##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K



---

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended December 29,
    2002                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|   |  | For the transition period
    from                to                .                           

Commission file number 000-32527

Briazz, Inc.


(Exact name of registrant as specified in its
charter)


|                                |  |                                     
|------------------------------- |  | ------------------------------------
|Washington                      |  | 91-1672311                          
|(Jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)

3901 7th Avenue South,
Suite 200

Seattle, Washington 98108


(Address of principal executive
offices)


Registrants telephone number:
(206) 467-0994

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

|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of each exchange
|Title of each class |  | on which registered  
|                    |  |                      
|None                |  | None                 

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

Common Stock, no par value

(Title of Class)


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past
90 days.     Yes þ          No o

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold
on Nasdaq as of the last business day of the registrants
most recently completed second fiscal quarter, which was
June 28, 2002, was $4,048,585.

The number of shares of the registrants
Common Stock outstanding as of March 24, 2003, was
5,990,916.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held in May 2003 are incorporated by
reference into Part III.



---






---

TABLE OF CONTENTS



|              |                                                                                                |  |  |  |  |  |  | 
|------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business.                                                                             
|              | Item 2. Properties.                                                                           
|              | Item 3. Legal Proceedings.                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                
|              | Item 6: Selected Financial Data.                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|              | Item 8. Financial Statements and Supplementary Data.                                          
|              | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant.                                  
|              | Item 11. Executive Compensation.                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|              | Item 13. Certain Relationships and Related Transactions and Related Stockholder Matters.      
|              | Item 14. Controls and Procedures.                                                             
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                     
|SIGNATURES   
|EXHIBIT 3.1.1
|EXHIBIT 3.2  
|EXHIBIT 4.2  
|EXHIBIT 10.15
|EXHIBIT 10.22
|EXHIBIT 10.24
|EXHIBIT 10.25
|EXHIBIT 10.26
|EXHIBIT 10.27
|EXHIBIT 10.29
|EXHIBIT 10.30
|EXHIBIT 10.31
|EXHIBIT 10.32
|EXHIBIT 10.33
|EXHIBIT 10.34
|EXHIBIT 10.35
|EXHIBIT 10.36
|EXHIBIT 10.37
|EXHIBIT 23.1 
|EXHIBIT 99.1 



---



##### Table of Contents



BRIAZZ, INC.

December 29, 2002


TABLE OF CONTENTS

|               |  |                                                                                           |    |      |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                           |    | Page
|               |  |                                                                                           |    |     
|PART I.       
|ITEM 1.        |  | Business                                                                                  |    |      | 2  | 
|ITEM 2.        |  | Properties                                                                                |    |      | 23 | 
|ITEM 3.        |  | Legal Proceedings                                                                         |    |      | 24 | 
|ITEM 4.        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 24 | 
|              
|PART II.      
|ITEM 5.        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |    |      | 24 | 
|ITEM 6.        |  | Selected Financial Data                                                                   |    |      | 25 | 
|ITEM 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 27 | 
|ITEM 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |    |      | 39 | 
|ITEM 8.        |  | Financial Statements and Supplementary Data                                               |    |      | 39 | 
|ITEM 9.        |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure  |    |      | 59 | 
|              
|PART III.     
|ITEM 10.       |  | Directors and Executive Officers of the Registrant                                        |    |      | 59 | 
|ITEM 11.       |  | Executive Compensation                                                                    |    |      | 59 | 
|ITEM 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 59 | 
|ITEM 13.       |  | Certain Relationships and Related Transactions
    and Related Stockholder Matters        |    |      | 59 | 
|ITEM 14.       |  | Controls and Procedures                                                                   |    |      | 59 | 
|              
|PART IV.      
|ITEM 15.       |  | Exhibits, Financial Statements and Reports on
    Form 8-K                                |    |      | 60 | 
|SIGNATURES     |  |                                                                                           | 63 |     
|CERTIFICATIONS |  |                                                                                           | 64 |     

Unless the context indicates otherwise, the terms
we, us, our, the
Company, or BRIAZZ refer to BRIAZZ,
INC., a Washington corporation.

1



---



##### Table of Contents



FORWARD LOOKING STATEMENTS

Certain statements in this Annual Report
(Annual Report or the Report) constitute
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements can often be identified by
terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue,
the negative of such terms or other comparable terminology. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual
results, performance or achievements of BRIAZZ, Inc., or
developments in the Companys industry, to differ
materially from the anticipated results, performance or
achievements expressed or implied by such forward-looking
statements. Any such forward-looking statements are not
guarantees of future results or performance and involve risks
and uncertainties, and actual results may differ materially from
those contemplated by such forward-looking statements. Important
factors currently known to management that could cause actual
results to differ materially from those in forward-looking
statements include, without limitation, fluctuation of our
operating results, our ability to obtain additional financing on
terms favorable to us, or at all, our ability to compete
successfully, our ability to successfully transition food
production to third parties, our reliance upon Flying Food
Group, L.L.C. (FFG), our ability to meet our
obligations, actions of our debt holders, landlords and
suppliers, office occupancy, our ability to maintain current
café locations and secure new ones, food and labor costs,
operation in only four geographic areas and the other risks and
uncertainties described under Business  Risk
Factors in Part I of this Annual Report. We undertake
no obligation to update these forward-looking statements to
reflect events or circumstances occurring after the date of this
Annual Report.




PART I




Item 1.     Business.

Overview
BRIAZZ prepares and sells high-quality, branded lunch and
breakfast foods for the on-the-go consumer. We sell
our products primarily through our company-operated cafes,
through delivery of box lunches and catered platters directly to
corporate customers and through selected wholesale accounts. Our
core products are sandwiches, salads and soups, which are
complemented by a variety of fresh baked goods, premium juices,
Starbucks coffees and fresh fruit.

We currently operate a total of
45 cafés in Seattle, San Francisco, Chicago and Los
Angeles. Our growth strategy is to open new cafés in our
existing markets and, when appropriate, enter into new markets
served by one of the central kitchens of FFG or another suitable
supplier. In the future, we anticipate growth not only through
Company owned cafés, but possibly as well through
franchising in one of our existing markets or in new markets.

Our target customers are office workers. Our
cafés are conveniently located either in city center
locations with a high density of office buildings and retail
foot traffic or within individual office buildings where we
serve as an amenity for building tenants. To satisfy the demands
of our time-constrained customers for lunch, breakfast and
between-meal snacks, we design our cafés for quick service.
Refrigerated display cases offer easy access to pre-packaged
food items.

We contract with FFG to assemble and package
substantially all of our food products used at our café
locations and in our branded sales in Chicago, Los Angeles and
Seattle and intend to outsource our remaining food production in
San Francisco and close our central kitchen in that market by
the end of the second quarter of 2003. Contracting with a third
party, such as FFG, allows us to reduce our overhead in our
existing markets and allows us to lower the costs of entry into
new markets served by its existing central kitchens. FFG has a
right of first refusal to supply products in new markets we may
expand into, but it is not required to do so. We and FFG have
agreed at this time it would be in both parties best interest to
seek a third party central kitchen operator due to limited
production space in the FFG kitchen in San Francisco. We may
either, outsource to a third party, make arrangements with FFG
to produce within their kitchen, or continue to operate our own
kitchen in San Francisco. At this time we are in negotiations
with two third party kitchens. There can be no

2



---



##### Table of Contents



guarantee that we will successfully complete
those negotiations. See the Section entitled Central
Kitchens; Flying Food Group Production Agreement.


Competitive
Strengths Subject to
available funding, we intend to expand our presence in our
existing markets and expand into new markets. The following are
central factors in our business strategy and in order to achieve
our planned expansion goals, we intend to leverage the following
strengths:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Well-defined business
    concept Over the past
    seven years, we have refined our menu selections and café
    presentation, reduced unit production costs and established
    enhanced real estate guidelines for new locations.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Diverse, high-quality product
    offerings.We offer a diverse range of
    menu items designed for broad appeal to our target customers. We
    also offer varying portion sizes for selected salads and
    sandwiches. We believe our product selection, ranging from
    traditional foods, such as Cobb salads and tuna sandwiches, to
    gourmet foods, such as tarragon chicken sandwiches, attracts new
    customers and increases the frequency of visits by repeat
    customers. We have placed increased emphasis on hot menu items
    with significant focus on a line of Hot Panini Sandwiches.                                    
|
| | Frequent menu
    changes.Our goal is to introduce new
    food selections to our customers approximately quarterly. We
    also adjust our menu seasonally, for instance, by offering a
    larger variety of hot soups and hot sandwiches during the winter
    months and a larger variety of salads during the summer months.                                                                                                                                                                                                                                                                                                                   
|
| | Speed and quality of
    service.We have designed our
    cafés to serve a large number of customers in a very short
    period of time and to allow easy movement within the café
    from entry to exit. In addition, because our café employees
    are not preparing most of the food products, they can focus
    their attention on customer service.                                                                                                                                                                                                                                                                                         
|
| | Range of prices.Our
    entrees range in price from $2.99 to $6.49. In addition, our
    multiple price point strategy allows customers to select their
    own meal combinations, such as a soup and salad or a soup and
    sandwich, providing further flexibility in offering meals to fit
    differing budgets.                                                                                                                                                                                                                                                                                                                               
|
| | Multiple distribution
    channels.For the convenience of our
    corporate customers, we deliver box lunches and catered platters
    for in-office meetings through our fleet of trucks and vans. We
    also deliver to selected wholesale customers.                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Central kitchens.We
    currently contract with FFG for our food preparation in Chicago,
    Los Angeles, and Seattle and intend to outsource food
    preparation in San Francisco to another company by the end of
    the second quarter of 2003. Contracting with third parties such
    as FFG allows us to eliminate the carrying cost of excess
    capacity that was endemic to maintaining our own central
    kitchens. In addition, the use of central kitchens (whether our
    own or belonging to a third party) allows us to locate
    cafés on smaller sites and sites without the ventilation
    required for an on-site kitchen.
|
| | Strategic café
    locations.We locate our cafés
    primarily in areas with many office buildings or within
    individual buildings where we serve as an amenity for building
    tenants. Amenity locations are typically sites on the ground
    floor or in the plaza of an office building and are often leased
    at favorable rates because they offer conveniences to building
    tenants. In addition, for cafés in amenity locations, very
    little marketing is required due to the high visibility of the
    café within the building and the comparatively low level of
    competition within the building.                     

Growth
Strategy We believe that
measured growth opportunities exist for us both in our current
markets and in new markets. Our key strategies to drive growth
are:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increase our penetration in existing
    markets.Subject to available funding
    and general economic conditions in the downtown corridors we
    serve, our expansion plans in our current markets call for the
    establishment of new cafés and an increase in our
    distribution capabilities to expand our sales from box lunches,
    catering platters and wholesale accounts. We believe that the
    opportunity exists to add several cafés in our existing
    geographic markets over the next five years.

3



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amenity locations.In selecting sites and opening new locations, we will pursue a
    strategy of opening cafés primarily in amenity locations.
    We believe these sites often have a built-in barrier to entry
    because there are typically no other sites available in the
    building to potential competitors, or competition within the
    building is limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Real estate
    initiatives.We opened five cafés
    in 2002. We closed a café during the first quarter of 2002.
    This closure resulted from decreased sales as the cafes
    building occupancy shifted from normal office occupancy to a
    data-center. We closed a second café in the third quarter
    of 2002 as a result of occupancy levels being significantly
    below capacity in the building the café was located. We
    closed one low volume café in first quarter of 2003 and may
    close an additional two to three cafes in the first half of this
    year subject to our ability to successfully negotiate release
    from our leases in locations that are being considered for
    closure.                                                                                                                                                                                                                                                                                                                                                     
|
| | Distribution
    capabilities.We believe there is a
    significant market for our box lunches and catered meals outside
    the highly competitive city centers. In city centers, we are one
    of numerous food options for customers who need meals delivered.
    Outside city centers, however, the options are more limited.
    Because our food products are distributed through a central
    kitchen, our distribution area for box lunches and catered meals
    is not limited to the geographic areas where our cafés are
    located. Customers place orders directly with our branded sales
    department by phone, fax or through our web site. In the first
    quarter of 2003 we established a national call center to receive
    all box lunch and catering orders. This decision was made to
    improve service and reduce costs. We plan to implement a
    centralized national outbound telemarketing program for box
    lunch and catering sales. The call center and outbound sales
    effort will operate from the our headquarters in Seattle.
|
| | Expand into new geographic
    markets.In the next few years, we
    intend to expand into new geographic markets. Although we have
    not yet identified specific new markets, we believe many of the
    25 largest metropolitan areas in the United States, as well as
    certain international cities, are suitable for potential
    expansion of BRIAZZ operations and brand. Our general preference
    is to expand first into markets where an existing food supplier
    has a central kitchen facility. This strategy would allow us to
    reduce the initial capital outlays necessary to enter a new
    market. When appropriate, and subject to available funding, we
    intend to enter into new markets by concurrently opening
    cafés and initiating delivery of box lunch and catering
    services. It typically takes eight months to open a new
    café from the date of signing the lease.                                                                                                                                                       
|
| | Develop franchising
    channels.We are in the final stages
    of developing our expansion plans. At this time the focus is to
    develop a franchise program and for the emphasis to be on
    franchising new stores. The initial focus will be in current
    markets. Longer term we seek to expand as a franchiser into new
    markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Build brand
    awareness.We believe that sales of
    our branded food products through our cafés and other
    distribution channels reinforce our image as a provider of
    fresh, high-quality lunch and breakfast foods and between-meal
    snacks. We currently build brand awareness through café
    visibility, branded delivery vans and trucks and product
    packaging. We are engaged in a number of marketing initiatives
    designed to further build brand awareness, such as in-cafe
    promotions, redesigned signage for our cafés and new
    wholesale relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

History
Victor D. Alhadeff founded BRIAZZ in 1995, after recognizing the
convergence of two consumer trends: decreasing time for lunch
and breakfast and an increasing desire for high-quality, healthy
food at affordable prices. Mr. Alhadeff founded BRIAZZ on the
belief that demand for healthy, premium foods served quickly and
conveniently could be met through the sale of pre-packaged food
items from open, self-serve refrigerated cases. In September
1995, the first BRIAZZ café in Seattle, Washington was
opened. We expanded our operations into San Francisco in 1996,
Chicago in 1997 and Los Angeles in 1998 and now operate
45 cafes.

Our Menu
We offer sandwiches, salads and soups, as well as a variety of
fresh baked goods, juices, gourmet coffees and fresh fruit.
Within each basic product category, such as sandwiches, salads,
soups and

4



---



##### Table of Contents



baked goods, we strive to offer a large number of
choices. On average, we offer approximately 300 different items
in our cafes.


Our food products are made with high-quality,
fresh ingredients and are served in our cafes, in box lunches or
on our catered platters within 24 hours. We develop our
menu and recipes to provide flavorful choices, ranging from the
traditional to the gourmet. Our sandwiches are made with a
variety of traditional and artisan breads.

We are committed to an ongoing process of
introducing new food items approximately quarterly. New food
items are introduced based on factors including food trends,
customer input and test marketing in a limited number of cafes.
From time to time, we remove seasonal and less popular items
from our menu. In response to customer requests, we now offer
hot panini sandwiches in each of our geographic markets.
Cafés with this new design generate more of hot food sales
compared to an overall company average. We anticipate any new
cafés will be designed with a merchandising focus on hot
food. We also offer a line of hot sub sandwiches in the Chicago
market and now have hot sandwiches in 35 of our
45 locations. We are testing rapid cook technology that, if
successful, will enable us to offer hot menu items in all
locations. The ability to expand with rapid cook technology is
dependent upon successfully completing our financing activities
in order to have adequate capital to purchase or lease this
equipment. In addition, to keep our product offering current, we
adjust our menu on a seasonal basis. For example, we offer a
larger variety of hot soups and sandwiches during the winter
months, and a larger variety of salads during the summer months.

We constantly re-evaluate our pricing structure
to maintain strategic price points. Recently, we reduced the
price of our popular panini sandwiches to $3.79 in most
locations to provide our budget minded customers with another
attractive meal option. In addition, we are testing a value menu
were you can get 40 items for under $4. We believe that
these initiatives will attract consumers who would otherwise be
reluctant to purchase their meals due to general economic
concerns.

We derive the majority of our café sales
from sandwiches, salads and soups. Our sandwiches and salads are
prepared by central kitchens operated by FFG or ourselves and
our soups are prepared by Stockpot Soups, a division of the
Campbell Soup Co. Our beverage selection includes Starbucks
coffee, fresh juices and other brand-name beverages. Our baked
goods include bagels, muffins, pound cakes, scones and cookies.
We have recently completed a program of new in store signage
bringing greater Starbucks brand awareness within Briazz
cafés. In addition we are now selling Starbucks
coffee by the pound, certain Starbucks merchandise such as cups,
and certain Starbucks branded mints and gums. Cookies are baked
in ovens in our cafes, providing fresh cookies to our customers
and filling the cafés with the aroma of baking cookies. In
the morning and after lunch, the majority of café sales
consist of beverages and fresh baked goods. During the breakfast
hours, we offer a selection of hot egg sandwiches on an English
muffin, as well as hot oatmeal, along with other pre-packaged
items for takeaway.

Most of our products are pre-packaged for
convenience and labeled with our logo and a list of ingredients,
which, in combination with clear packaging material, allows for
easy product and ingredient identification and additional
branding.

Our Distribution
Channels Our food products
are distributed through our company-operated cafes, through
delivery of box lunches and catered platters directly to
corporate customers, and through selected wholesale accounts.
These distribution channels are designed to increase market
penetration within each geographic market.

Cafés
Our cafés are typically open from early morning to late
afternoon. These hours of operation are designed to capture the
breakfast, lunch and afternoon traffic. Typically, our
cafés have one or two managers supported by senior hourly
lead employees. Each hourly employee is trained to
facilitate speed and quality of service, performing such
functions as cashiering, limited food preparation, coffee and
other drink preparation, greeting customers and bussing tables.

Under the guidance of a district manager, each
café manager or lead employee is responsible for ordering
the appropriate products and quantities from the central
kitchens. To aid in this process, we have developed

5



---



##### Table of Contents



extensive cafe-level reports that provide
managers with trend and product-volume information. The use of
these reports helps ensure adequate inventory levels and helps
reduce the amount of unsold products.


Of our 45 company-owned cafes, approximately half
are amenity locations. The size of our cafés ranges from
approximately 170 square feet in the Wrigley Building in
Chicago to 3,800 square feet in the 525 Market
building in San Francisco. Our cafés sell an extensive
selection of BRIAZZ branded and third-party products and
incorporate a distinctive decor that is instrumental in building
the BRIAZZ brand.

We believe our target customers place a high
priority on speed of service. Accordingly, we strive to make the
entire process of selecting and purchasing products require less
than five minutes inside our cafes, even during the lunch hour
rush. We have designed our cafés to serve a large number of
customers in a very short period of time and to allow easy
movement within the cafés from entry to exit. Most food
items are clearly labeled and selected from self-serve
refrigerated cases, requiring minimal employee assistance. The
hot items on our menu, such as soups, hot subs and paninis, can
be served quickly. This focus on speed and convenience caters to
the time-constrained individual and, we believe, builds a loyal
customer base.

The preparation of food products at central
kitchens, either operated by FFG or ourselves, minimizes the
space required for food preparation in our cafes. Generally, our
customers consume their purchases elsewhere; we do, however,
provide a limited number of tables and chairs at some cafés
for customers who wish to eat on the premises.

Box Lunches and Catered
Platters We deliver box
lunches and catered platters in each of our four geographic
markets. We provide service to customers in the vicinities of
our cafés and to customers whose business sites are located
outside these vicinities. Our box lunches come in a BRIAZZ
branded box and include a BRIAZZ branded sandwich or salad
entree, complemented by a bag of chips, a beverage, a fruit cup
and a cookie or brownie. Catering choices include breakfast
trays, sandwich platters, salad bowls, party platters, dessert
trays and cold beverages. Box lunches and catered platters are
delivered by employees wearing BRIAZZ uniforms driving BRIAZZ
branded trucks or vans. Our target customers are companies that
order food items for participants of in-house business meetings.

We receive box lunch or catering orders on a
daily basis by telephone, fax and through our web site. We
developed the web site in 1999 in response to requests from
corporate customers for online ordering capabilities.
Substantially all of our orders are filled at a central kitchen
and delivered directly to the customers. We have consolidated
the box lunch ordering into a call center in Seattle to improve
service and reduce costs. We have determined that outbound
telemarketing has the potential to be a profitable method of
developing new business for our box lunch and catering business.
Our plans are to consolidate all outbound telemarketing and grow
the telemarketing team from one employee currently focusing on
Southern California to 4 to 8 telemarketers who will be able to
telemarket into each of our markets.

Wholesale
Accounts We have completed
an extensive financial analysis of our wholesale business. Based
on that analysis we made a determination that the economics of
wholesale accounts did not support the grocery segment and,
accordingly, we voluntarily withdrew our products from QFC at
the end of 2002. In addition, we terminated the test with
Albertsons in October 2002, and the test with Target in
2003.

We remain highly committed to growing profitable
wholesale accounts. Accounts such as Tullys and
Seattles Best Coffee remain attractive since they do not
require the same level of discount that is required by the
grocery segment. We also have established a successful business
relationship with Sodexho primarily serving the Washington State
Ferries and Sodexho vending. At this time we are in negotiations
for a national agreement with Sodexho that has the potential to
enable us to expand our relationship with Sodexho into other
markets, such San Francisco and Los Angeles.

BRIAZZ and FFG are working together, to sell,
service and support the Starbucks account. Prior to establishing
a business relationship with BRIAZZ, FFG was and is a supplier
to Starbucks in Chicago, New York and Los Angeles. BRIAZZ and
FFG are currently working together to supply sandwiches and
salads to approximately 120 Starbucks stores in Chicago
under the Starbucks brand. FFG is currently a supplier to
Starbucks in New York providing sandwiches and salads to
approximately 70 Starbucks locations. Working together with FFG,
it is anticipated that BRIAZZ and FFG will supply approximately
90 Starbucks locations

6



---



##### Table of Contents



with a new menu that will be introduced at the
end of April 2003. In this relationship BRIAZZ plays an active
role in sales, menu development, and marketing support. FFG has
total responsibility for the production of the menu. All
products are prepared at the central kitchen and are picked up
daily by a third party distribution company that is paid by
Starbucks. At this time, there are no written agreement among
us, FFG and Starbucks regarding these relationships.


Distribution
Logistics Most of our
products originate at an FFG- or Company-operated central
kitchen and are transferred to various distribution points by
our fleet delivery trucks and vans, many of which are
refrigerated. We deliver food products at different times of the
day, allowing us to use our fleet throughout the day. For
example, our trucks and vans deliver each days food
products to our cafés very early in the morning. Our fleet
delivers food products to our wholesale accounts mid-morning and
delivers box lunches and catered platters at lunchtime. We pick
up leftover food products from our cafés at the end of each
day. Most unsold food is donated to charity through
Americas Second Harvest, a hunger relief organization, or
its affiliates.

