or permit any class or
consolidated proceeding.

             25.2.4   The arbitrators' fees shall be borne equally by the
parties. Except as provided in Section 25.2.5, all other costs and expenses in
connection with the 

                                    - 38 -
<PAGE>
 
arbitration shall be borne by the party who incurs such expense or who
requests a service (such as, but not limited to, a transcript of the
arbitration proceeding).

             25.2.5   The decision of a majority of the arbitrators shall be
final and binding on the parties, and the arbitrators' award shall be the
exclusive remedy between the parties with respect to all claims, counterclaims,
and issues presented or pled to the panel. The arbitrators may award injunctive
relief as well as damages, but they shall have no authority to award punitive or
exemplary damages.  Any monetary award shall be paid promptly, without deduction
or offset.  Judgment upon the award may be entered in any court having
jurisdiction thereof.  If the award is upheld by a court of competent
jurisdiction in a proceeding by either party to enforce the award or to
challenge the award, the party challenging the award or resisting its
enforcement shall pay, to the extent permitted by law, all reasonable costs,
legal fees, and expenses incurred by the party defending the award or seeking
its enforcement.

             25.2.6   The decision of the arbitrators shall have no collateral
estoppel effect with respect to any person or entity who is not a party to the
arbitration proceeding.

     25.3    Unless otherwise agreed by Franchisor and Franchisee at the time of
the dispute, Section 25.2 shall not apply to: (i) any claim or dispute involving
actual or threatened disclosure or misuse of the contents of the Manuals, the
Bagel Production Manual, or any other confidential information or trade secrets
of Franchisor and its affiliates; (ii) any claim or dispute involving the
ownership, validity, use of, or right to use or license the Proprietary Marks;
(iii) any action by Franchisor to enforce the covenants set forth in Section 17
of this Agreement; or (iv) any action by Franchisor to stop or prevent any
threat or danger to public health or safety resulting from the construction,
maintenance, or operation of the Bakery or any facility in which Franchisee
manufactures bagel dough.

     25.4    Any issue regarding arbitrability or the enforcement of Section
25.2 shall be governed by the Federal Arbitration Act and the federal common law
of arbitration.

     25.5    Any arbitration proceeding or other action, whether or not arising
out of this Agreement, brought by Franchisee against Franchisor shall be
brought, and any arbitration proceeding or other action brought by Franchisor
against Franchisee may be brought, in the judicial district in which Franchisor
has its principal place of business.  The parties hereby waive all questions of
personal jurisdiction and venue for the purpose of carrying out this provision.

     25.6    Except as otherwise provided in this Section 25, no right or remedy
conferred upon or reserved to Franchisor or Franchisee by this Agreement is
exclusive of any other right or remedy provided herein or permitted by law or
equity, but each shall be cumulative of every other right or remedy.

                                    - 39 -
<PAGE>
 
     25.7    Any and all claims and actions arising out of or relating to this
Agreement, the relationship of Franchisee and Franchisor, or Franchisee's
operation of the Bakery brought by either party against the other, whether in
arbitration or any other proceeding, shall be commenced within one (1) year from
the occurrence of the facts giving rise to such claim or action, or such claim
or action shall be barred.

     25.8    Franchisor and Franchisee irrevocably waive trial by jury in any
action, proceeding, or counterclaim brought by either of them against the other.
Franchisor and Franchisee hereby waive to the fullest extent permitted by law
any right to, or claim of, any punitive or exemplary damages against the other
and agree that, in the event of a dispute between them, each shall be limited to
the recovery of any actual damages sustained by it.

     25.9    Nothing in this Agreement shall bar either party's right to obtain
injunctive relief against threatened conduct that will cause it loss or damage,
under the usual equity rules, including the applicable rules for obtaining
specific performance, restraining orders, and preliminary injunctions.

26.  ACKNOWLEDGMENTS
     ---------------

     26.1    Franchisee acknowledges that it has conducted an independent
investigation of the business franchised hereunder,  and recognizes that the
business venture contemplated by this  Agreement involves business risks and
that its success will be largely dependent upon the ability of Franchisee as an
independent business.  Franchisor expressly disclaims the making of, and
Franchisee acknowledges that it has not received, any warranty or guarantee,
express or implied, as to the potential sales, income, profits, or success of
the business venture contemplated by this Agreement.

     26.2    Franchisee acknowledges that it received a complete copy of this
Agreement, the attachments hereto, and agreements relating thereto, if any, at
least five (5) business days prior to the date on which this Agreement was
executed.  Franchisee further acknowledges that it received the disclosure
document required by the Trade Regulation Rule of the Federal Trade Commission
entitled "Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures" at least ten (10) business days prior to the date
on which this Agreement was executed.

     26.3    Franchisee acknowledges that it has read and understood this
Agreement, the attachments hereto, and agreements relating thereto, if any, and
that Franchisor has accorded Franchisee ample time and opportunity to consult
with advisors of Franchisee's own choosing about the potential benefits and
risks of entering into this Agreement.

                                    - 40 -
<PAGE>
 
     26.4    ACKNOWLEDGMENT OF ARBITRATION:

             I understand that this agreement contains an agreement to arbitrate
             certain specific issues. After signing this document, I understand
             that I will not be able to bring a lawsuit concerning any dispute
             that may arise which is covered by one of these arbitration
             agreements, unless it involves a question of constitutional or
             civil rights. Instead, I agree to submit any such dispute to an
             impartial arbitrator as set forth in this Agreement.


     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on
the date first above written.


BRUEGGER'S FRANCHISE CORPORATION             ________________________
                                             FRANCHISEE


By:___________________                       By:_____________________

Name:_________________                       Name:___________________

Title:________________                       Title:__________________

                                    - 41 -
<PAGE>
 
                              EXHIBIT A

                                 to

                    BRUEGGER'S FRESH BAGEL BAKERY
                    AFFILIATE FRANCHISE AGREEMENT



                          PROPRIETARY MARKS
                          -----------------

<TABLE>
<CAPTION>
                                    Date
Registered Mark            Type  Registered  Reg. No.
-------------------------  ----  ----------  ---------
<S>                        <C>   <C>         <C>
BRUEGGER'S                 TM    11/22/88    1,513,741
 
THE BEST THING ROUND       SM     6/15/93    1,776,884
 
BRUEGGEROONS               TM     7/13/93    1,781,622
 
BRUEGGER'S LAST NIGHT'S
BAGELS AND DESIGN          TM     7/13/93    1,781,629
 
BRUEGGER'S BAGEL BAKERY
FRESH BAGELS AND DESIGN    SM     8/31/93    1,790,827
 
BRUEGGER'S FRESH BAGEL
BAKERY AND DESIGN          SM     8/31/93    1,790,828
 
BRUEGGER'S                 SM     9/7/93     1,792,050
</TABLE>