Central Kitchens; Flying Food Group Production
Agreement Until December
2002, we operated a central kitchen in each of our geographic
markets. Our central kitchens prepared, assembled and
distributed substantially all of our food products. Establishing
a central kitchen in each of our geographic locations was
intended to enable us to deliver consistently high-quality,
affordable food at an attractive unit cost. During 2002, we
recognized that the costs of carrying excess capacity at our
central kitchen facilities outweighed the benefits of potential
rapid expansion in food output and that our current utilization
rates did not achieve the economies of scale that we had
envisioned. As a result, we entered into an agreement wherein we
agreed to purchase our branded food from FFG. FFG maintains
central kitchens in our existing markets and, therefore, was in
an ideal position to support our operations. Accordingly, we
have been gradually phasing out our central kitchens. As of
December 29, 2002, we had completed our transition to
purchasing food products from FFG and closed our central
kitchens in Chicago and Los Angeles. By the end of February we
had also closed our Seattle central kitchen and begun purchasing
food products from FFG in that market. We believe that using
third party central kitchens will significantly reduce our
overhead without significantly impacting our capacity. FFG also
has central kitchens in additional markets, allowing us the
potential ability to rapidly enter new markets without the
capital outlays traditionally involved in establishing a central
kitchen facility. Under our food product agreement, FFG has a
right of first refusal to provide us with our food products in
additional markets we may enter; however, FFG is under no
obligation to do so.

Under the food production agreement with FFG
dated December 1, 2002, FFG has agreed to manufacture and
package all food products we sell in our existing markets for
the term of the agreement. We will pay FFG for its actual cost
incurred in production of the food items plus a profit factor to
be negotiated. The agreement allows us to change our menu items
provided we give reasonable notice to FFG and the number of
items on our menu remains relatively constant. In addition, the
agreement generally prohibits FFG from using our trademarks for
its own purposes. However, it does not forbid FFG from using the
same food formulations, recipes or ingredients for products that
it sells to the food service industry.

As part of the agreement, we agreed to transfer
production of our food products over to FFG in a multi-staged
process. As part of this process, we have already transferred
food production to FFG facilities in the Chicago, Los Angeles
and Seattle markets. As part of this transition, we agreed to
transfer to FFG, without charge, any of our central kitchen
equipment that may be requested by FFG. If the production
agreement is terminated within one year following commencement
of production, FFG will return the equipment to us. Otherwise,
FFG will retain all transferred equipment.

The agreement provides that our rights and
remedies for any breach by FFG of its representations,
warranties and covenants under the agreement are limited to
(i) actual damages of up to $50,000 if FFGs failure
to assume food production in a particular market results in us
being unable to take advantage of a subleasing opportunity for
our central kitchen in that market, (ii) our ability to
reject nonconforming products or recover the actual costs of
nonconforming products, (iii) indemnification by FFG for
any claims or other liabilities arising from any personal injury
resulting from the use of nonconforming products, and
(iv) our ability to terminate the agreement as to a
specific geographic market in which a breach has occurred. The

7



---



##### Table of Contents



agreement provides that we are not entitled to
any additional damages in the event of a breach by FFG,
including actual or consequential damages resulting from lost
sales or lost profits. In addition, we are not entitled to
terminate the agreement in the event of a breach by FFG, except
by terminating the agreement as to the specific geographic
market in which the breach occurred.


The agreement has a term of ten years subject to
earlier termination (i) by FFG upon 180-days notice
if we fail to obtain shareholder approval for the issuance of
common stock upon the conversion of shares of Series D
Preferred Stock held by FFGs affiliate by April 30,
2003 or (ii) by either party if the other party becomes
insolvent. In addition, the agreement may be terminated in
specific markets (i) by the non-defaulting party in the
event of a default in a specific market by the other party or
(ii) by us if FFG is not able to resume production within
60 days of a Force Majeure event, until FFG can resume
production in the specific market. After the initial ten-year
term, the agreement renews automatically for successive one-year
terms unless terminated by either party on one-years
notice.

We and FFG have agreed at this time it would be
in both parties best interest to seek a third party central
kitchen operator due to limited production space in the FFG
kitchen in San Francisco. We may either, outsource to a third
party, make arrangements with FFG to produce within their
kitchen, or continue to operate our own kitchen in San
Francisco. At this time we are in negotiations with two third
party kitchens. There can be no guarantee that we will
successfully complete those negotiations.

At this time we are in negotiations with two
third party kitchens. There can be no guarantee that we will
successfully complete those negotiations.

Our remaining central kitchen in San Francisco
functions as a food preparation, assembly and distribution hub.
Central kitchen functions include ingredient preparation,
baking, and assembly and packaging of food products. The central
kitchens are designed to benefit from the economies of scale
generated by high unit-production volumes. However, our central
kitchens have traditionally run significantly below capacity
diminishing the actual economies of scale.

A key element of our brand-building strategy is
to maintain consistent product quality through our comprehensive
quality assurance programs. As part of our food production
agreement with FFG, FFG must ensure that all products sold to us
meet state and federal standards and must maintain a Hazard
Analysis Critical Control Point (HACCP) program similar to
the program maintained at our remaining central kitchens. FFG
must also indemnify us for damages arising from their failure to
provide us with food meeting these standards. In our remaining
central kitchens, the managers compile and analyze daily reports
that detail key central kitchen statistics, including total
production, production by business unit, labor as a percentage
of sales and labor cost per unit produced. Our quality assurance
programs include the HACCP program for use in our central
kitchens and the ServSafe Training Program for use in our
cafés and central kitchens, which training program was
created by the Education Foundation of the National Restaurant
Association. In addition to our quality assurance and safety
programs at our cafés and central kitchens, all delivery
vehicles used to deliver food requiring refrigeration are
refrigerated for food safety.

Employee Training and
Development We have
developed a comprehensive program to train employees in customer
service, operations and product knowledge. We provide product
and customer service training to all employees. Our retail
employees are exposed to a high level of product training. We
believe that our personnel must be able to provide customers
with information about the food products we offer. In addition,
we believe that customer service training and awareness is
critical to our success. We reinforce the importance of training
on a daily basis in our retail locations. In addition to product
training, we train our café employees in general store
operations to achieve and maintain a high level of quality and
customer service.

Purchasing
In the markets where we have switched food production over to
FFG central kitchens, FFG procures most of our food ingredients,
products and supplies. We pay FFG a handling fee for acquiring
products and supplies for our use from third parties. In San
Francisco, where we still maintain our central kitchen, our
purchasing staff procures all of our food ingredients, products
and supplies. We seek to obtain high quality ingredients,
products and supplies from reliable sources at competitive
prices. To that end, we

8



---



##### Table of Contents



continually research and evaluate various food
ingredients, products and supplies for consistency and compare
them to our specifications.


Competition
The quick-service segment within the restaurant industry is
highly competitive. We compete on the basis of many factors,
including service, convenience, taste, quality, value and price.
We believe our menu, the quality of our food, our convenient
café locations and our prices allow us to compete with and
differentiate ourselves from our competitors. Competitors
include sandwich shops, company cafeterias, delicatessens,
pushcart vendors, fast food chains, catering companies and other
providers that offer quick and inexpensive lunch and breakfast
meals and between-meal snacks. Prét a Manger has
successfully executed a similar concept in Great Britain and has
opened 13 stores in New York City. In addition, in 2001
Prét a Manger announced that it had received a significant
equity investment from McDonalds Corporation. Although
Prét a Manger is not a current competitor in any of our
existing geographic markets, we may compete directly with them
in the future or Prét a Manger may serve as a model for
other companies to establish restaurants with a concept similar
to ours in markets in which we currently operate or expect to
expand. Many of our competitors have significantly more capital,
research and development, distribution, manufacturing,
marketing, human and other resources than we do. As a result,
they may be able to adapt more quickly to market trends, devote
greater resources to the promotion or sale of their products,
receive greater support and better pricing terms from
independent distributors, initiate or withstand substantial
price competition or take advantage of acquisition or other
opportunities more readily than we can.

Intellectual
Property We regard our
trademarks and service marks as an important factor in the
marketing and branding of our products and services. Our
registered trademarks and service marks include, among others,
the text BRIAZZ and our stylized logo. We have
registered all of these marks with the United States Patent and
Trademark Office. We have registered our ownership of the
Internet domain name www.BRIAZZ.com. We also own a
Washington state registration for JAVA JUMBLES. We
believe that our trademarks, service marks and other proprietary
rights have significant value and are important to our
brand-building efforts.

An individual in Mexico City, Mexico has opened a
restaurant called café Briazz and has registered the
Internet domain name www.cafeBRIAZZ.com. We are
attempting to have ownership of the domain name terminated or
transferred to us, but we cannot assure you we will be
successful. We are not aware of any other infringing uses that
could materially affect our business, nor any prior claim to
BRIAZZ®, our stylized logo or JAVA JUMBLES that would
prevent us from using these marks.

We have certain copyrights such as the design of
our menus, brochures and designs used in connection with our
trademarks and service marks, and trade secrets such as recipes,
methods and processes, marketing and promotional strategies and
proprietary customer lists. We have not recorded any copyrights
with the United States Copyright Office.

In addition to registered trademarks, we consider
our food product packaging (typically consisting of a clear
plastic container with a bold label and product description),
our box lunch packaging (consisting of a brown cardboard box
printed with our logo) and the design of the interior of our
cafés (consisting of bright lighting, walls lined with
well-lit refrigerated cases, and metal designwork) to be strong
identifiers of our brand. Although we consider our packaging and
store design to be essential to our brand identity, we have not
applied to register trademarks and trade dress for these
features, and therefore cannot rely on the legal protections
provided by trademark registration.

We intend to vigorously protect our proprietary
rights. We cannot predict, however, whether steps taken by us to
protect our proprietary rights will be adequate to prevent
misappropriation of these rights or the use by others of
café or retail features based upon, or otherwise similar
to, our concept. We may be unable to prevent others, including
FFG, from copying elements of our concept and any litigation to
enforce our rights will likely be costly and may divert
resources away from our day-to-day operations.

Employees
As of December 29, 2002, BRIAZZ employed 69 full-time
salaried employees and 276 hourly employees. Of these
employees, 23% were involved in our central kitchens, 14% were
involved in our box lunch, catering and wholesale operations,
54% were involved in café operations, and 10% were

9



---



##### Table of Contents



involved in administrative/corporate functions,
including senior management. This was a decrease from 100
full-time salaried and 350 hourly employees at
December 30, 2001, a 23% decrease. At March 15, 2003,
after the Seattle kitchen closure and other corporate personnel
reductions, the number of employees had further declined to 56
full-time salaried and 245 hourly employees, a 13% decrease
since December 29, 2002. We believe our relationship with
our employees is good. None of our employees is a party to a
collective bargaining agreement or represented by a labor union.


Financial Information About Segments and
Geographic Areas We
operate through four reportable segments: Retail, Branded Sales,
Kitchens and General & Administrative. Retail consists of
sales generated through our cafes. Branded Sales consists of two
subgroups: (1) box lunch, catering and vending, and
(2) wholesale and grocery. Branded Sales subgroups consists
of sales which are aggregated because they have similar economic
characteristics. Kitchens consists of unallocated costs of
products and packaging, along with unallocated costs of kitchen
operations. General & Administrative consists of all costs
incurred by the corporate office as well as those administrative
costs incurred by retail, branded sales and the kitchens. All
sales have been attributed to the United States, and all of our
long-lived assets are located in the United States. Segment
results for each of our past three fiscal years are provided in
the financial statements included in this Annual Report.

Government
Regulation We must comply
with local, state and federal government regulations, standards
and other requirements for food storage, preparation facilities,
food handling procedures, other good manufacturing practices
requirements, and product labeling. The U.S. Department of
Agriculture has broad jurisdiction over all meat and poultry
products, and separate authority over non-meat and poultry
products is exercised by the Food and Drug Administration. State
and local jurisdictions also have separate, distinct authority
over our food-related operations. Advertising and promotional
activities are subject to the jurisdiction of the Federal Trade
Commission, which has jurisdiction over all consumer advertising
with respect to unfair or deceptive business practices. State
and local jurisdictions typically enforce similar consumer
protection statutes.

Our facilities are subject to licensing and
regulation by state and local health, sanitation, safety, fire
and other authorities, including licensing and regulation
requirements for the sale of food. To date, we have not
experienced an inability to obtain or maintain any necessary
licenses, permits or approvals, including restaurant and retail
licensing. The development and construction of additional
cafés must also comply with applicable zoning, land use and
environmental regulations. Various federal and state labor laws
govern our relationship with our employees and affect our
operating costs. These laws include minimum wage requirements,
overtime, unemployment tax rates, workers compensation
rates, citizenship requirements and sales taxes. In addition,
the federal Americans with Disabilities Act prohibits
discrimination on the basis of disability in public
accommodations and employment.

Available
Information BRIAZZ files
regular disclosures with the SEC. The public may read and copy
any materials BRIAZZ files with the SEC at the SECs Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information about the SECs Public Reference Room
may be obtained at 1-800-SEC-0330. BRIAZZ files its reports
electronically and the SEC maintains an Internet site that
contains reports, proxy and information statements and other
information regarding issuers at http://www.sec.gov. Our
Internet address is http://www.BRIAZZ.com. The information on
our Internet site is not a part of this filing.

RISK FACTORS

Risks Related To Our Business

We Have A History Of Losses And Anticipate
Continued Losses In The Future, Which May Have A Material
Adverse Effect On Our Business, Our Ability To Implement Our
Business Strategy And Our Stock Price.

We incurred losses of $12.5 million during
the fiscal year ended December 27, 1998, $15.4 million
during the fiscal year ended December 26, 1999,
$6.3 million during the fiscal year ended December 31,
2000,

10



---



##### Table of Contents



$6.8 million during the fiscal year ended
December 30, 2001 and $15.1 million during the fiscal
year ended December 29, 2002. Since inception, we had
accumulated net losses of $63.2 million as of
December 29, 2002. These matters raise substantial doubt
about our ability to continue as a going concern. Our ability to
continue as a going concern is dependent upon numerous factors,
including our ability to obtain additional financing, our
ability to increase our level of future revenues or our ability
to reduce operating expenses. Failure to achieve profitability,
or maintain profitability if achieved, may have a material
adverse effect on our business, our ability to implement our
business strategy and our stock price.


There can be no assurance that we will be able to
obtain additional financing, increase revenues, reduce expenses
or successfully complete other steps to continue as a going
concern. If we are unable to obtain sufficient funds to satisfy
our cash requirements, we may be forced to curtail operations.
Such events would materially and adversely affect our financial
position and results of operations.

We Have Not Made Rent Payments on Certain of
Our Leases and Payments to Certain of Our Suppliers. If We Are
Unable to Meet Our Obligations to Third Parties, We May Be
Required to Discontinue Our Operations.

Due to limitations on capital, we have deferred
rent payments on certain of our leases. We have also deferred
payments to certain of our suppliers. If our landlords or our
suppliers require payments in excess of our available cash, we
may be required to close cafes, discontinue use of suppliers,
limit our product offerings or cease operations altogether. Any
such action by our landlords or suppliers may also cause an
event of default under the terms of our debt financings or our
other contractual relationships, or adversely affect our
relationships with other third parties, all of which would
adversely affect our operations.

We deferred rent payments for our Chicago central
kitchen after the closure of that kitchen, and were evicted from
the location (which we were no longer using) subsequent to the
fiscal year end. In January 2003, the landlord garnished
approximately $22,000 from our bank accounts to cover rent for
October and November 2002. We are currently negotiating with the
landlord to terminate our obligations under this lease.

If We Are Unable to Complete Our Announced
Financings in the Immediate Future, On Terms Favorable To Us, We
May Be Required to Discontinue Our Operations.

We have announced that DB Advisors, LLC, an
affiliate of Deutsche Bank (DB) has signed a term sheet to
purchase up to $3.9 million of senior secured
non-convertible promissory notes to fund our immediate capital
needs and that we are seeking additional financing of up to a
total of $5 to $6 million. Financing completed to date has
not been sufficient to meet our immediate capital needs. DB has
no contractual commitment to purchase the notes. In addition, we
may be unable to obtain additional financing on terms favorable
to us, or at all. If we are unable to close the financing with
DB or to secure sufficient additional financing in the immediate
future or if other creditors require payments in excess of our
available cash, we may be unable to make required payments and
we may be required to cease operations. If we do secure
additional debt financing, we may be unable to comply with the
financial or other covenants contained therein or to obtain
sufficient cash, through our operations or through additional
financings, to repay such debt when it becomes due.

If We Are Unable to Complete Our Announced
Central Kitchen Closures and Transition to Outsourcing Our
Central Kitchen Functions On Terms Favorable To Us, We May Be
Unable to Obtain Additional Financing and Our Business May Be
Harmed.

We have entered into a food production agreement
with FFG pursuant to which we are in the process of closing our
central kitchens and outsourcing the production and assembly of
substantially all of the food products previously made in our
central kitchens. We have closed our central kitchens in
Chicago, Los Angeles, and Seattle and shifted food production to
FFG in those markets. We are therefore highly dependent on FFG
in those markets. We intend to close our remaining central
kitchen in the San Francisco market and outsource our food
production in that market by the end of the second quarter of
2003. The timing and benefits of this transition will depend on
a number of factors, many of which are outside our control,
including

11



---



##### Table of Contents



maintaining product quality, ensuring adequate
product quantities, the closing of our remaining central kitchen
in San Francisco, including the transfer or sale of equipment,
termination or transfer of staff and termination or sublease of
the space, and transfer of the central kitchen functions to a
supplier other than FFG, including hiring, training, production
and assembly and coordination of functions. We have had some
initial challenges in some markets. The Chicago market has been
challenged in giving us consistent service and quality. This has
had some impact on our business. We are currently creating
solutions to correct this problem. The LA market transition has
been more successful. The Seattle market transition has recently
occurred and is performing similar to the LA transition. The
terms of our food production agreement with FFG provides us with
limited remedies in the event that this transition is not
successful. If we are unable to complete a smooth and efficient
transition to outsourcing our kitchen functions, our retail
operations, our financial results and our business may be harmed.


As We Continue to Outsource Our Central
Kitchen Functions, We Will Become Increasingly Dependent Upon
FFG for the Supply, Quality, Safety and Cost of Our Food
Products.

As we complete our transition to outsourcing of
food production, we are, and will continue to be, substantially
dependent on FFG for the production and assembly of
substantially all of our food products in Chicago, Los Angeles
and Seattle. Any failure or delay by FFG to manufacture and
assemble our food products, even for a short period of time,
would impair our ability to supply our cafés and could harm
our business. We have limited control over FFG, and we cannot
assure you that we will be able to maintain satisfactory
relationships with FFG on acceptable commercial terms. Nor can
we assure you that FFG will continue to provide food products
that meet our quality standards. Our agreement with FFG may
permit FFG to terminate our relationship on short notice. If
this relationship were to terminate unexpectedly, we may have
difficulty obtaining, manufacturing and assembling our food
products, or obtaining adequate quantities of products, at the
same quality at competitive prices in a timely fashion, which
could limit our ability to adequately supply our cafés and
could adversely affect our operating results. If we were unable
to find another third party to product our food products on
acceptable terms, we might be required to reestablish central
kitchens or to discontinue our operations.

We Have Transferred Much of Our Central
Kitchen Equipment to FFG, Which Limits Our Ability to Establish
New Central Kitchens Should It Become Necessary to Do
So.

As part of the food production agreement with
FFG, we agreed to transfer to FFG without charge any of our
central kitchen equipment that may be requested by FFG. Pursuant
to this agreement, we have transferred certain of our central
kitchen equipment to FFG in the Chicago, Los Angeles and Seattle
markets. If the production agreement is terminated within one
year following commencement of production, FFG will return the
equipment to us. Otherwise, FFG will retain all transferred
equipment. As a result of the equipment transfers, we will find
it necessary to acquire new equipment should we enter into
markets where FFG does not have an existing central kitchen or
declines to provide services, or should we cease to use FFG in
an existing market. Due to the high cost of equipment, any
future need to acquire such equipment could have a material
adverse effect on our results. Further, we may not be able to
acquire necessary equipment in a timely manner and, as a result,
may not be able to meet food production requirements. Any
failure to acquire necessary equipment could have a material
adverse effect on our business and results.

We May Face Competition From FFG or Its
Customers Providing Similar Products to Those We
Market.

While the food production agreement with FFG
generally prohibits FFG from using our trademarks for its own
purposes, it does not forbid FFG from using the same food
formulations, recipes or ingredients for products that it sells
to the food service industry. FFG may thus compete with us
directly by selling the same or similar products to wholesalers
that we target for wholesale accounts. In such event, we will
not be able to offer products at a competitive price compared to
FFG. FFG may also sell such products to wholesalers or retailers
with whom we compete. In the event of such sales, we may not be
able to offer products at a competitive price compared to
wholesalers or retailers who purchased the similar products from
FFG because

12



---



##### Table of Contents



these retailers and wholesalers were not required
to invest the large amounts we spend in product development, and
may not be required to provide FFG with the same profit factor
as we are under the food production agreement. In any such case,
we may lose customers to FFG or to these wholesalers and
retailers, and our business and results may suffer materially.


If FFG Terminates the Food Production
Agreement We May Not Be Able to Find a Timely Replacement or a
Replacement At All, Which Would Adversely Effect Our
Business.

The agreement has a term of ten years subject to
earlier termination (i) by FFG upon 180-days notice
if we fail to obtain shareholder approval for the issuance of
common stock upon the conversion of shares of Series D
Preferred Stock held by FFGs affiliate by April 30,
2003 or (ii) by either party if the other party becomes
insolvent. In addition, the agreement may be terminated in
specific markets (i) by the non-defaulting party in the
event of a default in a specific market by the other party or
(ii) by us if FFG is not able to resume production within
60 days of a Force Majeure event, until FFG can resume
production in the specific market. After the initial ten-year
term, the agreement renews automatically for successive one-year
terms unless terminated by either party on one-years
notice. If FFG exercises its right to terminate the agreement in
total or in a particular market, we may not be able to locate a
commercially reasonable replacement in a timely manner or at
all. If we were not able to find another source of product or
re-establish our central kitchens, our business and results of
operations would suffer adversely.

Any Default in the Repayment of the
Convertible Note Held By Laurus Master Fund, Ltd. Could Have a
Material and Adverse Affect on Our Business, Prospects, Results
of Operations or Financial Condition.

Unpaid principal and accrued and unpaid interest
on our $1.25 million convertible note is payable in 7 equal
installments on the first business day of each calendar month,
beginning with the latter of (i) June 2003 and
(ii) the month after the earlier of June 30, 2003 or
the closing date of an investment by Deutsche Bank or any of its
affiliates. Interest-only payments are required monthly until
such time. Although the convertible note provides us with the
option of making such payments by issuing shares, we are not
permitted to make such payments in shares and are required to
make such payments in cash if any of the following events
occurs: (i) there fails to exist an effective resale
registration statement with respect to the shares;
(ii) such conversion of the note would result in the
issuance pursuant to the note and associated warrants of more
than 1,163,614 shares of common stock, or 19.9% of the number of
shares of common stock outstanding on June 18, 2002, unless
the issuance of the shares is approved by our shareholders; or
(iii) there occurs any event of default. The events of
default under the convertible note are similar to those
customary for convertible debt securities, including breaches of
material terms, failure to pay amounts owed, delisting of our
common stock from the Nasdaq Stock Market (unless our common
stock is subsequently listed on the Nasdaq SmallCap Market, the
OTC Bulletin Board or a national securities exchange), or
failure to comply with the reporting, filing or other
obligations of listing on such market. The principal amount
outstanding on the note as of March 1, 2003 was $926,214.
Assuming the principal amount of the note was converted on such
date by the holder at the fixed conversion price of $0.10,
9,262,142 shares representing more than 60% of the shares of
common stock outstanding at such date, post-conversion basis,
would be issued. If we default on our obligations under the
convertible note, if we fail to have a resale registration
statement declared and maintained as effective with respect to
the shares, or if a payment is due that cannot be made in stock
because it would result in the conversion of the convertible
note into more than 1,163,614 shares, we may be required to
immediately repay the outstanding principal amount of the
convertible note and any accrued and unpaid interest. We do not
currently have cash or cash equivalents or available debt or
equity financing sufficient to repay such amounts if such
repayment is required. Accordingly, we anticipate that
additional financing would be required to repay such amounts. We
cannot guarantee that such financing would be available on terms
favorable to us, or at all. If we could not arrange for such
financing on favorable terms, our business and financial results
would be materially adversely affected. In the event of any sale
or liquidation of our assets to repay such debt, the note
holder, as a secured party, would have priority over other
creditors and over our shareholders with respect to such assets
and the proceeds of such assets.

13



---



##### Table of Contents



Any Default in the Repayment of the Note Held
By an Affiliate of FFG Could Have a Material and Adverse Affect
on Our Business, Prospects, Results of Operations or Financial
Condition.

The principal and accrued and unpaid interest on
the $2.0 million note we issued to an affiliate of FFG
(referred to herein as FFG) is due in March 2004;
provided, however, that the note will accelerate and become due
on the 45th day after the end of any fiscal quarter
beginning with the second fiscal quarter of 2003 in which we
fail to obtain positive EBITDA for either (i) such fiscal
quarter or (ii) the cumulative period from the beginning of
the second fiscal quarter of 2003 through the end of such fiscal
quarter. We are obligated to make monthly interest payments
commencing in April 2003. The amounts due under the note are
secured by a blanket security interest in all our assets. If we
are unable to pay any amount when due, FFG may foreclose on are
assets and we would be unable to continue as a going concern. We
do not currently have cash or cash equivalents or available debt
or equity financing sufficient to repay the principal amounts if
such repayment is required. Accordingly, we anticipate that
additional financing would be required to repay such amounts. We
cannot guarantee that such financing would be available on terms
favorable to us, or at all. If we can not arrange for such
financing on favorable terms, our business and financial results
would be materially adversely affected. In the event of any sale
or liquidation of our assets to repay such debt, the note
holder, as a secured party, would have priority over other
creditors and over our shareholders with respect to such assets
and the proceeds of such assets.

We May Be Unsuccessful In Developing New
Product Lines Or New Distribution Channels For Our Products,
Which May Harm Our Business.

We frequently review and evaluate new product
lines and new distribution channels for our products. We may,
however, be unable to successfully implement any new product
lines or distribution channels after having dedicated
considerable management time and financial resources to them. We
are currently testing the sale of our food products through
Starbucks. In the past, we distributed our products
through Quality Food Centers, Albertsons, Safeway,
Ralphs and Dominicks grocery stores and through
Target stores. We also developed a line of dinner foods for home
meal replacement that was tested through one of our Seattle
cafes. These attempts were unsuccessful and have been
discontinued. We have evaluated the grocery segment of our
wholesale business and decided to withdraw from this
distribution channel. We remain committed to growing profitable
wholesale accounts. Inability to successfully develop new
product lines or new distribution channels in the future could
slow our growth and divert managements attention from
other areas of our business.

Our Growth Strategy Requires Us To Open A
Significant Number Of New Cafés In Our Existing Markets. If
We Are Not Able To Achieve This Planned Expansion, Our Business
May Suffer And We May Be Unable To Achieve Or Sustain
Profitability.

The success of our growth strategy will depend in
large part on our ability to open new cafés and to operate
our cafés profitably. We do not currently plan to open
additional cafés in 2003. In 2001 and 2002, we postponed
certain café openings due to lower than expected office
occupancy rates and poor market conditions in Seattle, San
Francisco and Los Angeles. We cannot assure you that we will be
able to achieve our current expansion goals, that we will
operate profitably, or, if we do achieve profitability, that we
will be able to sustain or increase profitability on a quarterly
or annual basis. Any inability to achieve our expansion goals
may adversely affect our financial results or stock price.

The success of our planned expansion will depend
upon numerous other factors, many of which are beyond our
control, including our ability to:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | develop sufficient sales volumes through our
    cafés to justify expansion;                 
|
| |  | hire, train and retain qualified operating
    personnel;                                    
|
| |  | identify and obtain suitable café sites at
    favorable lease terms;                        
|
| |  | timely develop new cafes, and manage construction
    and development costs of new cafés and;

14



---



##### Table of Contents





| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | secure required governmental approvals and
    permits, and comply with ongoing and changing regulatory
    requirements; and compete successfully in our markets.

In the past, we have closed cafés because
they did not generate sufficient revenues and we cannot assure
you that additional cafés will not be closed. For the year
ended December 29, 2002, our same-store sales decreased
compared to the prior fiscal year. If our same-store sales
continue to decline or fail to sufficiently improve, we may be
required to close additional cafes. The closing of a significant
number of cafés or the failure to increase same-store sales
could have an adverse impact on our reputation, operations and
financial results.

We May Not Be Successful In Implementing Our
Business Strategy, Which Would Impede Our Growth And Operating
Results.

Our business strategy is to focus our retail
expansion on cafés in amenity locations (i.e.,
office buildings where the competition is limited or where we
are the only food supplier), maintain our current café
locations, and expand our box lunch and catering distribution
capabilities to serve locations outside the core metropolitan
areas in which we operate. Our ability to implement this
business strategy depends on our ability to:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | identify and lease amenity locations suitable for
    new cafes;                                                                                                       
|
| |  | increase our brand recognition in our existing
    markets; and                                                                                                        
|
| |  | manage growth in administrative overhead and
    distribution costs likely to result from the planned expansion
    of our retail and non-retail distribution channels.

Any inability to implement our business strategy
and manage our growth effectively would have a material adverse
impact on our operating results.

Failure to manage our growth effectively could
harm our business. We have grown significantly since our
inception and intend to grow substantially in the future. We
have increased the number of our cafés from two cafés
as of December 31, 1996 to 45 cafés currently and,
subject to available funding, we anticipate opening new
cafés in the future. Our existing café management
systems, financial and management controls and information
systems may not be adequate to support our planned expansion.
Our ability to manage our growth effectively will require us to
continue to expend funds to improve these systems, procedures
and controls, which we expect will increase our operating
expenses and capital requirements. In addition, we must
effectively expand, train and manage our work force. We cannot
assure you that we will be able to respond on a timely basis to
all of the changing demands that our planned expansion will
impose on management and on our existing systems, procedures and
controls. In addition, we cannot assure you that we will be able
to continue to improve our information systems and financial
controls or to manage other factors necessary for us to achieve
our growth strategy. For any of these reasons, we could lose
opportunities or overextend our resources, which could adversely
affect our operating results.

If We Are Unable To Continue Leasing Our
Retail Locations Or Obtain Acceptable Leases For New Cafes, Our
Business May Suffer.

All of our 45 café locations are on leased
premises. If we are unable to renew our leases on acceptable
terms, or if we are subject to substantial rent increases, our
business could suffer. Because we compete with other retailers
for café sites and because some landlords may grant
exclusive rights to locations to our competitors, we may not be
able to obtain new leases or renew existing leases on acceptable
terms. Any inability to renew or obtain leases could increase
our costs and adversely affect our operating results and
brand-building strategy.

15



---



##### Table of Contents



Our Restaurant Expansion Strategy Focuses
Primarily On Further Penetration Of Existing Markets. This
Strategy Could Cause Sales In Some Of Our Existing Cafés To
Decline.

In accordance with our expansion strategy, we
intend to open new cafés primarily in our existing markets.
Many of our cafés are situated in concentrated downtown
areas. As a result, the presence of additional cafés in
existing markets may result in diminished sales performance and
customer counts for cafés near the area in which a new
café opens, due to sales cannibalization.

Tenant Turnover And Vacancies In Office
Buildings Where Our Cafés Are Located Could Cause Our
Café Sales To Decline.

Our business could suffer as a result of tenant
turnover and vacancies. Many of our cafés are located in
office buildings, and office workers are our target customers.
Vacancies, tenant turnover or tenants with few office workers,
especially in San Francisco and Seattle, have negatively
impacted the operations of our cafés located in office
buildings during the last two years due to the reduction in the
number of potential customers in the building, and could
continue to have a negative impact on our operations. The risk
related to vacancies and tenant turnover is greater in office
buildings with larger tenants, where the loss of a single tenant
may have a greater impact on that cafes sales.

If Production at FFG Central Kitchens or Our
San Francisco Central Kitchen Is Interrupted, We Will Be Unable
To Supply Our Cafés In That Geographic Market And Our
Business Will Suffer.

FFGs central kitchens and our San Francisco
central kitchen produce or distribute substantially all of our
food products for the cafés and wholesale accounts in their
geographic regions, as well as all of the box lunches and
catered platters in each region. If FFGs central kitchens
or our central kitchen were to close for any reason, such as
fire, natural disaster or failure to comply with government
regulations, we would be unable to provide our food products in
the areas served by the affected central kitchen. The FFG
central kitchens and our San Francisco central kitchen are
geographically dispersed and none could supply another market if
a central kitchen were to close. Even though FFG has a central
kitchen located in San Francisco, it would likely take too long
to shift production from our central kitchen to FFG in the event
of a failure of our central kitchen to avoid an adverse impact.
As a result, closure of a central kitchen, whether operated by
FFG or ourselves, even for a short period of time, would have a
material adverse effect on our operating results. We may have no
control over any such closures.

We Are Substantially Dependent On Third-Party
Suppliers And Distributors And The Loss Of Any One Of Them Could
Harm Our Operating Results.

We are substantially dependent on a small number
of suppliers and distributors for our products, including FFG
and suppliers of meat, breads and soups, and Sysco Distribution
Services, which during December 2002 procured from our suppliers
and delivered to us approximately 50% of our ingredients and
packaging products. The majority of our packaged products come
from Bunzl, a national distributor. Such packaged products
represent roughly 15% of our purchases. During the year ended
December 29, 2002, Stockpot, Inc. provided approximately
20% of our cost of food and packaging. Any failure or delay by
any of these suppliers or distributors to deliver products to
our central kitchens, even for a short period of time, would
impair our ability to supply our cafés and could harm our
business. We have limited control over these third parties, and
we cannot assure you that we will be able to maintain
satisfactory relationships with any of them on acceptable
commercial terms. Nor can we assure you that they will continue
to provide food products that meet our quality standards. Our
relationships with our suppliers are generally governed by
short-term contracts. If any of these relationships were to
terminate unexpectedly, we may have difficulty obtaining
adequate quantities of products of the same quality at
competitive prices in a timely fashion, which could limit our
product offerings or our ability to adequately supply our
cafés and could adversely affect our operating results.

16



---



##### Table of Contents



If We Fail To Further Develop And Maintain Our
Brand, Our Business Could Suffer.

We believe that maintaining and developing our
brand is critical to our success and that the importance of
brand recognition may increase as a result of competitors
offering products similar to ours. Subject to available funding,
we intend to increase our marketing expenditures to create and
maintain brand loyalty and increase awareness of our brand. If
our brand-building strategy is unsuccessful, these expenses may
never be recovered, and we may be unable to increase or maintain
our revenues.

Our success in promoting and enhancing the BRIAZZ
brand will also depend on our ability to provide customers with
high-quality products, which is, in part, dependent on the
performance of FFG and our San Francisco central kitchen, and
customer service. We cannot assure you that consumers will
perceive our products as being of high quality. If they do not,
the value of our brand may be diminished and, consequently, our
ability to implement our business strategy may be adversely
affected.

If Our Customers Do Not Perceive Pre-Packaged
Sandwiches And Salads As Fresh And Desirable, Or If They Would
Prefer Made-To-Order Food Items, Our Operating Results Will
Suffer.

Our business strategy focuses on pre-packaged
food items. All of our salads and most of our sandwiches are
prepared and assembled in our central kitchens and sold as
pre-packaged items. Unlike delicatessens, our cafés
generally do not add or omit specific ingredients to or from
food items at the customers request. If customers prefer
custom prepared items over pre-packaged items, or if they do not
perceive pre-packaged sandwiches and salads as fresh and
desirable, we may be unsuccessful in attracting and retaining
customers, causing our operating results to suffer.

Our Business Could Be Harmed By Litigation Or
Publicity Concerning Food Quality, Health And Other Issues,
Which May Cause Customers To Avoid Our Products And Result In
Liabilities.

Our business could be harmed by litigation or
complaints from customers or government authorities relating to
food quality, illness, injury or other health concerns or
operating issues. Because most of our food products for each
geographic market is prepared in a central kitchen, either
operated by FFG or ourselves, health concerns surrounding our
food products, if raised, may adversely affect sales in all of
our cafés in that market. Adverse publicity about such
allegations may negatively affect our business, regardless of
whether the allegations are true, by discouraging customers from
buying our products. Because we emphasize the freshness and
quality of our products, adverse publicity relating to food
quality or similar concerns may affect us more than it would
food service businesses that compete primarily on other factors.
Such adverse publicity could damage our reputation and divert
the attention of our management from other business concerns. We
could also incur significant liabilities if a lawsuit or claim
resulted in an adverse decision or in a settlement payment, and
incur substantial litigation costs regardless of the outcome of
such litigation. As we outsource our food production to FFG, we
are similarly affected by any litigation, complaints or
publicity relating to FFG.

Our quarterly operating results may fluctuate
and could fall below expectations of securities analysts and
investors, resulting in a decline in our stock price.

Our quarterly and yearly operating results have
varied in the past, and we believe that our operating results
will continue to vary in the future. For this reason, you should
not rely on our operating results as indications of future
performance. In future periods, our operating results may fall
below the expectations of securities analysts and investors,
causing the trading price of our common stock to fall. In
addition, most of our expenses, such as employee compensation
and lease payments for facilities and equipment, are relatively
fixed. Our expense levels are based, in part, on our
expectations regarding future sales. As a result, any shortfall
in sales relative to our expectations may cause significant
decreases in our operating results from quarter to quarter,
cause us to fail to meet the expectations of securities analysts
and investors and result in a decline in our stock price.

17



---



##### Table of Contents



Our cafés are currently located in four
geographic markets. As a result, we are highly vulnerable to
negative occurrences in those markets.

We currently operate our cafés in Seattle,
San Francisco, Chicago and Los Angeles. As a result, we are
susceptible to adverse trends and economic conditions in these
markets. Additionally, given our geographic concentration,
negative publicity regarding any of our cafes, or other regional
occurrences such as local strikes, earthquakes or other natural
disasters, in these markets, may have a material adverse affect
on our business and operations.

Our food preparation and presentation methods
are not proprietary, and therefore competitors may be able to
copy them, which may harm our business.

We consider our food preparation and presentation
methods, including our food product packaging, box lunch
packaging and design of the interior of our cafes, essential to
the appeal of our products and brand. Although we consider our
packaging and store design to be essential to our brand
identity, we have not applied to register all trademarks or
trade dress in connection with these features, and therefore
cannot rely on the legal protections provided by trademark
registration. Because we do not hold any patents for our
preparation methods, it may be difficult for us to prevent
competitors from copying our methods. If our competitors copy
our preparation and presentation methods, the value of our brand
may be diminished and our market share may decrease. In
addition, competitors may be able to develop food preparation
and presentation methods that are more appealing to consumers
than our methods, which may also harm our business.

We depend on the expertise of key personnel.
If any of these individuals were to leave, our business may
suffer.

We are dependent to a large degree on the
services of Victor D. Alhadeff, our Chairman of the Board, Chief
Executive Officer, President, Chief Financial Officer and
Secretary. Our operations may suffer if we were to lose the
services of this individual, who could leave BRIAZZ at any time.
In addition, competition for qualified management in our
industry is intense. Many of the companies with which we compete
for experienced management personnel have greater financial and
other resources than we do.

Risks Related To Our Industry

Our operations are susceptible to changes in
food and supply costs, which could adversely affect our
margins.

Our profitability depends, in part, on our
ability to anticipate and react to changes in food and supply
costs. Our purchasing staff negotiates prices for all of our
ingredients and supplies based upon current market prices with
the exception of the food production contract with FFG where we
pay a fee based on FFGs actual costs plus a profit factor.
Various factors beyond our control, including, for example,
governmental regulations, rising energy costs and adverse
weather conditions, may cause our food and supply costs to
increase. We cannot assure you that we will be able to
anticipate and react to changing food and supply costs by
adjusting our purchasing practices. Any failure to do so may
adversely affect our operating results. As we continue to
outsource our food production to FFG, we become more reliant
upon FFG to react to and mitigate these risks, over which we
have limited control.

If we face increased labor costs or labor
shortages, our growth and operating results may be adversely
affected.

Labor is a primary component in the cost of
operating our business. As of December 29, 2002, we
employed 69 salaried and 276 hourly employees. We expend
significant resources in recruiting and training our managers
and employees. If we face increased labor costs because of
increases in competition for employees, the minimum wage or
employee benefits costs (including costs associated with health
insurance coverage), or unionization of our employees, our
operating expenses will likely increase and our growth may be
adversely

18



---



##### Table of Contents



affected. Additionally, any increases in employee
turnover rates are likely to lead to additional recruiting and
training costs.


Our success depends upon our ability to attract,
motivate and retain a sufficient number of qualified employees,
including café managers, to keep pace with our growth
strategy. Any inability to recruit and retain sufficient numbers
of employees may delay or prevent the anticipated openings of
new cafes.

Competition in our markets may result in price
reductions, reduced margins or the inability to achieve market
acceptance for our products.

The market for lunch and breakfast foods in the
geographic markets where we operate is intensely competitive and
constantly changing. We may be unable to compete successfully
against our current and future competitors, which may result in
pricing reductions, such as our recent decrease of the price of
our panini sandwiches to $3.79, reduced margins and the
inability to achieve market acceptance for our products.

Many businesses provide services similar to ours.
Our competitors include sandwich shops, company cafeterias,
delicatessens, pushcart vendors, fast food chains and catering
companies. Prét a Manger has successfully executed a
concept similar to ours in Great Britain and has opened 13
stores in New York City. In addition, during 2001 Prét a
Manger announced that it had received a significant equity
investment from McDonalds Corporation. Prét a Manger
may expand its operations to markets in which we operate or
expect to enter and it may serve as a model for other
competitors to enter into markets in which we operate or expect
to enter. Many of our competitors have significantly more
capital, research and development, manufacturing, distribution,
marketing, human and other resources than we do. As a result,
they may be able to adapt more quickly to market trends, devote
greater resources to the promotion or sale of their products,
receive greater support and better pricing terms from
independent distributors, initiate or withstand substantial
price competition, or take advantage of acquisition or other
opportunities more readily than we can.

We may be subject to product liability claims,
which may adversely affect our operations.

We may be held liable or incur costs to settle
liability claims if any of the food products we or FFG prepare
or we sell cause injury or are found unsuitable during
preparation, sale or use. While FFG must indemnify us for
damages arising from its failure to provide us with food meeting
state and federal standards, we may not receive payment pursuant
to this right in a timely manner. As a result, we may be
required to make substantial payments with respect to any claims
well in advance of any collection we may realize from FFG.
Although we currently maintain product liability insurance,
where appropriate, we cannot assure you that this insurance is
adequate, and, at any time, it is possible that such insurance
coverage may cease to be available on commercially reasonable
terms, or at all. A product liability claim could result in
liability to us greater than our total assets or insurance
coverage. Moreover, product liability claims could have an
adverse impact on our business even if we have insurance
coverage.

Changes in consumer preferences or
discretionary consumer spending could negatively impact our
results.

Our success depends, in part, upon the popularity
of our food products and our ability to develop new menu items
that appeal to consumers. Shifts in consumer preferences away
from our cafés or away from our cuisine, our inability to
develop new menu items that appeal to consumers, or changes in
our menu that eliminate items popular with some consumers could
harm our business. Also, our success depends to a significant
extent on numerous factors affecting discretionary consumer
spending, including economic conditions, disposable consumer
income and consumer confidence. Adverse changes in these factors
could reduce customer traffic or impose practical limits on
pricing, either of which could harm our business.

Inability to obtain regulatory approvals, or
to comply with ongoing and changing regulatory requirements, for
our remaining central kitchen, FFGs central kitchens or
our cafés could restrict our business and
operations.

Our remaining central kitchen, FFGs central
kitchens and our cafés are subject to various local, state
and federal governmental regulations, standards and other
requirements for food storage, preparation facilities,

19



---



##### Table of Contents



food handling procedures, other good
manufacturing practices requirements and product labeling. In
addition, license and permit requirements relating to health and
safety, building and land use and environmental protection apply
to our operations. If we or FFG encounter difficulties in
obtaining any necessary licenses or permits or complying with
these ongoing and changing regulatory requirements:




| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | the opening of new cafés could be delayed;                                                                                      
|
| |  | existing cafés or central kitchens, whether
    operated by FFG or ourselves, could be closed temporarily or
    permanently; or
|
| |  | our product offerings could be limited.                                                                                         

The occurrence of any of these problems could
harm our operating results.

Risks Relating To Our Securities

Our directors, executive officers and
significant shareholders hold a substantial portion of our
stock, and FFG and Laurus hold substantial rights, which may
lead to conflicts with other shareholders over corporate
governance.

Our directors, executive officers and current
holders of 5% or more of our outstanding common stock hold a
substantial portion of our stock. In addition, an affiliate of
FFG and Laurus hold rights to purchase a substantial portion of
our stock and hold debt with covenants relating to corporate
governance. These shareholders, acting together, and
Victor D. Alhadeff, FFG and Laurus, each acting alone, will
be able to significantly influence all matters requiring
shareholder approval, including the election of directors and
significant corporate transactions, such as mergers or other
business combinations. In addition, an affiliate of FFG holds
100 shares of our Series D Preferred Stock that may become
convertible into a large majority of our common stock at an
aggregate conversion price of $2,000,000, and may become
entitled to vote together with the holders of our common stock
on an as-converted basis prior to the conversion of such shares
and the payment of such exercise price. These shares become
convertible and become entitled to voting rights on the earlier
to occur of our shareholders approving the conversion or Nasdaq
exempting us from this requirement. As part of the transaction
in which FFG purchased the Series D Preferred Stock, FFG
was also granted the right to appoint one of our directors,
which will increase to the right to appoint five of our
directors if approved by our shareholders. As a result, FFG
exercises substantial control over our business and, if approved
by our shareholders, will acting alone be able to determine the
outcome of most or all matters requiring shareholder approval.
We believe that this entity will continue to exert a large
degree of control on the affairs of our corporation. The control
exercised by FFG and major shareholders may delay, deter or
prevent a third party from acquiring or merging with us, which
in turn could reduce the market price of our common stock.

Conversion of our outstanding convertible
securities could substantially dilute common stock prices
because the conversion prices of those securities and/or the
number of shares of common stock issuable upon conversion of
those securities are below our current market price or subject
to adjustment.

We have issued and plan to issue in the future
various securities that are convertible or exercisable at prices
that are lower than the current market price of our common stock
or are subject to adjustment due to a variety of factors,
including fluctuations in the market price of our common stock
and the issuance of securities at an exercise or conversion
price less than the then-current exercise or conversion price of
those securities. For example, Laurus holds a note convertible
into approximately 9,262,142 shares of our common stock at
$0.10 per share, subject to the adjustments set forth below, and
a warrant exercisable for 250,000 shares of our common
stock at $0.10 per share, and FFG holds 100 shares of our
Series D Preferred Stock that may become convertible into a
large majority of our shares of our common stock at an aggregate
conversion price of $2,000,000 (at a per share conversion price
yet to be determined, but expected to be approximately $0.06)
subject to the conditions noted in the previous risk factor, and
subject to the adjustments set forth below. As of March 28,
2003, the closing price of a share of our common stock on the
Nasdaq Small Cap Market was $0.15. The number of shares of
common stock that these adjustable securities

20



---



##### Table of Contents



ultimately may be converted into or exercised for
could increase and the price at which such securities are issued
could decrease if the market price of our common stock declines
or if we issue additional securities at prices lower than the
conversion prices of such securities. The value of common stock
could, therefore, experience substantial dilution as a result of
the conversion or exercise of our outstanding derivative
securities or as a result of any issuance of additional
securities at prices lower than the conversion prices of such
securities. Also, as a result of conversions of the principal or
interest portion of our convertible note or conversion of the
Series D Preferred Stock and any related sales of our
common stock by the holders, the market price of our common
stock could be depressed.


The applicable conversion price of the
$1.25 million note issued to Laurus is variable and does
not have a lower-limit; therefore the dilutive effect to our
existing security holders is theoretically limitless.
Conversely, because the variable conversion price of this note
has an upper limit, an increase in the trading price of a share
of our common stock will result in a limited benefit to existing
security holders with respect to the conversion of this note.
The following table sets forth the number of shares issuable
upon conversion of the principal portion of the note based upon
the indicated hypothetical trading prices, based on the initial
conversion price of $0.10 per share and assuming that the
principal amount of the note as of March 1, 2003, which was
$926,214, is converted at our election in accordance with the
regular payment schedule:

|                 |       |                     |  |                     |      |                  |  |                   |        |  |  |  |             |  |  |  |        | 
|---------------- | ----- | ------------------- |  | ------------------- | ---- | ---------------- |  | ----------------- | ------ |  |  |  | ----------- |  |  |  | ------ | 
|                 |       | Hypothetical        |  |                     |      |                  |  |                  
|Hypothetical     |       | Average of 5 Lowest |  |                     |      |                  |  |                  
|Average VWAP For |       | Closing Prices For  |  |                     |      |                  |  | Percentage of Our
|Last 11 Trading  |       | Last 30 Trading     |  |                     |      | Number of Shares |  | Common           
|Days(1)          |       | Days(2)             |  | Conversion Price(3) |      | Issuable         |  | Stock(4)         
|                 |       |                     |  |                     |      |                  |  |                  
|                 | $0.50 |                     |  | $                   | 0.40 |                  |  | $                 | 0.10   |  |  |  | 9,262,142   |  |  |  | 60.72% | 
|                 |       |                     |  | $                   | 0.20 |                  |  | $                 | 0.10   |  |  |  | 9,262,142   |  |  |  | 60.72% | 
|                 | $0.25 |                     |  | $                   | 0.15 |                  |  | $                 | 0.10   |  |  |  | 9,262,142   |  |  |  | 60.72% | 
|                 |       |                     |  | $                   | 0.10 |                  |  | $                 | 0.10   |  |  |  | 9,262,142   |  |  |  | 60.72% | 
|                 | $0.10 |                     |  | $                   | 0.05 |                  |  | $                 | 0.0425 |  |  |  | 21,793,275  |  |  |  | 78.44% | 
|                 |       |                     |  | $                   | 0.01 |                  |  | $                 | 0.0085 |  |  |  | 108,966,376 |  |  |  | 94.79% | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Hypothetical average daily volume weighted
    average (VWAP) of the common stock as reported by
    Bloomberg, L.P. on the Nasdaq National Market for the 11 trading
    days preceding a repayment date.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Hypothetical average of the five lowest closing
    prices during the 30 trading days immediately preceding the
    conversion date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) | The current conversion price is $0.10 per share.
    However, if the average VWAP of the common stock as reported by
    Bloomberg, L.P. on the principal trading market for our common
    stock for the 11 trading days preceding a repayment date is less
    than 125% of the conversion price, and we have elected to pay
    the monthly repayment amount in shares of our common stock, then
    the holder is permitted to convert the repayment amount into our
    common stock at a conversion price of 85% of the average of the
    five lowest closing prices during the 30 trading days
    immediately preceding the conversion date.
|   
|(4) | Amounts are based on 5,990,916 shares of our
    common stock outstanding as of March 24, 2003, plus the
    corresponding number of shares issuable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

In addition to the adjustments described in
footnote (3) to the foregoing table, the initial conversion
price of $0.10 per share is subject to downward adjustments in
the event any event of default has occurred and is continuing
under the note, in which case the conversion price shall be the
lower of $0.10 or 70% of the average of the three lowest closing
prices for the common stock as reported on the principal trading
exchange of our common stock for the prior thirty trading days.
The foregoing adjustments to the conversion price of the note
are cumulative.

If we issue any common stock or securities
convertible for common stock prior to the Series D
Preferred Stock first becoming convertible, then the number of
shares of common stock for which the shares of Series D
Preferred Stock are convertible will increase such that the
Series D Preferred Stock will continue to be convertible
into a number of shares of our common stock equal to 66.67% of
the fully-diluted share capital

21



---



##### Table of Contents



(excluding from the calculation of our
fully-diluted share capital, subject to certain limitations,
those securities subject to our stock incentive plans), and the
conversion price per share of common stock will decrease such
that the aggregate conversion price remains constant. Upon the
Series D Preferred Stock first becoming convertible, the
conversion price per share of common stock will be fixed.
Thereafter, if we issue any additional shares of common stock or
shares convertible into shares of common stock (subject to
customary exclusions) at an effective price per share that is
less than the Series D Preferred Stock conversion price
then in effect, the conversion price will be reduced to equal
the lower price at which such additional securities were issued.
The foregoing adjustments to the conversion price of the
Series D Preferred Stock are cumulative.


As a result of conversions of the principal or
interest portion of our convertible note or our shares of
Series D Preferred Stock and related sales of our common
stock by the holders, the market price of our common stock could
be depressed, thereby resulting in a significant increase in the
number of shares issuable upon conversion of the principal and
interest portions of the note. Therefore, substantial dilution
of common stock could be experienced as a result of the
conversion of the principal or interest portions of our
convertible debentures.

If our security holders engage in short sales
of our common stock, including sales of shares to be issued upon
conversion of debt securities, the price of our common stock may
decline.

Selling short is a technique used by a
shareholder to take advantage of an anticipated decline in the
price of a security. A significant number of short sales or a
large volume of other sales within a relatively short period of
time can create downward pressure on the market price of a
security. The decrease in market price would allow holders of
our debt securities that have conversion prices based upon a
discount on the market price of our common stock to convert
their debt securities into or for an increased number of shares
of our common stock. Further sales of common stock issued upon
conversion of our debt securities could cause even greater
declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage
short sales that could further undermine the value of our common
stock. The common stock could, therefore, experience a decline
in value as a result of short sales of our common stock.

We were recently transferred to the Nasdaq
SmallCap market and are not in compliance with its listing
requirements and, as a result, we may be delisted if we are
unable to comply.

Our common stock was transferred to the Nasdaq
SmallCap Market on January 27, 2003 because we failed to
meet the requirements for listing on the Nasdaq National Market.
There are a number of continuing requirements that must be met
in order for our common stock to remain eligible for quotation
on the Nasdaq SmallCap Market. We do not currently meet the
SmallCap Market requirements that a company maintain a minimum
bid price of $1.00 and a minimum market value of publicly held
shares of $1 million. Nasdaq has provided us with a
temporary exception from these requirements provided that we
file our Annual Report on Form 10-K by March 31, 2003,
we file our Quarterly Report for the first quarter of 2003 on
Form 10-Q by May 15, 2003, we evidence continued
compliance with the $2.5 million shareholders equity
requirement in such reports, we come into compliance with the
requirement for a market value of publicly held shares of
$1 million by June 5, 2003 and we come into compliance
with the requirement for a minimum bid price of $1.00 by
August 25, 2003. The failure to meet the maintenance
criteria in the future could result in the delisting of our
common stock from Nasdaq. If our common stock were to be
delisted, trading, if any, in the common stock may then continue
to be conducted on the OTC Bulletin Board. As a result, an
investor may find it more difficult to sell our common stock or
to obtain accurate quotations as to the market value of our
common stock.

Our stock price may be volatile because of
factors beyond our control.

The market price of our common stock may
fluctuate significantly in response to a number of factors, most
of which are beyond our control, including:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | changes in securities analysts
    recommendations or estimates of our financial performance;
|
| |  | changes in market valuations of similar
    companies; and                                    

22



---



##### Table of Contents





| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements by us or our competitors of
    significant contracts, new products, acquisitions, commercial
    relationships, joint ventures or capital commitments.

In the past, companies that have experienced
volatility in the market price of their stock have been subject
to securities class action litigation. A securities class action
lawsuit against us, regardless of its merit, could result in
substantial costs and divert the attention of our management
from other business concerns, which in turn could have a
materially adverse impact on our financial results.

Our articles of incorporation, bylaws, certain
of our agreements and the Washington Business Corporation Act
contain anti-takeover provisions which could discourage or
prevent a takeover, even if an acquisition would be beneficial
to our shareholders.

Provisions of our amended and restated articles
of incorporation and bylaws could make it more difficult for a
third party to acquire us, even if doing so would be beneficial
to our shareholders. These provisions include:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorizing the issuance of blank
    check preferred stock that could be issued by our board of
    directors, without shareholder approval, to increase the number
    of outstanding shares or change the balance of voting control
    and thwart a takeover attempt;
|
| |  | prohibiting cumulative voting in the election of
    directors, which would otherwise allow less than a majority of
    shareholders to elect directors;                                                                                                                   
|
| |  | limiting the ability of shareholders to call
    special meetings of shareholders; and                                                                                                                                                                                     
|
| |  | prohibiting shareholder action by non-unanimous
    written consent and requiring all shareholder actions to be
    taken at a meeting of our shareholders.                                                                                                                

In addition, Chapter 23B.19 of the
Washington Business Corporation Act and the terms of our debt
financings and our stock option plan may discourage, delay or
prevent a change in control which you may favor.




Item 2.     Properties.

Cafés At December 29, 2002 there were
46 BRIAZZ cafés operating in four metropolitan areas. Of
these cafés, approximately half were in amenity locations.
We had twelve cafés in Seattle, fifteen cafés in San
Francisco, nine cafés in Chicago (one of which has since
closed) and ten cafés in Los Angeles. We operate all of our
cafés in leased locations under terms of operating leases,
which typically cover five years some of which have options for
an additional five-year term. Rents are either fixed base
amounts, variable amounts determined as a percentage of sales,
or a combination of base and percentage of sales. To implement
our growth strategy, we will require additional café sites
which we believe will be available on commercially reasonable
terms, although we have not identified properties or signed
letters of intent with regard to all of the space necessary for
our intended growth.

Central kitchens and corporate
headquarters We are in the
process of phasing out our central kitchens as we outsource our
food production in each of our geographic markets.

We currently have one central kitchen in San
Francisco. Our San Francisco central kitchen occupies 7,940
square feet under a lease that terminates on October 31,
2006, with an option to renew for one five-year period. We
intend to phase out the San Francisco central kitchen by the end
of the second quarter of 2003.

Our Seattle central kitchen and corporate
headquarters together occupied 35,665 square feet under a lease
that terminates on October 30, 2006. Following the closure
of our Seattle central kitchen in February 2003, we sublet
approximately 70% of this space for the remainder of the lease,
subject to receipt of all required consents. We retain a portion
of the warehouse space and the space occupied by the corporate
headquarters.

Our Los Angeles central kitchen was closed in
December 2002. Following the closure of our Los Angeles kitchen,
we entered into an agreement with the landlord terminating the
remainder of our lease. We paid the

23



---



##### Table of Contents



landlord a fee of $15,000 in connection with the
termination of this lease and leasehold improvements remained.


Our Chicago central kitchen was closed in
December 2002. Following the closure of our Chicago kitchen, the
landlord retook possession of the premises. We are seeking to
sublet or terminate our Chicago central kitchen lease.

We expect the facilities we are retaining will be
adequate for our needs for the foreseeable future.




Item 3.     Legal
Proceedings.

The Company is subject to various legal
proceedings and claims that arise in the ordinary course of
business. Company management currently believes that resolution
of such legal matters will not have a material adverse impact on
the Companys financial position, results of operations or
cash flows.




Item 4.     Submission
of Matters to a Vote of Security Holders.

None.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters.

Price Range of Common Stock Our Common Stock was first quoted on
the Nasdaq National Market under the symbol BRZZ on
May 2, 2001. Prior to that time, there was no public market
for our common stock. Our Common Stock was transferred from the
Nasdaq National Market to the Nasdaq SmallCap Market effective
January 27, 2003. The following table shows the high and
low closing sale prices for our common stock as reported on the
Nasdaq National Market for the periods indicated:

|                             |                 |      |   |      |  |  |   |      | 
|---------------------------- | --------------- | ---- | - | ---- |  |  | - | ---- | 
|                             |                 | High |   | Low 
|                             |                 |      |   |     
|Year Ended December 30, 2001 |                 |      |   |      |  |  |   |     
|                             | Second quarter* |      | $ | 8.25 |  |  | $ | 2.60 | 
|                             | Third quarter   |      | $ | 2.80 |  |  | $ | 0.99 | 
|                             | Fourth quarter  |      | $ | 1.44 |  |  | $ | 0.68 | 
|Year Ended December 29, 2002 |                 |      |   |      |  |  |   |     
|                             | First quarter   |      | $ | 1.94 |  |  | $ | 0.84 | 
|                             | Second quarter  |      | $ | 1.80 |  |  | $ | 0.97 | 
|                             | Third quarter   |      | $ | 1.09 |  |  | $ | 0.30 | 
|                             | Fourth quarter  |      | $ | 0.91 |  |  | $ | 0.25 | 



---



|  |                          
|- | -------------------------
|* | Beginning on May 2, 2001.

As of March 24, 2003, there were
approximately 121 holders of record of the Common Stock of
BRIAZZ and 5,990,916 shares of the Common Stock outstanding.

Dividends The Company has never paid dividends
on the Common Stock and does not intend to pay dividends on the
Common Stock in the foreseeable future. Terms of certain of the
Companys borrowing agreements restrict and/or prohibit the
payment of dividends. The Companys board of directors
intends to retain any earnings to provide funds for the
operation and expansion of the Companys business.

Recent Sales of Unregistered Securities(During the fourth fiscal quarter of
2002)  We issued demand notes to FFG and its
affiliates in the following principal amounts: $250,000 on
October 25, 2002, $100,000 on October 30, 2002,
$450,000 on December 3, 2002 and $225,000 on
December 12, 2002. The demand notes

24



---



##### Table of Contents



were issued to accredited investors and, if
deemed to be securities, in reliance upon Section 4(2) and
Rule 506 of Regulation D under the Securities Act. The
demand notes were cancelled subsequent to the fiscal year end as
part of the $2.0 million offer and sale of secured
promissory notes, warrants and shares of series D preferred
stock described elsewhere in this report.


We issued to Laurus a two-year warrant to
purchase 150,000 shares of our common stock at a price of $0.50
per share on December 2, 2002. The exercise price of the
warrant may be adjusted in certain circumstances such as if we
pay a stock dividend, subdivide or combine outstanding shares of
common stock into a greater or lesser number of shares, or take
such other actions as would otherwise result in dilution of the
selling stockholders position. Laurus has contractually agreed
to restrict its ability to exercise the warrant and receive
shares of our common stock such that the number of shares of
common stock beneficially owned by it and its affiliates after
such exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock; provided however, that such
restrictions on exercise may be revoked by Laurus upon
75 days prior notice to us, and are automatically null and
void upon an event of default under the convertible note we
issued to Laurus on June 18, 2002. We granted Laurus
registration rights with respect to the shares of our common
stock underlying the warrant. The warrant was issued to an
accredited investor in reliance upon Section 4(2) and
Rule 506 of Regulation D under the Securities Act.

We issued 10,000 shares of our common stock to
Laurus on December 2, 2002 upon conversion of $3,026 of the
principal amount under the convertible note we issued to Laurus
on June 18, 2002. The shares were issued to an accredited
investor, solely in exchange for conversion of outstanding debt,
in reliance upon Section 3(a)(9), Section 4(2) and
Rule 506 of Regulation D under the Securities Act.




Item 6:     Selected
Financial Data.

The following selected financial data are
qualified in their entirety by reference to, and you should read
them in conjunction with, BRIAZZs financial statements and
the notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Annual Report. The statement of
operations data presented below for the years ended
December 29, 2002, December 30, 2001, and
December 31, 2000 and the selected balance sheet data at
December 29, 2002 and December 30, 2001 are derived
from BRIAZZs financial statements included in this Annual
Report. The statement of operations data presented below for the
years ended December 26, 1999 and December 27, 1998,
and the selected balance sheet data at December 30, 2000,
December 26, 1999 and December 27, 1998, are derived
from BRIAZZs audited financial statements that are not
included in the Annual Report. Segment results for each of the
past three fiscal years are provided in the financial statements
included in this Annual Report.

|                   |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |        |        | 
|------------------ | ------------------------------------------------ | --------------------------------- | - | ------------ | ------ | ------------ | - | ------------ | ------ | ------------ | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                   |                                                  |                                  
|                   |                                                  | Years Ended                      
|                   |                                                  |                                  
|                   |                                                  | December 29,                      |   | December 30, |        | December 31, |   | December 26, |        | December 27,
|                   |                                                  | 2002                              |   | 2001         |        | 2000         |   | 1999         |        | 1998        
|                   |                                                  |                                   |   |              |        |              |   |              |        |             
|                   |                                                  |                                  
|                   |                                                  | (In thousands, except share data)
|Sales              |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       
|                   | Retail                                           |                                   | $ | 22,327       |        |              | $ | 22,737       |        |              | $ | 23,624 |        |  | $ | 19,428 |        |  | $ | 11,913 |       
|                   | Branded Sales                                    |                                   |   | 8,266        |        |              |   | 9,292        |        |              |   | 10,068 |        |  |   | 6,170  |        |  |   | 3,452  |       
|                   |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       
|                   |                                                  | Total Sales                       |   |              | 30,593 |              |   |              | 32,029 |              |   |        | 33,692 |  |   |        | 25,598 |  |   |        | 15,365 | 
|                   |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       
|Operating Expenses |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       
|                   | Cost of food and packaging                       |                                   |   | 11,850       |        |              |   | 12,480       |        |              |   | 13,597 |        |  |   | 11,520 |        |  |   | 6,979  |       
|                   | Occupancy expenses                               |                                   |   | 4,602        |        |              |   | 4,010        |        |              |   | 3,818  |        |  |   | 3,602  |        |  |   | 2,393  |       
|                   | Labor expenses                                   |                                   |   | 10,925       |        |              |   | 11,098       |        |              |   | 11,186 |        |  |   | 9,506  |        |  |   | 6,690  |       
|                   | Depreciation and amortization                    |                                   |   | 4,352        |        |              |   | 2,686        |        |              |   | 2,657  |        |  |   | 2,628  |        |  |   | 1,785  |       
|                   | Other operating expenses                         |                                   |   | 2,434        |        |              |   | 1,849        |        |              |   | 1,921  |        |  |   | 2,419  |        |  |   | 2,501  |       
|                   | General and administrative expenses              |                                   |   | 7,546        |        |              |   | 6,837        |        |              |   | 6,581  |        |  |   | 6,033  |        |  |   | 6,492  |       
|                   | Loss on disposal of assets                       |                                   |   | 1,172        |        |              |   |             |        |              |   |       |        |  |   |       |        |  |   |       |       
|                   | Provision for asset impairment and store closure |                                   |   | 2,256        |        |              |   | 26           |        |              |   | 63     |        |  |   | 779    |        |  |   | 1,169  |       
|                   |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       
|                   |                                                  | Total operating expenses          |   |              | 45,137 |              |   |              | 38,986 |              |   |        | 39,823 |  |   |        | 36,487 |  |   |        | 28,009 | 
|                   |                                                  |                                   |   |              |        |              |   |              |        |              |   |        |        |  |   |        |        |  |   |       

25



---



##### Table of Contents



|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |         |  
|---------------------------------------------------------------------------------- | -------------------- | --------------------------------- | --------- | ------------ | - | ------------ | --------- | ------------ | - | ------------ | --------- | ------ | - | - | --------- | ------ | - | - | --------- | ------- | -
|                                                                                   |                      |                                  
|                                                                                   |                      | Years Ended                      
|                                                                                   |                      |                                  
|                                                                                   |                      | December 29,                      |           | December 30, |   | December 31, |           | December 26, |   | December 27,
|                                                                                   |                      | 2002                              |           | 2001         |   | 2000         |           | 1999         |   | 1998        
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |             
|                                                                                   |                      |                                  
|                                                                                   |                      | (In thousands, except share data)
|Loss from operations                                                               |                      |                                   | (14,544   | )            |   |              | (6,957    | )            |   |              | (6,131    | )      |   |   | (10,889   | )      |   |   | (12,644   | )      
|Other (expense) income                                                             |                      |                                   | (585      | )            |   |              | 155       |              |   |              | (156      | )      |   |   | (4,492    | )      |   |   | 193       |        
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Net loss                                                                           |                      |                                   | (15,129   | )            |   |              | (6,802    | )            |   |              | (6,287    | )      |   |   | (15,381   | )      |   |   | (12,451   | )      
|Accretion of dividends/amortization of discount
    on preferred stock             |                      |                                   |          |              |   |              | 4,318     |              |   |              | 3,319     |        |   |   | 2,421     |        |   |   | 1,951     |        
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Net loss attributable to common stockholders                                       |                      | $                                 | (15,129   | )            |   | $            | (11,120   | )            |   | $            | (9,606    | )      |   | $ | (17,802   | )      |   | $ | (14,402   | )      
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Basic and diluted net loss per share                                               |                      | $                                 | (2.59     | )            |   | $            | (2.86     | )            |   | $            | (2,455.68 | )      |   | $ | (5,148.14 | )      |   | $ | (4,264.87 | )      
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Weighted-average shares used in computing basic
    and diluted net loss per share |                      |                                   | 5,852,362 |              |   |              | 3,889,472 |              |   |              | 3,912     |        |   |   | 3,458     |        |   |   | 3,377     |        
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Other Financial Data:                                                              |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|EBITDA                                                                             |                      | $                                 | (6,764    | )            |   | $            | (4,245    | )            |   | $            | (3,350    | )      |   | $ | (7,374    | )      |   | $ | (9,290    | )      
|                                                                                   |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|Cash provided by (used in):                                                        |                      |                                   |           |              |   |              |           |              |   |              |           |        |   |   |           |        |   |   |           |        
|                                                                                   | Operating activities |                                   | $         | (5,279       | ) |              | $         | (5,609       | ) |              | $         | (2,233 | ) |   | $         | (8,438 | ) |   | $         | (8,309  | )
|                                                                                   | Investing activities |                                   |           | (2,263       | ) |              |           | (3,755       | ) |              |           | (772   | ) |   |           | (1,591 | ) |   |           | (10,956 | )
|                                                                                   | Financing activities |                                   |           | 1,840        |   |              |           | 15,002       |   |              |           | 1,407  |   |   |           | 9,974  |   |   |           | 5,227   |  

|                                                   |  |                |        |              |  |              |        |              |  |              |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------------- | ------ | ------------ |  | ------------ | ------ | ------------ |  | ------------ | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  | December 29,   |        | December 30, |  | December 31, |        | December 26, |  | December 27,
|                                                   |  | 2002           |        | 2001         |  | 2000         |        | 1999         |  | 1998        
|                                                   |  |                |        |              |  |              |        |              |  |             
|                                                   |  |               
|                                                   |  | (In thousands)
|Balance Sheet Data:                                |  |                |        |              |  |              |        |              |  |              |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                          |  | $              | 491    |              |  | $            | 6,193  |              |  | $            | 555     |   |  | $ | 2,153   |   |  | $ | 2,208   |  
|Working capital                                    |  |                | (4,909 | )            |  |              | 4,066  |              |  |              | (2,620  | ) |  |   | (2,414  | ) |  |   | (5,554  | )
|Total assets                                       |  |                | 10,705 |              |  |              | 21,953 |              |  |              | 14,409  |   |  |   | 17,676  |   |  |   | 19,958  |  
|Current liabilities                                |  |                | 7,042  |              |  |              | 3,702  |              |  |              | 4,869   |   |  |   | 5,955   |   |  |   | 9,507   |  
|Long-term liabilities                              |  |                | 234    |              |  |              | 335    |              |  |              | 1,888   |   |  |   | 213     |   |  |   | 474     |  
|Mandatorily redeemable convertible preferred stock |  |                |       |              |  |              |       |              |  |              | 53,609  |   |  |   | 48,025  |   |  |   | 30,148  |  
|Total shareholders equity (deficit)               |  | $              | 3,429  |              |  | $            | 17,916 |              |  | $            | (45,957 | ) |  | $ | (36,517 | ) |  | $ | (20,171 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA represents earnings before interest
    expense, income taxes, depreciation, amortization, loss on
    disposal of assets, and provision for asset impairment and store
    closure. In 2002 and 2001 interest income was also excluded.
    EBITDA data is included because management understands that such
    information is considered by certain investors as an additional
    basis on which to evaluate a companys ability to pay
    interest, repay debt and make capital expenditures. Because all
    companies do not calculate EBITDA identically, the presentation
    of EBITDA in this Annual Report is not necessarily comparable to
    similarly entitled measures of other companies. EBITDA is not
    intended to represent and should not be considered more
    meaningful than, or an alternative to, measures of operating
    performance as determined in accordance with generally accepted
    accounting principles. A reconciliation of net loss to EBITDA is
    as follows:

|          |                                                  |              |         |              |   |              |        |              |   |              |        |       |  |   |         |       |  |   |         |       | 
|--------- | ------------------------------------------------ | ------------ | ------- | ------------ | - | ------------ | ------ | ------------ | - | ------------ | ------ | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|          |                                                  |             
|          |                                                  | Years Ended 
|          |                                                  |             
|          |                                                  | December 29, |         | December 30, |   | December 31, |        | December 26, |   | December 27,
|          |                                                  | 2002         |         | 2001         |   | 2000         |        | 1999         |   | 1998        
|          |                                                  |              |         |              |   |              |        |              |   |             
|Net loss  |                                                  | $            | (15,129 | )            |   | $            | (6,802 | )            |   | $            | (6,287 | )     |  | $ | (15,381 | )     |  | $ | (12,451 | )    
|Add back: |                                                  |              |         |              |   |              |        |              |   |              |        |       |  |   |         |       |  |   |         |      
|          | Depreciation and amortization                    |              |         | 4,352        |   |              |        | 2,686        |   |              |        | 2,657 |  |   |         | 2,628 |  |   |         | 1,785 | 
|          | Loss on disposal of assets                       |              |         | 1,172        |   |              |        |             |   |              |        |      |  |   |         |      |  |   |         |      | 
|          | Provision for asset impairment and store closure |              |         | 2,256        |   |              |        | 26           |   |              |        | 63    |  |   |         | 779   |  |   |         | 1,169 | 
|          | Interest expense                                 |              |         | 637          |   |              |        | 125          |   |              |        | 217   |  |   |         | 4,600 |  |   |         | 207   | 
|          | Interest income                                  |              |         | (52          | ) |              |        | (280         | ) |              |        | N/A   |  |   |         | N/A   |  |   |         | N/A   | 
|          |                                                  |              |         |              |   |              |        |              |   |              |        |       |  |   |         |       |  |   |         |      
|EBITDA    |                                                  | $            | (6,764  | )            |   | $            | (4,245 | )            |   | $            | (3,350 | )     |  | $ | (7,374  | )     |  | $ | (9,290  | )    
|          |                                                  |              |         |              |   |              |        |              |   |              |        |       |  |   |         |       |  |   |         |      

26



---



##### Table of Contents








|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

The following managements discussion and
analysis should be read in conjunction with Selected
Financial Data, the financial statements and accompanying
notes and the other financial data included elsewhere in this
Annual Report.

Overview BRIAZZ prepares and sells
high-quality, branded lunch and breakfast foods for the
on-the-go consumer. We sell our products primarily
through our company-operated cafés, through delivery of box
lunches and catered platters directly to corporate customers and
through selected wholesale accounts. Our core products are
sandwiches, salads and soups, which are complemented by a
variety of fresh baked goods, premium juices, Starbucks coffees
and fresh fruit.

We currently operate 45 cafés in the
Seattle, San Francisco, Chicago and Los Angeles metropolitan
areas, a net increase of three cafés since
December 30, 2001. The three café increase in 2002 is
due to the opening of a café in the first quarter and four
cafés in the second quarter of 2002 as well as the closure
of a location in the first quarter and another in the third
quarter of 2002. The first closure resulted from decreased sales
as the cafés building occupancy shifted from normal
office occupancy to a data-center. The second café closure
resulted from an occupancy level significantly below capacity in
the building which the café was located. The third closure
was in a small suburban location in Chicago. The café was
not profitable and the landlord allowed us to terminate our
lease without penalty. We discontinued plans to open one more
additional café following the change of the development
site to a less desirable location. Due to the discontinuation of
this planned opening and due to capital restrictions, we do not
currently plan to open any additional cafés in 2003. Our
growth strategy is to open new cafés in our existing
markets and, when appropriate, enter into new markets.

In December 2002, we contracted with FFG to
assemble and package substantially all of our food products used
at our café locations and in our branded sales. Pursuant to
this agreement we closed our central kitchens and transferred
our food production to FFG in the Chicago and Los Angeles
markets in December 2002 and in the Seattle market at the end of
February 2003. Due to FFGs insufficient capacity in San
Francisco, we intend to outsource our food production in San
Francisco to another company and to close our remaining central
kitchen in San Francisco by the end of the second quarter of
2003. We believe that contracting our food production to another
party, such as FFG, will allow us to reduce our overhead in our
existing markets and may allow us to lower the costs of entry
into new markets served by their central kitchens. There can be
no assurance that the transition to third-party central kitchens
for food preparation will be successful or that the Company will
be able to realize anticipated cost savings. During 2002, the
Company recorded a loss on disposition relating to the Los
Angeles and Chicago central kitchen closures of approximately
$1.2 million, which includes the value of leasehold
interests transferred to landlords and of equipment transferred
to FFG. It is not anticipated that there will be significant
losses recorded upon closure of Seattle and San Francisco
central kitchens, due to the relatively low net book value of
the related assets at the closure dates.

We have evaluated the grocery segment of our
wholesale business and decided to withdraw from this
distribution channel. We remain committed to growing profitable
wholesale accounts. Additionally, we are working with FFG in
Chicago and New York markets to supply Starbucks branded
sandwiches and salads to Starbucks Stores.

As a result of central kitchen closures and
reductions in corporate personnel, there was a decrease of 105
employees from the beginning of the year, or 23%, to 345
employees at December 29, 2002, 69 full-time salaried and
276 hourly. At March 15, 2003, after the Seattle central
kitchen closure and other corporate personnel reductions, the
number of employees had declined further to 56 full-time
salaried and 245 hourly. These employee reductions will result
in decreases in labor expenses in 2003.

Our common stock was transferred to the Nasdaq
Small Cap Market on January 27, 2003 because we failed to
meet the requirements for listing on the Nasdaq National Market.
There are a number of continuing requirements that must be met
in order for our common stock to remain eligible for quotation
on the Nasdaq Small Cap Market. We do not currently meet the
Small Cap Market requirements that a company maintain a

27



---



##### Table of Contents



minimum bid price of $1.00 and a minimum market
value of publicly held shares of $1 million. Nasdaq has
provided us with a temporary exception from these requirements
provided that we file our Annual Report on Form 10-K by
March 31, 2003, we file our Quarterly Report for the first
quarter of 2003 on Form 10-Q by May 15, 2003, we
evidence continued compliance with the $2.5 million
shareholders equity requirement in such reports, we come
into compliance with the requirement for a market value of
publicly held shares of $1 million by June 5, 2003 and
we come into compliance with the requirement for a minimum bid
price of $1.00 by August 25, 2003. If we cannot comply with
the foregoing requirements, we may be delisted, after which our
common stock may continue to be quoted on the OTC Bulletin
Board. If we are delisted from the Nasdaq Small Cap Market, it
may be more difficult for our shareholders to sell their shares
and the market price of our common stock may be depressed.


Geographic Markets We currently operate in four markets:
Seattle, San Francisco, Chicago and Los Angeles. We have
presented our sales results here by geographic market to help
you understand our business, but we do not operate our business
in geographic segments. We manage our business through four
reportable segments: Retail, Branded Sales, Kitchens, and
General & Administrative. Retail consists of sales generated
through the Companys cafés. Branded Sales consists of
two subgroups: 1) box lunch, catering and vending and
2), wholesale and grocery. Branded Sales consists of sales
which are aggregated because they have similar economic
characteristics. Kitchens consist of unallocated cost of
products and packaging, along with unallocated costs of kitchen
operations. General and Administrative consists of costs
incurred by the corporate office as well as those administrative
costs incurred by Retail. Management evaluates segment
performance primarily based on sales and segment operating
income (loss).

Below is a comparison of sales in each market for
fiscal years 2002, 2001 and 2000. Market pre-tax profit
(loss) consists of sales less expenses related to each
market other than corporate general and administrative expense.
Sales include sales from cafés, box lunches, catering,
vending, wholesale, grocery and other accounts. Expenses for
each market consist of occupancy expense, labor expense, general
and administrative expense, other operating expense,
depreciation and amortization and provision for asset impairment
and store closure. Each of these items are described in more
detail in Results of Operations. Because corporate
general and administrative included depreciation and
amortization related to corporate assets corporate general and
administrative totals will differ from the General and
Administrative segment financial information.

Geographic Markets

|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |     |        |        |  
|------- | ----------------------------- | ------------------------------------------ | -------------------------------- | ------------ | ------ | ------------ | - | -- | ------ | ------ | - | --- | ------ | ------ | -
|        |                               |                                           
|        |                               | Years Ended                               
|        |                               |                                           
|        |                               | December 29,                               |                                  | December 30, |        | December 31,
|        |                               | 2002                                       |                                  | 2001         |        | 2000        
|        |                               |                                            |                                  |              |        |             
|        |                               |                                           
|        |                               | (In thousands)                            
|Seattle |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        | Sales:                        |                                            |                                  |              |        |              |   |    |        |        |   |     |       
|        |                               | Retail                                     |                                  | $            | 5,756  |              |   | $  | 5,997  |        |   | $   | 6,607  |       
|        |                               | Branded Sales                              |                                  |              | 4,441  |              |   |    | 5,686  |        |   |     | 5,915  |       
|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        |                               |                                            | Total sales                      |              |        | 10,197       |   |    |        | 11,683 |   |     |        | 12,522 |  
|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        | Cost of food and packaging:   |                                            |                                  |              |        |              |   |    |        |        |   |     |       
|        |                               | Retail                                     |                                  |              | (2,099 | )            |   |    | (2,211 | )      |   |     | (2,447 | )     
|        |                               | Branded Sales                              |                                  |              | (1,917 | )            |   |    | (2,565 | )      |   |     | (2,792 | )     
|        |                               | Unallocated cost of products and packaging |                                  |              | (100   | )            |   |    | (109   | )      |   |     | (85    | )     
|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        |                               |                                            | Total cost of food and packaging |              |        | (4,116       | ) |    |        | (4,885 | ) |     |        | (5,324 | )
|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        | Income (loss) from operations |                                            | $                                | (1,377       | )      |              | $ | 88 |        |        | $ | 550 |       
|        |                               |                                            |                                  |              |        |              |   |    |        |        |   |    
|        | Cafes                         |                                            |                                  | 12           |        |              |   | 13 |        |        |   | 11  |       

28



---



##### Table of Contents



|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |        |        |         |  
|------------- | ------------------------------------ | ------------------------------------------ | -------------------------------- | ------------ | ------ | ------------ | - | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|              |                                      |                                           
|              |                                      | Years Ended                               
|              |                                      |                                           
|              |                                      | December 29,                               |                                  | December 30, |        | December 31,
|              |                                      | 2002                                       |                                  | 2001         |        | 2000        
|              |                                      |                                            |                                  |              |        |             
|              |                                      |                                           
|              |                                      | (In thousands)                            
|San Francisco |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Sales:                               |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  | $            | 7,581  |              |   | $      | 8,051  |         |   | $      | 9,053  |        
|              |                                      | Branded Sales                              |                                  |              | 1,248  |              |   |        | 1,426  |         |   |        | 2,270  |        
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total sales                      |              |        | 8,829        |   |        |        | 9,477   |   |        |        | 11,323  |  
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cost of food and packaging:          |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  |              | (2,716 | )            |   |        | (2,822 | )       |   |        | (3,214 | )      
|              |                                      | Branded Sales                              |                                  |              | (377   | )            |   |        | (462   | )       |   |        | (911   | )      
|              |                                      | Unallocated cost of products and packaging |                                  |              | (177   | )            |   |        | (165   | )       |   |        | (115   | )      
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total cost of food and packaging |              |        | (3,270       | ) |        |        | (3,449  | ) |        |        | (4,240  | )
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Income (loss) from operations        |                                            | $                                | (3,095       | )      |              | $ | (11    | )      |         | $ | 1,029  |       
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cafes                                |                                            |                                  | 15           |        |              |   | 12     |        |         |   | 11     |       
|Chicago       |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Sales:                               |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  | $            | 4,387  |              |   | $      | 4,812  |         |   | $      | 4,430  |        
|              |                                      | Branded Sales                              |                                  |              | 1,237  |              |   |        | 1,153  |         |   |        | 1,094  |        
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total sales                      |              |        | 5,624        |   |        |        | 5,965   |   |        |        | 5,524   |  
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cost of food and packaging:          |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  |              | (1,650 | )            |   |        | (1,835 | )       |   |        | (1,774 | )      
|              |                                      | Branded Sales                              |                                  |              | (473   | )            |   |        | (411   | )       |   |        | (444   | )      
|              |                                      | Unallocated cost of products and packaging |                                  |              | (86    | )            |   |        | (64    | )       |   |        | (85    | )      
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total cost of food and packaging |              |        | (2,209       | ) |        |        | (2,310  | ) |        |        | (2,303  | )
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Income (loss) from operations        |                                            | $                                | (2,005       | )      |              | $ | (836   | )      |         | $ | (1,114 | )     
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cafes                                |                                            |                                  | 9            |        |              |   | 10     |        |         |   | 9      |       
|Los Angeles   |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Sales:                               |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  | $            | 4,603  |              |   | $      | 3,877  |         |   | $      | 3,534  |        
|              |                                      | Branded Sales                              |                                  |              | 1,340  |              |   |        | 1,027  |         |   |        | 789    |        
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total sales                      |              |        | 5,943        |   |        |        | 4,904   |   |        |        | 4,323   |  
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cost of food and packaging:          |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  |              | (1,671 | )            |   |        | (1,398 | )       |   |        | (1,324 | )      
|              |                                      | Branded Sales                              |                                  |              | (522   | )            |   |        | (354   | )       |   |        | (311   | )      
|              |                                      | Unallocated cost of products and packaging |                                  |              | (62    | )            |   |        | (84    | )       |   |        | (95    | )      
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total cost of food and packaging |              |        | (2,255       | ) |        |        | (1,836  | ) |        |        | (1,730  | )
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Income (loss) from operations        |                                            | $                                | (1,652       | )      |              | $ | (652   | )      |         | $ | (592   | )     
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cafes                                |                                            |                                  | 10           |        |              |   | 8      |        |         |   | 7      |       
|All Markets   |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Sales:                               |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  | $            | 22,327 |              |   | $      | 22,737 |         |   | $      | 23,624 |        
|              |                                      | Branded Sales                              |                                  |              | 8,266  |              |   |        | 9,292  |         |   |        | 10,068 |        
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total sales                      |              |        | 30,593       |   |        |        | 32,029  |   |        |        | 33,692  |  
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Cost of food and packaging:          |                                            |                                  |              |        |              |   |        |        |         |   |        |       
|              |                                      | Retail                                     |                                  |              | (8,136 | )            |   |        | (8,266 | )       |   |        | (8,759 | )      
|              |                                      | Branded Sales                              |                                  |              | (3,289 | )            |   |        | (3,792 | )       |   |        | (4,458 | )      
|              |                                      | Unallocated cost of products and packaging |                                  |              | (425   | )            |   |        | (422   | )       |   |        | (380   | )      
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              |                                      |                                            | Total cost of food and packaging |              |        | (11,850      | ) |        |        | (12,480 | ) |        |        | (13,597 | )
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Income (loss) from operations        |                                            | $                                | (8,129       | )      |              | $ | (1,411 | )      |         | $ | (127   | )     
|              | Corporate general and administrative |                                            |                                  | (6,415       | )      |              |   | (5,546 | )      |         |   | (6,004 | )     
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Loss from operations                 |                                            | $                                | (14,544      | )      |              | $ | (6,957 | )      |         | $ | (6,131 | )     
|              |                                      |                                            |                                  |              |        |              |   |        |        |         |   |       
|              | Total cafes                          |                                            |                                  | 46           |        |              |   | 43     |        |         |   | 38     |       

29



---



##### Table of Contents



Results of
Operations Our fiscal
year ends on the last Sunday in December and is based on a 52-
or 53-week fiscal year. The following table sets forth statement
of operations data for the periods indicated as a percentage of
net sales:

|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |      |       |  
|---------------------------------- | ------------------------------------------------ | --------------------------------- | ----- | ------------ | ----- | ------------ | ----- | ---- | ----- | - | ----- | ---- | ----- | -
|                                   |                                                  |                                  
|                                   |                                                  | Years Ended                      
|                                   |                                                  |                                  
|                                   |                                                  | December 29,                      |       | December 30, |       | December 31,
|                                   |                                                  | 2002                              |       | 2001         |       | 2000        
|                                   |                                                  |                                   |       |              |       |             
|                                   |                                                  |                                  
|                                   |                                                  | (As a percentage of sales, except
|                                   |                                                  | number of locations data)        
|Statement of Operations Data       |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Sales:                             |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|                                   | Retail                                           |                                   |       | 73.0         | %     |              |       | 71.0 | %     |   |       | 70.1 | %    
|                                   | Branded Sales                                    |                                   |       | 27.0         | %     |              |       | 29.0 | %     |   |       | 29.9 | %    
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|                                   |                                                  | Total Sales                       |       |              | 100.0 | %            |       |      | 100.0 | % |       |      | 100.0 | %
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Operating Expenses:                |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|                                   | Cost of food and packaging                       |                                   |       | 38.7         | %     |              |       | 39.0 | %     |   |       | 40.4 | %    
|                                   | Occupancy expenses                               |                                   |       | 15.0         | %     |              |       | 12.5 | %     |   |       | 11.3 | %    
|                                   | Labor expenses                                   |                                   |       | 35.7         | %     |              |       | 34.6 | %     |   |       | 33.2 | %    
|                                   | Depreciation and amortization                    |                                   |       | 14.2         | %     |              |       | 8.4  | %     |   |       | 7.9  | %    
|                                   | Other operating expenses                         |                                   |       | 8.0          | %     |              |       | 5.8  | %     |   |       | 5.7  | %    
|                                   | General and administrative expenses              |                                   |       | 24.7         | %     |              |       | 21.3 | %     |   |       | 19.5 | %    
|                                   | Loss on disposal of assets                       |                                   |       | 3.8          | %     |              |       | 0.0  | %     |   |       | 0.0  | %    
|                                   | Provision for asset impairment and store closure |                                   |       | 7.4          | %     |              |       | 0.1  | %     |   |       | 0.2  | %    
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|                                   |                                                  | Total operating expenses          |       |              | 147.5 | %            |       |      | 121.7 | % |       |      | 118.2 | %
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Loss from operations               |                                                  |                                   | (47.5 | )%           |       |              | (21.7 | )%   |       |   | (18.2 | )%  
|Other (expense) income             |                                                  |                                   | (1.9  | )%           |       |              | 0.5   | %    |       |   | (0.5  | )%  
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Net loss                           |                                                  |                                   | (49.5 | )%           |       |              | (21.2 | )%   |       |   | (18.7 | )%  
|                                   |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Selected Operations Data           |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|Number of locations at period end: |                                                  |                                   |       |              |       |              |       |      |       |   |       |     
|                                   | Central kitchens                                 |                                   |       | 2            |       |              |       | 4    |       |   |       | 4    |      
|                                   | Cafes                                            |                                   |       | 46           |       |              |       | 43   |       |   |       | 38   |      

Year Ended December 29, 2002 Compared to
Year Ended December 30, 2001

Sales Total
sales decreased by $1.4 million, or 4.5%, from
$32.0 million to $30.6 million.

Retail sales decreased by $0.4 million, or
1.8%, from $22.7 million to $22.3 million. This
decrease was primarily due to reduced same store sales which
more than offset the sales from cafés opened in 2001 and
2002. Same-store sales decreased by $2.7 million, or 12.2%,
from $21.8 million to $19.1 million. Same-store sales
consist only of sales from cafés, and do not include
Branded sales. The decrease in same-store sales was primarily
due to the decrease in occupancy rates of many of the buildings
in which we are located.

Branded sales decreased by $1.0 million, or
11.0%, from $9.3 million to $8.3 million. This decrease was
primarily due to a decrease in sales to Tullys and QFC.

The wholesale and grocery subgroup of Branded
sales, which generally has lower margins than our other
distribution channels, has provided us with an opportunity to
more fully utilize the excess capacity of our central kitchens.
The Company has evaluated the grocery segment of our wholesale
business and decided to withdraw from this distribution channel.
The Company remains committed to growing profitable wholesale
accounts. Additionally, the Company is working with FFG in
Chicago and New York markets to supply Starbucks branded
sandwiches and salads to Starbucks Stores.

30



---



##### Table of Contents



Operating
Expenses Operating
expenses consist of cost of food and packaging, occupancy,
labor, depreciation and amortization, other operating, general
and administrative, loss on disposal of assets, and provision
for asset impairment and store closure. Total operating expenses
increased by $6.1 million, or 15.8%, from
$39.0 million to $45.1 million. As a percentage of
sales, our operating expenses increased from 121.7% to 147.5%.
Included in total operating expense in 2002 is $3.4 million
of loss on disposal of assets and provision for asset
impairment. Excluding these losses, as a percentage of sales,
our operating expenses were 136.3%. The increase in operating
expense as a percentage of sales was primarily due to the costs
related to being a public company, occupancy expenses for new
retail locations and decreased sales.

Cost of food and packaging decreased by
$0.6 million, or 5.0%, from $12.5 million to
$11.9 million due to lower sales volume. Cost of food and
packaging decreased as a percentage of sales from 39.0% to
38.7%. We expect that cost of food and packaging will increase
in future periods as our food production is outsourced.

Cost of food and packaging for retail sales
decreased by $0.2 million, or 1.6%, from $8.3 million
to $8.1 million. Cost of food and packaging for branded
sales decreased by $0.5 million, or 13.3%, from
$3.8 million to $3.3 million. The decrease for both
retail sales and branded sales was due to the lower sales
volumes. Unallocated cost of food and packaging for kitchens
remained the same at $0.4 million.

Occupancy expense consists of costs related to
the leasing of retail space for our cafés and our central
kitchens. Occupancy expense increased by $0.6 million, or
14.8%, from $4.0 million to $4.6 million. This
increase was due to the opening of five additional cafés
during the fiscal year 2001 and five cafés in the first
half of 2002, offset by the closure of two cafés in 2002.
As a percentage of sales, occupancy expense increased from 12.5%
to 15.0%, primarily due to decreased sales. Our rents are fixed
or variable determined as a percentage of sales, or a
combination of both. We expect that occupancy expense will
decrease in 2003 as our central kitchens are closed and those
leases are either terminated or sublet.

Labor expenses consist of wages and salaries paid
to employees. Labor expenses decreased by $0.2 million, or
1.6%, from $11.1 million to $10.9. This decrease was
primarily due to the workforce reductions undertaken in 2002. As
a percentage of sales, labor expenses increased from 34.6% to
35.7%. This increase was primarily due to decreased sales. In
the future, as products are purchased from outside suppliers,
such as FFG, labor expense will decrease as a result of our
central kitchen labor decreasing.

Depreciation and amortization relates to
leasehold improvements, equipment and vehicles. Depreciation and
amortization expense increased by $1.7 million, or 62.0%,
from $2.7 million to $4.4 million, primarily as a
result of opening new cafés. Depreciation in 2002 also
includes an additional $0.9 million in expense due to
shortening the lives of the Seattle and San Francisco kitchens.
As a percentage of sales, depreciation and amortization
increased from 8.4% to 14.2%.

Other operating expenses consist of direct
operating, marketing, repair and maintenance expense. Other
operating expenses increased by $0.6 million, or 31.6%,
from $1.8 million to $2.4 million, primarily as a
result of opening new cafés. As a percentage of sales,
other operating expenses increased from 5.8% to 8.0%. This
increase was primarily due to decreased sales.

General and administrative expenses relate to the
support functions performed by our corporate office, such as
finance, human resources, marketing, food development and
information systems. This expense primarily consists of salaries
of our corporate executives, senior management and staff, and
our corporate office lease and related office expenses. General
and administrative expenses increased by $0.7 million, or
10.4%, from $6.8 million to $7.5 million. The increase
was primarily due to expenses relating to being a public company
such as additional legal and accounting expenses. As a
percentage of sales, general and administrative expenses
increased from 21.3% to 24.7%, primarily due to decreased sales.
As a result of reductions in corporate personnel, general and
administrative expenses are expected to decrease in 2003.

Pursuant to a plan to close its four company
owned central kitchens and outsource production of the
Companys branded food products, the Los Angeles and
Chicago central kitchens were closed in late 2002. The Company
recorded a loss on disposition for these facilities of
approximately $1.2 million. During 2002, the Company
recorded an impairment write-down of long-lived assets of
approximately $2.3 million, primarily related to certain
café locations. These write-downs consisted primarily of
leasehold improvements and, to a

31



---



##### Table of Contents



lesser extent, equipment. We performed an
impairment analysis of our café locations and remaining
kitchens by comparing the carrying amount of the long-term
assets to their associated undiscounted cash flows. Because the
carrying amount exceeded the associated undiscounted cash flows
we recorded an impairment charge. The impairment charge reflects
the fair value of the cafés based upon discounted cash
flows versus the next book value of the assets.


Other (Expense)
Income Other
(expense) income includes interest and other expense and
interest and other income. Other (expense) income decreased
by $0.8 million from $0.2 million of income to
$0.6 million of expense. This decrease was due to interest
expense associated with new borrowings obtained during 2002 and
lower interest income in 2002 resulting from lower cash and cash
equivalents. As a percentage of sales, other
(expense) income decreased from 0.5% to (1.9%).

Net
Loss Net loss
increased by $8.3 million, or 122.4%, from
$6.8 million to $15.1 million. This increase was
primarily due to decreased sales and increased operating
expenses, including increased depreciation expense, loss of
disposal of assets and impairment provision. As a percentage of
sales, net loss increased from 21.2% to 49.5%. The Company
recognized no tax benefit from its losses in 2002 or 2001.

EBITDA represents earnings before interest
expense, interest income, income taxes, depreciation,
amortization, loss on disposal of assets, and provision for
asset impairment and store closure. EBITDA data is included
because management understands that such information is
considered by certain investors as an additional basis on which
to evaluate a companys ability to pay interest, repay debt
and make capital expenditures. Because all companies do not
calculate EBITDA identically, the presentation of EBITDA in this
Annual Report is not necessarily comparable to similarly
entitled measures of other companies. EBITDA is not intended to
represent and should not be considered more meaningful than, or
an alternative to, measures of operating performance as
determined in accordance with generally accepted accounting
principles. EBITDA for the 52-week periods ended
December 29, 2002 and December 30, 2001 was
($6.8) million and ($4.2) million, respectively. The
decreased in EBITDA was primarily due to decreased sales and
increased operating expenses.

Year Ended December 30, 2001 Compared to
Year Ended December 31, 2000

Sales Total sales decreased by
$1.7 million, or 4.9%, from $33.7 million to
$32.0 million.

Retail sales decreased by $0.9 million, or
3.8%, from $23.6 million to $22.7 million. Of this
decrease, $0.5 million was attributable to the closing of
one café in Seattle during 2001. The remainder of this
decrease was a result of a decrease in the occupancy rates of
many of the buildings we are located in, which more than offset
sales from additional cafes opened in 2001 and 2002. Same-store
sales decreased by $1.3 million, or 5.6%, from
$23.1 million to $21.8 million. Same-store sales
consist only of sales from cafés, and do not include sales
from box lunches or catered meals. The decrease in same-store
sales was primarily due to the decrease in occupancy rates of
many of the buildings in which we are located.

Branded sales decreased by $0.8 million, or
7.7%, from $10.1 million to $9.3 million. This
decrease was primarily attributable to the loss of three
customers. Kozmo.com, an Internet-based consumer delivery
service ceased operations in April 2001. Our relationship with
Costco and Safeway also ended in 2001 due to unprofitable sales.
In June 2000, we began providing Tullys Coffee with food
products for selected retail cafés located in Seattle and
San Francisco.

Operating
Expenses Operating
expenses decreased $0.8 million, or 2.1%, from
$39.8 million to $39.0 million due to reasons
described in the following paragraphs. As a percentage of sales,
our operating expenses increased from 118.2% to 121.7%. This
increase was primarily due to decreased sales.

Cost of food and packaging decreased by
$1.1 million, or 8.2%, from $13.6 million to
$12.5 million. Cost of food and packaging decreased as a
percentage of sales from 40.4% to 39.0%. Cost of food and
packaging for retail sales decreased by $0.5 million, or
5.2%, from $8.8 million to $8.3 million. This decrease
was primarily due to decreased retail sales. Cost of food and
packaging for branded sales decreased by $0.7 million, or
15.0%, from $4.5 million to $3.8 million. This
decrease was primarily due to decreased branded sales.

32



---



##### Table of Contents



Occupancy expense increased by $0.2 million,
or 5.0%, from $3.8 million to $4.0 million. This
increase was primarily due to the opening of five additional
cafés in 2001. As a percentage of sales, occupancy expense
increased from 11.3% to 12.5%, primarily due to decreased sales.

Labor expense decreased by $0.1 million, or
0.8%, from $11.2 million to $11.1 million. As a percentage
of sales, labor expense increased from 33.2% to 34.6%. This
increase was due to a decrease in sales.

Depreciation and amortization was unchanged. As a
percentage of sales, depreciation and amortization increased
from 7.9% to 8.4%. This increase was due to decreased sales.

Other operating expenses decreased by
$0.1 million, or 3.7%, from $1.9 million to
$1.8 million. As a percentage of sales, other operating
expenses increased from 5.7% to 5.8% because of the decrease in
sales.

General and administrative expenses increased by
$0.2 million, or 3.9%, from $6.6 million to
$6.8 million, primarily due to wage and salary increases,
offset by increased efficiencies at the corporate level. As a
percentage of sales, general and administrative expenses
increased from 19.5% to 21.3%, primarily due to decreased
sales.

Other (Expense)
Income Other
(expense) income decreased $0.3 million, or 199.4%,
from ($0.16) million to $0.16 million. This change was due
to the interest income generated from the proceeds associated
with the Series C financing that closed in February 2001
and the initial public offering that closed in May 2001. This
was complemented by a lower interest expense due to the
repayment of the line of credit in May 2001. As a percentage of
sales, other (expense) income increased from (0.5%) to 0.5%.

Net
Loss Net loss
increased by $0.5 million, or 8.2%, from $6.3 million
to $6.8 million. This increase was primarily due to
decreased sales and increased occupancy, labor and general and
administrative expenses. As a percentage of sales, net loss
increased from 18.7% to 21.2%. The Company recognized no tax
benefit from its losses in 2001 and 2000.

EBITDA represents earnings before interest
expense, income taxes, depreciation, amortization loss on
disposal of assets, and provision for asset impairment and store
closure. In 2001 interest income was also excluded. EBITDA for
the fiscal year ended December 30, 2001 and 2000 was ($4.2)
million and ($3.4) million, respectively.

Liquidity and
Capital Resources

Net cash used in operating activities during the
fiscal years ended December 29, 2002 and December 30, 2001
was $5.3 million and $5.6 million, respectively. Net
cash used in operating activities in each year resulted
primarily from net loss before non-cash charges.

Net cash used in investing activities for the
fiscal years ended December 29, 2002 and December 30,
2001 was approximately $2.3 million and $3.8 million,
respectively. Net cash used in investing activities resulted
from capital additions primarily related to opening additional
cafés and, in 2001, improvements to the central kitchens.

Net cash provided by financing activities for the
fiscal years ended December 29, 2002 and December 30,
2001 was $1.8 million and $15.0 million, respectively.
The financing activities during 2002 consisted primarily of cash
received from the net proceeds of $2.8 million in debt
financing ($1.0 million from FFG, $1.2 million from
Laurus, $0.5 million from bank borrowings, and
$0.1 million from a revolving line of credit). Offset by
$0.4 million in repayment of notes, $0.6 million from
checks issued in excess of bank deposits, and $0.2 million
from debt issue costs. Net cash provided by financing activities
for the year ended December 30, 2001 was $15.0 million
resulting primarily from the issuance of capital stock, which
was partially offset by financing costs, and the repayment of a
line of credit of $2.0 million. In January and February
2001, net cash provided from the issuance of additional shares
of Series C preferred stock was $3.0 million. In May
2001, net cash provided from our initial public offering was
approximately $13.6 million.

33



---



##### Table of Contents



At December 29, 2002, we had the contractual
cash obligations as set forth in the table below (in thousands):

|                                   |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ----- | ------ | --------- |  | ----- | ----- | ----- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |       |        | Less than |  | 1-3   |       | 4-5   |  | After 5
|Contractual Obligations            |  | Total |        | 1 Year    |  | Years |       | Years |  | Years  
|                                   |  |       |        |           |  |       |       |       |  |        
|Line of Credit Borrowings          |  | $     | 129    |           |  |       | 129   |       |  |         |       |  |  |   |       |  |  |   |       | 
|Notes Payable                      |  |       | 2,415  |           |  |       | 2,415 |       |  |         |       |  |  |   |       |  |  |   |       | 
|Operating Leases(a)                |  |       | 13,823 |           |  |       | 2,702 |       |  |         | 5,095 |  |  |   | 3,218 |  |  |   | 2,808 | 
|Capital Lease Obligations          |  |       | 481    |           |  | $     | 148   |       |  | $       | 253   |  |  | $ | 80    |  |  |   |       | 
|Total Contractual Cash Obligations |  | $     | 16,848 |           |  | $     | 5,394 |       |  | $       | 5,348 |  |  | $ | 3,298 |  |  | $ | 2,808 | 
|                                   |  |       |        |           |  |       |       |       |  |         |       |  |  |   |       |  |  |   |       | 



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(a) | Does not include accrued and deferred rents at
    December 29, 2002, which are included in accounts payable.

Since inception we have financed our operations
primarily through the issuance of capital stock and debt. Since
inception through December 29, 2002, we have raised cash of
approximately $65.7 million from sales of debt and equity
securities. In addition to funding capital expenditures, which
have approximated $27.8 million since inception, cash
provided by financing activities has funded our initiatives in
business and market development and related operating losses.
Since inception through the year ended December 29, 2002,
we have incurred net losses of approximately $63.2 million.
In the near term, operating losses may continue despite actions
taken to reduce negative cash flow from operations. Actions
taken to reduce negative cash flow from operations, including
improving operational efficiencies, cost controls and cutbacks,
workforce reductions and closing of certain unprofitable
operating properties, continued during 2002.

In June 2002, the Company entered into a
Securities Purchase Agreement with Laurus Master Fund, Ltd.
(Laurus) in connection with the issuance of a
$1.25 million 14% convertible note (the 14%
convertible notes) to Laurus and a warrant to purchase
250,000 shares of common stock at exercise prices ranging
from $1.43 to $1.95. The note is collateralized by all of the
Companys assets. The note was initially convertible into
1,041,667 shares of common stock. Net proceeds to the
Company were $1.14 million after paying fees to
Laurus fund manager and attorneys. The Company recorded a
debt discount of approximately $225,000 related to the issuance
of the warrants and the beneficial conversion feature. The note
was convertible into common stock from the date of issuance at
an initial conversion price of $1.20 per share (the Fixed
Conversion Price). If the Company elected to convert the
note at a time when the market price is less than $1.50 per
share, the conversion price would be at a discount to market.
The Company fully recognized the beneficial conversion feature
of approximately $112,000 as interest expense during 2002. In
December 2002, certain terms of the 14% convertible note were
amended to, among other things, change the Fixed Conversion
Price to $0.50 per share and defer principal payments until
March 2003. Additionally, in December 2002, the Company issued
to Laurus a warrant to purchase 150,000 shares of common stock
at an exercise price of $0.50 per share. The estimated fair
value of the warrant of $20,000 was recorded as deferred debt
issue costs. In January 2003, the note was amended to provide
that when the Company provides Laurus with a conversion notice
with respect to a scheduled repayment date, Laurus may elect to
calculate the conversion price for such issuance and receive
such shares of common stock in advance of the scheduled
repayment date. In March 2003, certain terms of the note were
amended to, among other things, change the Fixed Conversion
Price to $0.10 per share. The amendment to the note suspends our
obligation to make monthly payments of principal until the
latter of (i) June 2, 2003 and (ii) the first
business day of the month following the earlier of June 30,
2003 or the closing on an investment by Deutsche Bank or any of
its affiliates, suspends the right of Laurus to demand
conversion under the note until the earlier of June 30,
2003 or the closing on an investment by Deutsche Bank or any of
its affiliates, and restructures the repayment schedule for the
remaining payments over a seven month period following the
resumption of principal payments. The amendment also eliminates
the weighted average anti-dilution price protections
contained in the note. Additionally, in March 2003, terms of the
250,000 warrants issued in June 2002 were amended to, among
other things, change the exercise price to $0.10 per share and
suspend the right of Laurus to exercise the warrant until the
earlier of June 30, 2003 or the closing on an investment by
Deutsche Bank or any of its

34



---



##### Table of Contents



affiliates. As a result of the amended conversion
price for the notes and exercise price for the warrants being
less than the market price of the common stock on the amendment
date, the Company will recognize the estimated fair value of the
beneficial conversion feature as interest expense and an
increase in common stock and additional paid-in capital in 2003.


In August 2002, we entered into a one-year
$1.0 million revolving credit line based upon and
collateralized by our accounts receivable. We pay daily fees of
0.0667% computed on the outstanding daily balance. As of
December 29, 2002, approximately $270,000 was available for
borrowing, of which $129,000 had been drawn. We expect that our
accounts receivable and the amounts available to us under this
facility will be reduced during 2003, primarily due a reduction
in our sales to wholesale accounts.

In September 2002, we entered into a $500,000
note payable borrowing from U.S. Bank. The note is secured
by a certificate of deposit owned by the Companys Chief
Executive Officer and bears interest, payable monthly, at an
annual rate of 3.59%. The note was initially due March 31,
2003, which has since been extended to March 31, 2004.

In October 2002, we entered into negotiations to
issue $2.0 million in debt and equity securities to FFG or
one or more of its affiliates, and to outsource the production
of our BRIAZZ-branded food items to FFG in each of our
geographic markets. From October 2002 through January 2003, FFG
and its affiliates loaned us $1.45 million in secured
demand notes in anticipation of closing the $2.0 million
financing.

On March 6, 2003, we completed the offer and
sale of $2.0 million in secured promissory notes,
series D preferred stock and warrants to purchase common
stock to Briazz Venture, L.L.C., an affiliate of FFG (referred
to as FFG herein), pursuant to which we issued a
$2.0 million secured promissory note in consideration for
approximately $0.55 million in cash and conversion of the
$1.45 million principal amount of outstanding demand notes
issued to FFG and its affiliates. We also issued a five-year
warrant exercisable for 1,193,546 shares of our common
stock at a price per share of $0.50, and 100 shares of
series D preferred stock, and we granted registration
rights covering the shares of common stock issuable upon
conversion of the preferred stock and exercise of the warrant.
We agreed to cause up to one person designated by FFG to be
appointed to our Board of Directors, subject to increase if we
receive shareholder approval. We agreed that, if we receive
shareholder approval, we will cause up to five persons
designated by FFG to be appointed to our Board of Directors, in
accordance with the rules and regulations of Nasdaq or any
exchange on which our common stock is listed. The promissory
note is secured by all of our assets and bears interest at 10%
per year. Interest is payable monthly in arrears, in cash. The
note matures, and all principal and accrued and unpaid interest
becomes due, on March 6, 2004. The note may, however,
become due prior to March 6, 2004 if we fail to meet
financial covenants set forth in the note.

The maturity date of the note is dependent upon
our financial performance. The note requires that as of the end
of each fiscal quarter beginning with the second fiscal quarter
of 2003, we will have either generated positive EBITDA for such
fiscal quarter or we will have generated positive EBITDA for the
cumulative period beginning on the first day of the second
fiscal quarter of 2003 through the end of the fiscal quarter in
question. In the event we do not achieve at least one of these
goals in any fiscal quarter, the note will mature on the 45th
day after the end of the fiscal quarter. For example, if we do
not generate positive EBITDA for our second fiscal quarter of
2003, which ends on June 29, 2003, the note will be due on
August 13, 2003. For purposes of the note, EBITDA means net
income before extraordinary items, income taxes, interest
expense, investment income, non-recurring expenses, depreciation
and amortization, plus any losses incurred by us because of
FFGs failure to comply with certain of its obligations
under the food production agreement. In each of the last five
completed fiscal years, we have generated negative EBITDA. We
are not currently able to determine whether we will generate
positive EBITDA during the second, third or fourth fiscal
quarters of 2003.

If our shareholders approve the conversion of the
series D preferred stock, the series D preferred stock will
be convertible at the option of the holder, for an aggregate
conversion price of up to $2.0 million for a period of five
years, into that number of shares of our common stock as is
equal to 66.67% (the Applicable Percentage) of our
outstanding shares of common stock, on a post-conversion,
fully-diluted basis as measured on the date of shareholder
approval (but excluding from the calculation of our
fully-diluted share capital, subject to certain limitations,
shares subject to our outstanding stock options and other shares
reserved

35



---



##### Table of Contents



for issuance under our stock incentive plans).
The number of shares of our common stock into which our
series D preferred stock may be converted and the
conversion price per share of common stock will initially be
fixed on the date that the series D preferred stock first
becomes convertible in accordance with the foregoing formula. If
our shareholders approve the conversion of our series D
preferred stock, then based upon our outstanding securities as
of March 6, 2003, assuming that we do not issue, cancel or
modify any of our securities prior to the date of shareholder
approval and assuming that FFG does not exercise its warrant
prior to the date of shareholder approval, the series D
preferred stock would initially be convertible into a total of
approximately 33,171,900 shares of our common stock at a
conversion price of approximately $0.06 per share of common
stock. The exact number of shares of our common stock that may
be issued on conversion of the series D preferred stock and
the exact conversion price of the series D preferred stock
cannot be determined until the date we receive shareholder
approval.


If our series D preferred stock becomes
convertible, then so long as the secured promissory note remains
outstanding, the series D preferred stock will be entitled
to vote, with certain exceptions, together with our common stock
on an as-converted basis. If the conversion of our series D
preferred stock is not approved by our shareholders, the
series D preferred stock will not become convertible at the
option of the holder and will not be entitled to vote on an
as-converted basis. Any shares of series D preferred stock
outstanding on the fifth anniversary of the initial issuance of
our series D preferred stock will be automatically
converted into shares of our common stock at a rate of 1/100th
of a share of our common stock per share of our series D
preferred stock.

Subject to certain exceptions, if we issue any
additional shares of our common stock or any securities
convertible or exercisable for shares of our common stock at an
effective price that is less than the conversion price of the
series D preferred stock or exercise price of the warrant,
the conversion or exercise price will be adjusted to equal the
effective price at which the new securities were issued. Upon
the series D preferred stock becoming convertible, the warrant
will automatically terminate. Any exercise of the warrant prior
to such time will reduce the aggregate conversion price and
number of shares issuable upon conversion of the series D
preferred stock.

Victor D. Alhadeff, the Companys founder
and Chief Executive Officer, has entered into a voting agreement
with FFG in which he has agreed to vote all shares of our voting
capital stock that he owns, of record or beneficially, or over
which he has voting authority or discretion to approve the
common stock issuable upon conversion of the series D
preferred stock. In addition, we have agreed that by
April 5, 2003, FFG will receive voting agreements from the
beneficial holders of not less than 35% of our outstanding
common stock, in which the holders agree to vote their shares of
our common stock in favor of the approval of the issuance of
shares upon conversion of the series D preferred stock. In
the event that FFG does not receive these agreements and does
not waive this provision, an event of default will exist under
the terms of the note issued to FFG.

Upon the occurrence of event of default under the
FFG note, the amount due and owing under the note shall be
increased to 130% of the then outstanding aggregate principal
amount of the note together with any accrued and unpaid interest
and fees. While any event of default is continuing, a default
rate of 14% will apply and FFG may declare all amounts owning
under the note immediately due and payable.

In February 2003, the Company entered into a
letter of intent to sell senior secured notes and warrants to
purchase common stock (the DB securities) to DB
Advisors, LLC, an affiliate of Deutsche Bank (DB),
and other investors. If completed, this financing would result
in additional cash proceeds of approximately $3.9 million
and conversion of securities issued to FFG into DB securities.
The notes would bear interest at Libor plus 1%, mature two years
from date of closing and be collateralized by a pledge of all
Company assets. In addition to notes, investors would receive
warrants equal to approximately 78% of the common shares of
BRIAZZ on a fully-diluted, post-exercise basis with an exercise
price of $0.10 per share and members of management would receive
warrants to purchase 12% of the common shares of BRIAZZ on a
fully-diluted, post-exercise basis on the same terms as the
investors. Additionally, the investors would be entitled to
designate four of the five directors serving on the BRIAZZ board
of directors. The closing of the financing is subject to, among
other things, negotiation and execution of definitive documents
and satisfaction of

36



---



##### Table of Contents



conditions to closing, including the receipt of
BRIAZZ shareholder approval and the conversion by FFG of its
investment securities as described above. There can be no
assurance that the negotiations with the investors will be
successful or that the offering will be completed. The Company
anticipates using the additional cash proceeds from this
financing to repay $1.8 million of the Companys
current outstanding debt, which includes the debt owed to Laurus
and repayment of our line of credit, with the remainder used for
working capital.


As disclosed in the Form 8-K filed
February 21, 2003, FFG has indicated to us that it intends
to participate in the proposed financing with DB if the
financing is substantially on the same terms as set forth in the
letter of intent signed with DB and if the agreements and
related documentation are satisfactory to FFG. If FFG were to
participate in the proposed financing with DB, the notes,
warrants and Series D preferred stock issued to FFG would
be cancelled as payment for the securities issued in the DB
financing. The completion of the DB financing is subject to a
number of conditions, including but not limited to the
completion of due diligence satisfactory to DB, negotiation and
execution of agreements with DB, FFG and other investors, the
receipt of consents from Laurus and other third parties and the
receipt of shareholder consent. There can be no assurance that
this offering will be completed.

At December 29, 2002, we had cash and cash
equivalents of approximately $0.5 million. Since
December 29, 2002, we have used a combination of cash and
cash equivalents, operating revenues and the proceeds of
additional borrowings to meet our immediate cash needs; however,
we will need additional capital in the immediate future by the
end of the second quarter of 2003 in order to continue operating
our business. We are attempting to conserve cash by reducing
expenses and by delaying or deferring payments to some of our
suppliers and on some of our leases. We will need to raise
additional capital to finance our operations, as well as to
enhance our operations, fund our expansion, respond to
competitive pressures and repay our borrowings when they become
due. There can be no assurance that we will be able to obtain
additional financing at terms favorable to us, or at all, reduce
expenses or successfully complete other steps to continue as a
going concern. If we are unable to obtain sufficient funds to
satisfy our cash requirements within the required timeframe on
terms favorable to us, we may be forced to curtail operations,
dispose of assets, or seek extended payment terms from our
vendors. Such events would materially and adversely affect our
financial position and results of operations. In the event that
such steps are not sufficient, or we believe that they will not
be sufficient, we may be required to discontinue our operations.

Poor financial results, any inability to comply
with the terms of our borrowings, unanticipated expenses or
unanticipated opportunities that require financial commitments
could give rise to additional financing requirements sooner than
we expect. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership
of our existing shareholders would be reduced, and these
securities may have rights, preferences or privileges senior to
those of our common stock. If adequate funds are not available
or are not available on acceptable terms, our ability to enhance
our services, fund our expansion, respond to competitive
pressures or take advantage of business opportunities would be
significantly limited, and we might need to significantly
restrict or discontinue our operations.

The accompanying financial statements have been
prepared on the basis that we will continue as a going concern
and do not include any adjustments to reflect the possible
future effects on the recoverability of assets and liquidation
of liabilities that may result from this uncertainty. We have
incurred substantial operating losses and negative cash flows
from operations since inception and had an accumulated deficit
of $70.2 million at December 29, 2002. As disclosed in
the report of independent accountants on our financial
statements, these matters raise substantial doubt about our
ability to continue as a going concern. To date, we have
financed operations principally through the net proceeds from
debt and equity offerings. Our ability to continue as a going
concern is dependent upon numerous factors, including our
ability to obtain additional financing, our ability to increase
our level of future revenues or our ability to reduce operating
expenses.

Recent
Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143). SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset

37



---



##### Table of Contents



retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result
from the acquisition, construction, development, and
(or) the normal operation of a long-lived asset, except for
certain obligations of lessees. The provisions of SFAS
No. 143 will be effective for fiscal years beginning after
June 15, 2002, however early application is permitted. The
adoption of SFAS No. 143 will not have a material impact on
the Companys results of operations or financial position.


In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS No. 146). SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The adoption of SFAS
No. 146 did not have a material impact on our results of
operations or financial position.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Guarantees of Indebtedness of Others
an Interpretation of FASB Statement No. 5, 57 and 107 and
Rescission of FASB Interpretation No. 34 (FIN 45).
This interpretation expands on the existing accounting guidance
and disclosure requirements for most guarantees. It requires
that at the time a company issues a guarantee, the company must
disclose that information in its interim and annual financial
statements. The provisions for initial recognition and
measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31,
2002. The Company does not believe FIN 45 will have a material
impact on its results of operations, or financial position.

Critical Accounting Policies

We have identified the policies below as critical
to our business operations and the understanding of our results
of included in operations. The impact and any associated risks
related to these policies on our business operations is
discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For
a detailed discussion on the application of these and other
accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements included in this Annual Report. Our
preparation of this Annual Report on Form 10-K requires us
to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements,
and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results
will not differ from those estimates.

Revenue Recognition The Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101), as
amended by SAB 101A and 101B. SAB 101 requires that four basic
criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee
is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and
(4) are based on managements judgments regarding the
fixed nature of the fee charged for services rendered and
products delivered and the collectibility of those fees. Should
changes in conditions cause management to determine these
criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.
The Company has concluded that its revenue recognition policy is
appropriate and in accordance with generally accepted accounting
principles and SAB No. 101.

Valuation of Long-Lived Assets We periodically review the carrying
value of our long-lived assets for continued appropriateness.
This review is based upon our projections of anticipated future
cash flows. We record impairment losses on long-lived assets
used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amount of those items. Our cash flow estimates are
based on historical results adjusted to reflect our best
estimate of future market and operating conditions. While we
believe that our estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially
affect our evaluations. The net carrying value of assets not
recoverable are reduced to their fair value. Our estimates of

38



---



##### Table of Contents



fair value represent our best estimate based on
either discounted cash flows or appraised values, depending on
the nature of the asset.







|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk.

We have no derivative financial instruments or
derivative commodity investments. We invest our excess cash in
investment grade, highly liquid investments, consisting of money
market instruments, bank certificates of deposit and short-term
investments in commercial paper. We do not believe these
investments are subject to significant market risk.

Our $1.25 million convertible note and our
$2.0 million non-convertible note are not subject to market
risk from changes in interest rate; however, we will not receive
any benefit if interest rates decline.

All of our transactions are conducted, and our
accounts are denominated, in United States dollars. Accordingly,
we are not exposed to foreign currency risk.

Many of the food products purchased by us are
affected by commodity pricing and are, therefore, subject to
price volatility caused by weather, production problems,
delivery difficulties, utility costs and other factors that are
outside our control. We believe that substantially all of our
food and supplies are available from numerous sources, which
helps to control food commodity risk; however, we will be
reliant upon FFG to control food commodity risk for those
products we purchase from FFG. We believe we have the ability to
increase menu prices, or vary the menu items offered, if needed
in response to a food product price increase.




Item 8.     Financial
Statements and Supplementary Data.

BRIAZZ, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                   |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                   |  | Page
|                                                                                                                                   |  |     
|Report of Independent Accountants                                                                                                  |  |      | 40 | 
|Balance Sheets as of December 29, 2002 and
    December 30, 2001                                                                   |  |      | 41 | 
|Statements of Operations for the years ended
    December 29, 2002, December 30, 2001 and
    December 31, 2000                    |  |      | 42 | 
|Statement of Stockholders Equity (Deficit)
    for the years ended December 29, 2002, December 30,
    2001 and December 31, 2000 |  |      | 43 | 
|Statements of Cash Flows for the years ended
    December 29, 2002, December 30, 2001 and
    December 31, 2000                    |  |      | 44 | 
|Notes to the Financial Statements                                                                                                  |  |      | 45 | 

39



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
BRIAZZ, Inc.

In our opinion, the financial statements listed
in the accompanying index present fairly, in all material
respects, the financial position of BRIAZZ, Inc. at
December 29, 2002 and December 30, 2001 and the
results of its operations and its cash flows for each of the
three years in the period ended December 29, 2002 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the financial statements, the
Company has reported operating losses and negative cash flows
from operations since inception. These are conditions that raise
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.



| |                                
| | -------------------------------
| | /s/  PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

March 11, 2003


40



---



##### Table of Contents



BRIAZZ, INC.

BALANCE SHEETS

|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |         |        | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------------ | ------ |  | ------ | ------- | ------ | 
|                                                               |                                                                                                                                                                           | December 29,                               |       | December 30,
|                                                               |                                                                                                                                                                           | 2002                                       |       | 2001        
|                                                               |                                                                                                                                                                           |                                            |       |             
|                                                               |                                                                                                                                                                           |                                           
|                                                               |                                                                                                                                                                           | (In thousands,                            
|                                                               |                                                                                                                                                                           | except share data)                        
|ASSETS                                                        
|Current assets                                                 |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               | Cash and cash equivalents                                                                                                                                                 |                                            | $     | 491          |        |  | $      | 6,193   |       
|                                                               | Current portion of restricted certificates of
    deposit                                                                                                                 |                                            |       | 40           |        |  |        | 149     |       
|                                                               | Accounts receivable, net of allowance of $135
    (2002) and $104 (2001)                                                                                                  |                                            |       | 428          |        |  |        | 472     |       
|                                                               | Inventory                                                                                                                                                                 |                                            |       | 409          |        |  |        | 507     |       
|                                                               | Prepaid expenses                                                                                                                                                          |                                            |       | 611          |        |  |        | 366     |       
|                                                               | Other current assets                                                                                                                                                      |                                            |       | 154          |        |  |        | 81      |       
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total current assets                       |       |              | 2,133  |  |        |         | 7,768  | 
|Property and equipment, net                                    |                                                                                                                                                                           |                                            | 7,897 |              |        |  | 13,555 |        
|Restricted certificates of deposit, net of
    current portion |                                                                                                                                                                           |                                            | 423   |              |        |  | 453    |        
|Deposits and other assets                                      |                                                                                                                                                                           |                                            | 252   |              |        |  | 177    |        
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total assets                               |       | $            | 10,705 |  |        | $       | 21,953 | 
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                      
|Current liabilities                                            |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               | Line of credit borrowings                                                                                                                                                 |                                            | $     | 129          |        |  | $      |        |       
|                                                               | Accounts payable                                                                                                                                                          |                                            |       | 2,737        |        |  |        | 2,076   |       
|                                                               | Accrued compensation                                                                                                                                                      |                                            |       | 758          |        |  |        | 996     |       
|                                                               | Other accrued liabilities                                                                                                                                                 |                                            |       | 894          |        |  |        | 492     |       
|                                                               | Notes payable                                                                                                                                                             |                                            |       | 1,390        |        |  |        | 37      |       
|                                                               | Demand notes payable to related party
    (Note 4,)                                                                                                                       |                                            |       | 1,025        |        |  |        |        |       
|                                                               | Current portion of capital lease obligations                                                                                                                              |                                            |       | 109          |        |  |        | 101     |       
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total current liabilities                  |       |              | 7,042  |  |        |         | 3,702  | 
|Capital lease obligations, net of current portion              |                                                                                                                                                                           |                                            | 234   |              |        |  | 335    |        
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total liabilities                          |       |              | 7,276  |  |        |         | 4,037  | 
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|Commitments and contingencies (Notes 2 and
    10)             |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|Stockholders equity                                           |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               | Common stock and additional paid in capital, no
    par value; 100,000,000 shares authorized; 5,880,173
    (2002) and 5,824,993 (2001) shares issued and
    outstanding |                                            |       | 73,819       |        |  |        | 73,955  |       
|                                                               | Deferred stock compensation                                                                                                                                               |                                            |       | (203         | )      |  |        | (981    | )     
|                                                               | Accumulated deficit                                                                                                                                                       |                                            |       | (70,187      | )      |  |        | (55,058 | )     
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total stockholders equity                 |       |              | 3,429  |  |        |         | 17,916 | 
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        
|                                                               |                                                                                                                                                                           | Total liabilities and stockholders equity |       | $            | 10,705 |  |        | $       | 21,953 | 
|                                                               |                                                                                                                                                                           |                                            |       |              |        |  |        |        

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

41



---



##### Table of Contents



BRIAZZ, INC.

STATEMENTS OF OPERATIONS

|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |        |        | 
|---------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------- | --------- | ------------ | ------ | ------------ | --------- | ------ | ------ | - | --------- | ------ | ------ | 
|                                                                                   |                                                  |                                  
|                                                                                   |                                                  | Years Ended                      
|                                                                                   |                                                  |                                  
|                                                                                   |                                                  | December 29,                      |           | December 30, |        | December 31,
|                                                                                   |                                                  | 2002                              |           | 2001         |        | 2000        
|                                                                                   |                                                  |                                   |           |              |        |             
|                                                                                   |                                                  |                                  
|                                                                                   |                                                  | (In thousands, except share data)
|Sales                                                                              |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   | Retail                                           |                                   | $         | 22,327       |        |              | $         | 22,737 |        |   | $         | 23,624 |       
|                                                                                   | Branded Sales                                    |                                   |           | 8,266        |        |              |           | 9,292  |        |   |           | 10,068 |       
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   |                                                  | Total Sales                       |           |              | 30,593 |              |           |        | 32,029 |   |           |        | 33,692 | 
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Operating Expenses                                                                 |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   | Cost of food and packaging                       |                                   |           | 11,850       |        |              |           | 12,480 |        |   |           | 13,597 |       
|                                                                                   | Occupancy expenses                               |                                   |           | 4,602        |        |              |           | 4,010  |        |   |           | 3,818  |       
|                                                                                   | Labor expenses                                   |                                   |           | 10,925       |        |              |           | 11,098 |        |   |           | 11,186 |       
|                                                                                   | Depreciation and amortization                    |                                   |           | 4,352        |        |              |           | 2,686  |        |   |           | 2,657  |       
|                                                                                   | Other operating expenses                         |                                   |           | 2,434        |        |              |           | 1,849  |        |   |           | 1,921  |       
|                                                                                   | General and administrative expenses              |                                   |           | 7,546        |        |              |           | 6,837  |        |   |           | 6,581  |       
|                                                                                   | Loss on disposal of assets                       |                                   |           | 1,172        |        |              |           |       |        |   |           |       |       
|                                                                                   | Provision for asset impairment and store closure |                                   |           | 2,256        |        |              |           | 26     |        |   |           | 63     |       
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   |                                                  | Total operating expenses          |           |              | 45,137 |              |           |        | 38,986 |   |           |        | 39,823 | 
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Loss from operations                                                               |                                                  |                                   | (14,544   | )            |        |              | (6,957    | )      |        |   | (6,131    | )     
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Other (expense) income                                                             |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   | Interest and other expense                       |                                   |           | (637         | )      |              |           | (125   | )      |   |           | (217   | )     
|                                                                                   | Interest and other income                        |                                   |           | 52           |        |              |           | 280    |        |   |           | 61     |       
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|                                                                                   |                                                  |                                   | (585      | )            |        |              | 155       |        |        |   | (156      | )     
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Net loss                                                                           |                                                  |                                   | (15,129   | )            |        |              | (6,802    | )      |        |   | (6,287    | )     
|Accretion of dividends/amortization of discount
    on preferred stock             |                                                  |                                   |          |              |        |              | 4,318     |        |        |   | 3,319     |       
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Net loss attributable to common stockholders                                       |                                                  | $                                 | (15,129   | )            |        | $            | (11,120   | )      |        | $ | (9,606    | )     
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Basic and diluted net loss per share                                               |                                                  | $                                 | (2.59     | )            |        | $            | (2.86     | )      |        | $ | (2,455.68 | )     
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       
|Weighted-average shares used in computing basic
    and diluted net loss per share |                                                  |                                   | 5,852,362 |              |        |              | 3,889,472 |        |        |   | 3,912     |       
|                                                                                   |                                                  |                                   |           |              |        |              |           |        |        |   |           |       

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

42



---



##### Table of Contents



BRIAZZ, INC.

STATEMENT OF STOCKHOLDERS EQUITY
(DEFICIT)

|                                                                |  |                 |       |          |  |              |        |         |  |       |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | --------------- | ----- | -------- |  | ------------ | ------ | ------- |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  |                 |       |          |  |              |        |        
|                                                                |  | Common Stock    |       |          |  |              |        |        
|                                                                |  | and Additional  |       |          |  |              |        |        
|                                                                |  | Paid-in Capital |       | Deferred |  |              |        |        
|                                                                |  |                 |       | Stock    |  | Accumulated  |        |        
|                                                                |  | Shares          |       | Amount   |  | Compensation |        | Deficit |  | Total
|                                                                |  |                 |       |          |  |              |        |         |  |      
|                                                                |  |                
|                                                                |  | (In thousands) 
|Balance at December 26, 1999                                    |  |                 | 3     |          |  | $            | 2,075  |         |  | $     |       |   |  | $ | (38,592 | ) |  | $ | (36,517 | )
|Accretion of mandatorily redeemable preferred
    stock         |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | (3,320  | ) |  |   | (3,320  | )
|Common stock issued upon exercise of stock options              |  |                 | 1     |          |  |              | 1      |         |  |       |       |   |  |   |        |   |  |   | 1       |  
|Change in unearned compensation                                 |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | 44      |   |  |   | 44      |  
|Deferred compensation related to grant of stock
    options     |  |                 |      |          |  |              |       |         |  |       | (1,182 | ) |  |   | 1,182   |   |  |   |        |  
|Amortization of deferred compensation                           |  |                 |      |          |  |              |       |         |  |       | 122    |   |  |   |        |   |  |   | 122     |  
|Stock repurchased or redeemed                                   |  |                 | (3    | )        |  |              |       |         |  |       |       |   |  |   |        |   |  |   |        |  
|Net loss                                                        |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | (6,287  | ) |  |   | (6,287  | )
|                                                                |  |                 |       |          |  |              |        |         |  |       |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                    |  |                 | 1     |          |  |              | 2,076  |         |  |       | (1,060 | ) |  |   | (46,973 | ) |  |   | (45,957 | )
|Issuance of common stock, net of issuance costs                 |  |                 | 2,000 |          |  |              | 13,583 |         |  |       |       |   |  |   |        |   |  |   | 13,583  |  
|Accretion of mandatorily redeemable preferred
    stock         |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | (1,283  | ) |  |   | (1,283  | )
|Conversion of preferred stock to common stock                   |  |                 | 3,816 |          |  |              | 58,081 |         |  |       |       |   |  |   |        |   |  |   | 58,081  |  
|Beneficial conversion feature on preferred stock                |  |                 |      |          |  |              | 3,034  |         |  |       |       |   |  |   |        |   |  |   | 3,034   |  
|Amortization of discount on preferred stock                     |  |                 |      |          |  |              | (3,034 | )       |  |       |       |   |  |   |        |   |  |   | (3,034  | )
|Common stock issued upon exercise of stock options              |  |                 | 4     |          |  |              | 6      |         |  |       |       |   |  |   |        |   |  |   | 6       |  
|Common stock issued upon exercise of stock
    warrants         |  |                 | 4     |          |  |              |       |         |  |       |       |   |  |   |        |   |  |   |        |  
|Deferred compensation related to the grant of
    stock options |  |                 |      |          |  |              | 209    |         |  |       | (209   | ) |  |   |        |   |  |   |        |  
|Amortization of deferred compensation                           |  |                 |      |          |  |              |       |         |  |       | 288    |   |  |   |        |   |  |   | 288     |  
|Net loss                                                        |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | (6,802  | ) |  |   | (6,802  | )
|                                                                |  |                 |       |          |  |              |        |         |  |       |        |   |  |   |         |   |  |   |         |  
|Balance at December 30, 2001                                    |  |                 | 5,825 |          |  |              | 73,955 |         |  |       | (981   | ) |  |   | (55,058 | ) |  |   | 17,916  |  
|Amortization of deferred compensation                           |  |                 |      |          |  |              |       |         |  |       | 356    |   |  |   |        |   |  |   | 356     |  
|Reversal of deferred compensation for options
    forfeited     |  |                 |      |          |  |              | (422   | )       |  |       | 422    |   |  |   |        |   |  |   |        |  
|Employee stock purchase plan                                    |  |                 | 45    |          |  |              | 38     |         |  |       |       |   |  |   |        |   |  |   | 38      |  
|Issuance of stock warrants                                      |  |                 |      |          |  |              | 132    |         |  |       |       |   |  |   |        |   |  |   | 132     |  
|Beneficial conversion feature on convertible debt               |  |                 |      |          |  |              | 113    |         |  |       |       |   |  |   |        |   |  |   | 113     |  
|Issuance of shares for convertible debt                         |  |                 | 10    |          |  |              | 3      |         |  |       |       |   |  |   |        |   |  |   | 3       |  
|Net loss                                                        |  |                 |      |          |  |              |       |         |  |       |       |   |  |   | (15,129 | ) |  |   | (15,129 | )
|                                                                |  |                 |       |          |  |              |        |         |  |       |        |   |  |   |         |   |  |   |         |  
|Balance at December 29, 2002                                    |  |                 | 5,880 |          |  | $            | 73,819 |         |  | $     | (203   | ) |  | $ | (70,187 | ) |  | $ | 3,429   |  
|                                                                |  |                 |       |          |  |              |        |         |  |       |        |   |  |   |         |   |  |   |         |  

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

43



---



##### Table of Contents



BRIAZZ, INC.

STATEMENTS OF CASH FLOWS

|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |        |       |       |        |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ----- | ------------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | ----- | ------ | -
|                                                                           |                                                                                 |                                                                       
|                                                                           |                                                                                 | Years Ended                                                           
|                                                                           |                                                                                 |                                                                       
|                                                                           |                                                                                 | December 29,                                                           |                                           | December 30,                              |       | December 31,
|                                                                           |                                                                                 | 2002                                                                   |                                           | 2001                                      |       | 2000        
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |             
|                                                                           |                                                                                 |                                                                       
|                                                                           |                                                                                 | (In thousands)                                                        
|Cash flows from operating activities                                       |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Net loss                                                                        |                                                                        | $                                         | (15,129                                   | )     |              | $      | (6,802 | )     |        | $      | (6,287 | )    
|                                                                           | Adjustments to reconcile net loss to net cash
    used in operating activities  |                                                                        |                                           |                                           |       |              |        |        |       |        |        |        |      
|                                                                           |                                                                                 | Amortization of deferred compensation                                  |                                           |                                           | 356   |              |        |        | 288   |        |        |        | 122   |      
|                                                                           |                                                                                 | Non cash interest expense, including beneficial
    conversion feature |                                           |                                           | 304   |              |        |        |      |        |        |        |      |      
|                                                                           |                                                                                 | Depreciation and amortization                                          |                                           |                                           | 4,352 |              |        |        | 2,686 |        |        |        | 2,657 |      
|                                                                           |                                                                                 | Loss on disposal of assets                                             |                                           |                                           | 1,172 |              |        |        |      |        |        |        |      |      
|                                                                           |                                                                                 | Provision for asset impairment and store closure                       |                                           |                                           | 2,256 |              |        |        | 26    |        |        |        | 63    |      
|                                                                           |                                                                                 | Changes in operation assets and liabilities:                           |                                           |                                           |       |              |        |        |       |        |        |        |       |      
|                                                                           |                                                                                 |                                                                        | Accounts receivable                       |                                           |       | 44           |        |        |       | 75     |        |        |       | (42   | )     
|                                                                           |                                                                                 |                                                                        | Inventory                                 |                                           |       | 98           |        |        |       | 1      |        |        |       | 71    |       
|                                                                           |                                                                                 |                                                                        | Prepaid expenses and other current assets |                                           |       | (318         | )      |        |       | 43     |        |        |       | (274  | )     
|                                                                           |                                                                                 |                                                                        | Accounts payable                          |                                           |       | 1,460        |        |        |       | (1,880 | )      |        |       | 1,591 |       
|                                                                           |                                                                                 |                                                                        | Accrued compensation                      |                                           |       | (238         | )      |        |       | 92     |        |        |       | (204  | )     
|                                                                           |                                                                                 |                                                                        | Other accrued liabilities                 |                                           |       | 402          |        |        |       | (161   | )      |        |       | 83    |       
|                                                                           |                                                                                 | Other                                                                  |                                           |                                           | (38   | )            |        |        | 23    |        |        |        | (13   | )    
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           |                                                                                 |                                                                        |                                           | Net cash used in operating activities     |       |              | (5,279 | )      |       |        | (5,609 | )      |       |       | (2,233 | )
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|Cash flows from investing activities                                       |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Purchases of property and equipment                                             |                                                                        |                                           | (2,322                                    | )     |              |        | (3,755 | )     |        |        | (747   | )    
|                                                                           | Other                                                                           |                                                                        |                                           | 59                                        |       |              |        |       |       |        |        | (25    | )    
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           |                                                                                 |                                                                        |                                           | Net cash used in investing activities     |       |              | (2,263 | )      |       |        | (3,755 | )      |       |       | (772   | )
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|Cash flows from financing activities                                       |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Change in checks issued in excess of bank deposits                              |                                                                        |                                           | (597                                      | )     |              |        | 754    |       |        |        | (579   | )    
|                                                                           | Proceeds from (repayment of) line-of-credit
    borrowings                      |                                                                        |                                           | 129                                       |       |              |        | (2,000 | )     |        |        |       |      
|                                                                           | Repayment of notes payable                                                      |                                                                        |                                           | (350                                      | )     |              |        | (154   | )     |        |        | (302   | )    
|                                                                           | Proceeds from notes payable and stock warrants                                  |                                                                        |                                           | 2,775                                     |       |              |        |       |       |        |        |       |      
|                                                                           | Debt issue costs                                                                |                                                                        |                                           | (201                                      | )     |              |        |       |       |        |        |       |      
|                                                                           | (Increase) decrease in restricted certificate of
    deposit                    |                                                                        |                                           | 139                                       |       |              |        | (126   | )     |        |        | 53     |      
|                                                                           | Proceeds from sale of preferred stock, net of
    issuance costs                |                                                                        |                                           |                                          |       |              |        | 3,034  |       |        |        | 2,235  |      
|                                                                           | Proceeds from initial public offering, net of
    issuance costs                |                                                                        |                                           |                                          |       |              |        | 13,583 |       |        |        |       |      
|                                                                           | Proceeds from exercise of stock options                                         |                                                                        |                                           |                                          |       |              |        | 6      |       |        |        | 1      |      
|                                                                           | Proceeds from employee stock purchase plan                                      |                                                                        |                                           | 38                                        |       |              |        |       |       |        |        |       |      
|                                                                           | Repurchase of preferred and common stock                                        |                                                                        |                                           |                                          |       |              |        |       |       |        |        | (1     | )    
|                                                                           | Repayment of capital lease obligation                                           |                                                                        |                                           | (93                                       | )     |              |        | (95    | )     |        |        |       |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           |                                                                                 |                                                                        |                                           | Net cash provided by financing activities |       |              | 1,840  |        |       |        | 15,002 |        |       |       | 1,407  |  
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|Net (decrease) increase in cash and cash
    equivalents                   |                                                                                 |                                                                        | (5,702                                    | )                                         |       |              | 5,638  |        |       |        | (1,598 | )     
|Cash and cash equivalents                                                  |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Beginning of period                                                             |                                                                        |                                           | 6,193                                     |       |              |        | 555    |       |        |        | 2,153  |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | End of period                                                                   |                                                                        | $                                         | 491                                       |       |              | $      | 6,193  |       |        | $      | 555    |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|Supplemental disclosure of cash flow
    information                       |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Cash paid for interest                                                          |                                                                        | $                                         | 205                                       |       |              | $      | 114    |       |        | $      | 213    |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|Supplemental disclosure of non-cash investing
    and financing activities |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Conversion of mandatorily redeemable preferred
    stock to common stock        |                                                                        | $                                         |                                          |       |              | $      | 58,081 |       |        | $      |       |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Additions to property and equipment financed with
    capital lease obligations |                                                                        | $                                         |                                          |       |              | $      | 530    |       |        | $      |       |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       
|                                                                           | Accretion of dividend/amortization of discount on
    preferred stock           |                                                                        | $                                         |                                          |       |              | $      | 4,318  |       |        | $      | 3,319  |      
|                                                                           |                                                                                 |                                                                        |                                           |                                           |       |              |        |        |       |        |        |       

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

44



---



##### Table of Contents



BRIAZZ, INC.

NOTES TO FINANCIAL STATEMENTS



|        |                                                              
|------- | -------------------------------------------------------------
|Note 1. | Summary of operations and significant
    accounting policies

Operations BRIAZZ, INC. (BRIAZZ
or the Company) distributes branded lunch and
breakfast foods through multiple points of distribution in urban
and suburban locations. The Company commenced operations in 1995
in Seattle and opened new markets in San Francisco in 1996,
Chicago in 1997 and Los Angeles in 1998. The Companys
business strategy is to solidify its current markets and as
funding becomes available, build BRIAZZ into a national brand by
expanding in major metropolitan areas across the United States.
The Companys retail distribution network includes BRIAZZ
cafés, as well as box lunch and catered platter delivery.
The Company also distributes its products through select
wholesale accounts. Each market obtains products from a central
kitchen; which prepares meals daily. Until December 2002 the
Company operated a central kitchen in each market. The
Companys Chicago and Los Angeles central kitchens were
closed in late 2002 and the Seattle central kitchen was closed
in February 2003. It is expected the San Francisco central
kitchen will close in the second quarter of 2003. Upon closure
of the central kitchens, the Company has contracted for the
production of its products.

Fiscal Years The Companys fiscal year ends on
the last Sunday of December, and consists of 52-or 53-weeks.
There were fifty-two weeks in 2002 and 2001, and fifty-three
weeks in 2000

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

Cash and Cash Equivalents The Company considers all highly
liquid investments purchased with a remaining maturity of three
months or less to be cash equivalents. Restricted cash balances
are not included as a component of cash and cash equivalents.

Concentration of Credit Risk Cash, cash equivalents and restricted
cash are invested in deposits with financial institutions that
may, at times, exceed federally insured limits. The Company had
one customer which accounted for 4%, 9% and 8% of its revenue
for fiscal 2002, 2001 and 2000, respectively. This same customer
accounted for 21% of the Companys accounts receivable
balance at December 29, 2002 and 42% at December 30,
2001. Additionally, the Company has been dependent on a small
number of suppliers and distributors for the Companys
products, including suppliers of meat, breads and soups, and one
distribution vendor, who during December 2002 procured from
suppliers and delivered to the Company approximately 50% of
ingredients and packaging products. A majority of our packaged
products comes from a national distributor who represents
roughly 15% of the Companys purchases. During the year
ended December 29, 2002, one food supplier provided
approximately 20% of our cost of food and packaging.

Fair Value of Financial
Instruments Carrying
amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, restricted certificates of
deposit and accounts payable approximate fair value because of
their immediate or short-term nature. The fair value of
borrowings is not considered to be significantly different than
its carrying amount because the stated rates for substantially
all such debt reflects current market rates and conditions.

Inventory Inventory, which consists primarily of
food and packaging products, is stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.

Property and Equipment Property and equipment is stated at
cost. Additions and improvements that significantly add to the
productive capacity or extend the life of an asset are
capitalized. Maintenance and repairs are expensed as incurred.
Upon disposition of property and equipment, gains or losses are
reflected in the statement of operations. Depreciation is
computed using the straight-line method over five to seven years
for furniture, fixtures, equipment and vehicles, and over three
years for computer software and hardware.

45



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Leasehold improvements are amortized over the
shorter of the lease term or 10 years. Depreciable lives
for specific assets are adjusted if actual lives are determined
to be shorter.

Impairment of Long-Lived Assets The Company reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
might not be recoverable. When such an event occurs, management
determines whether there has been an impairment by comparing the
anticipated undiscounted future net cash flows at the lowest
level for which there are identifiable cash flows, which is at
the store, to the related assets carrying value. If an
asset is considered impaired, the asset is written down to fair
value, which is determined based on discounted anticipated
future cash flows or appraised values, depending on the nature
of the asset.

Accounts Payable The Companys banking system
provides for the daily replenishment of disbursement bank
accounts as checks are presented. Included in accounts payable
at December 29, 2002 and December 30, 2001 is $157,000
and $754,000, respectively, representing the excess of
outstanding checks over cash on deposit at the bank on which the
checks were drawn.

Income Taxes Deferred tax liabilities and assets
are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts expected
to be realized.

Revenue Recognition Revenues are recognized at the point
of sale at retail locations or upon delivery of the product for
box lunch, catering and wholesale sales. For some wholesale
products, where a right of return exists, revenue is recognized
after return rights have lapsed.

Pre-operating Costs Costs associated with opening new
locations are expensed as incurred.

Financing Costs Direct costs associated with obtaining
equity financing are recorded as a reduction of proceeds. Direct
costs associated with obtaining debt financing are deferred and
charged to interest expense using the effective interest rate
method over the debt term.

Advertising and Promotion Advertising and promotion costs are
expensed as incurred. Approximately $1.2 million, $480,000
and $316,000 were expensed in fiscal 2002, 2001 and 2000
respectively.

Stock-Based Compensation The Company accounts for stock-based
employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued
to Employees and complies with the disclosure provisions
of Statement of Financial Accounting Standards
(SFAS) No. 123 (SFAS No. 123),
Accounting for Stock-Based Compensation. As amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. Under APB
No. 25, compensation expense is based on the difference, if
any, on the date of grant, between the deemed fair value of the
Companys stock and the exercise price of the option.
Unearned compensation is amortized on a straight-line basis over
the vesting period of the individual options. Certain warrants
owned by employees contain provisions which result in the
application of variable plan accounting in accordance with the
provisions of FASB Interpretation No. 44 (FIN
No. 44). For those warrants, compensation expense is
adjusted quarterly as the market price of the Companys
common stock changes at price in excess of the exercise price.

46



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Had the Company applied the provisions of SFAS
No. 123 to all stock option grants, the Companys net
loss would have been increased to the pro forma amounts
indicated below (in thousands except share data):

|                                                              |                                                                                                             |              |         |              |   |              |         |       |   |   |        |           |  
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------ | ------- | ------------ | - | ------------ | ------- | ----- | - | - | ------ | --------- | -
|                                                              |                                                                                                             |             
|                                                              |                                                                                                             | Years Ended 
|                                                              |                                                                                                             |             
|                                                              |                                                                                                             | December 29, |         | December 30, |   | December 31,
|                                                              |                                                                                                             | 2001         |         | 2001         |   | 2000        
|                                                              |                                                                                                             |              |         |              |   |             
|Net loss attributable to common stockholders, as
    reported |                                                                                                             | $            | (15,129 | )            |   | $            | (11,120 | )     |   | $ | (9,606 | )        
|Add:                                                          |                                                                                                             |              |         |              |   |              |         |       |   |   |        |          
|                                                              | Total compensation cost included in net loss                                                                |              |         | 356          |   |              |         | 288   |   |   |        | 122       |  
|Deduct:                                                       |                                                                                                             |              |         |              |   |              |         |       |   |   |        |          
|                                                              | Total stock-based employee compensation expense
    determined under fair value based method for all awards |              |         | (700         | ) |              |         | (705  | ) |   |        | (296      | )
|                                                              |                                                                                                             |              |         |              |   |              |         |       |   |   |        |          
|Proforma Net Loss                                             |                                                                                                             | $            | (15,473 | )            |   | $            | (11,537 | )     |   | $ | (9,780 | )        
|                                                              |                                                                                                             |              |         |              |   |              |         |       |   |   |        |          
|Earnings per share:                                           |                                                                                                             |              |         |              |   |              |         |       |   |   |        |          
|                                                              | Basic and diluted  as reported                                                                             |              | $       | (2.59        | ) |              | $       | (2.86 | ) |   | $      | (2,455.68 | )
|                                                              | Basic and diluted  pro forma                                                                               |              | $       | (2.64        | ) |              | $       | (2.97 | ) |   | $      | (2,486.55 | )

The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Task Force Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods or Services. Compensation expense related to equity
instruments issued to non-employees is recognized as the equity
instruments vest. At each reporting date, the Company revalues
the compensation. As a result, stock-based compensation expense
related to unvested equity instruments issued to non-employees
fluctuates as the fair value of the Companys common stock
fluctuates.

Stock Warrants Stock warrants issued together with
debt securities are considered a cost of financing and are
recorded as original issue discount and additional paid-in
capital based on the estimated fair value at the date of
issuance. The original issue discount is reported as a reduction
of the related debt on the balance sheet and is amortized
utilizing the effective interest method over the debt term.

Net Loss Per Share The computation of basic and diluted
net loss per share is based on the weighted-average number of
shares of common stock outstanding during the period, and
excludes all outstanding options and warrants to purchase common
stock from the calculation of diluted net loss per share, as
such securities are anti-dilutive for all periods presented.

47



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table presents the calculation of
basic and diluted net loss per share for the year ended December
(in thousands, except share and per share data):

|                                                                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |           |           | 
|---------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------- | --------- | --------- | --------- | ---- | --------- | ------- | --------- | - | --------- | --------- | --------- | 
|                                                                                   |                                                                 | 2002                  |           | 2001      |           | 2000
|                                                                                   |                                                                 |                       |           |           |           |     
|Net loss attributable to common stockholders                                       |                                                                 | $                     | (15,129   | )         |           | $    | (11,120   | )       |           | $ | (9,606    | )        
|                                                                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |          
|Weightedaverage shares used in computing
    basic and diluted net loss per share |                                                                 |                       | 5,852,362 |           |           |      | 3,889,472 |         |           |   | 3,912     |          
|Basic and diluted net loss per share                                               |                                                                 | $                     | (2.59     | )         |           | $    | (2.86     | )       |           | $ | (2,455.68 | )        
|                                                                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |          
|Shares excluded from loss per share computation:                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |          
|                                                                                   | Options to purchase common stock                                |                       |           | 1,049,648 |           |      |           | 908,129 |           |   |           | 520,952   |          
|                                                                                   | Redeemable convertible preferred stock                          |                       |           |          |           |      |           |        |           |   |           | 3,126,060 |          
|                                                                                   | Convertible debt                                                |                       |           | 1,868,948 |           |      |           |        |           |   |           |          |          
|                                                                                   | Warrants to purchase redeemable convertible
    preferred stock |                       |           |          |           |      |           |        |           |   |           | 907,240   |          
|                                                                                   | Warrants to purchase common stock                               |                       |           | 1,330,404 |           |      |           | 930,404 |           |   |           |          |          
|                                                                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |          
|                                                                                   |                                                                 | Total shares excluded |           |           | 4,249,000 |      |           |         | 1,838,533 |   |           |           | 4,554,252 | 
|                                                                                   |                                                                 |                       |           |           |           |      |           |         |           |   |           |          

Reclassifications Reclassifications of certain prior
year balances have been made to conform to current year
classifications. The reclassifications have no effect on
stockholders equity or net loss.

Recent Accounting Pronouncements In July 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations
(SFAS No. 143). SFAS No. 143 addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development, and
(or) the normal operation of a long-lived asset, except for
certain obligations of lessees. The provisions of SFAS
No. 143 are effective for fiscal years beginning after
June 15, 2002, with early application is permitted. The
adoption of SFAS No. 143 will not have a material impact on
the Companys results of operation or financial position.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS No. 146). SFAS
No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). The adoption of SFAS
No 146 did not have a material impact on the Companys
financial position or results of operation.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Guarantees of Indebtedness of Others
an Interpretation of FASB Statement No. 5, 57 and 107 and
Rescission of FASB Interpretation No. 34 (FIN 45).
This interpretation expands on the existing accounting guidance
and disclosure requirements for most guarantees. It requires
that at the time a company issues a guarantee, the company must
disclose that information in its interim and annual financial
statements. The provisions for initial recognition and
measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31,
2002. The Company does not believe FIN 45 will have a material
impact on its results of operations, or financial position.

Note 2.     Financial
Condition and Basis of Presentation

The Company has incurred substantial operating
losses and negative cash flows from operations since inception
and had an accumulated deficit of $70.2 million and a
working capital deficit of $4.9 million at

48



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

December 29, 2002. These matters raise
substantial doubt about the Companys ability to continue
as a going concern. The Company has financed its operations
principally through the net proceeds from debt and equity
offerings. The Companys ability to continue as a going
concern is dependant upon numerous factors, including its
ability to obtain additional financing, its ability to increase
its level of future revenues or its ability to reduce operating
expenses. The accompanying financial statements have been
prepared on the basis that the Company will continue as a going
concern and do not include any adjustments to reflect the
possible future effects on the recoverability of assets and
liquidation of liabilities that may result from this uncertainty.

As described in Note 12, subsequent to
December 29, 2002, the Company has raised additional cash
from the sale of its debt and equity securities, and has entered
into a letter of intent to sell additional securities. There can
be no assurance that the Company will be able to obtain
additional financing, increase revenues, reduce expenses or
successfully complete other steps to continue as a going
concern. If the Company is unable to obtain sufficient funds to
satisfy its cash requirements, it may be forced to curtail
operations, dispose of assets, or seek extended payment terms
from its vendors. Such events would materially and adversely
affect the Companys financial position and results of
operations.

Note 3.     Property
and Equipment

Property and equipment consists of the following
(in thousands):

|                                          |                              |              |         |              |  |   |         |        | 
|----------------------------------------- | ---------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------ | 
|                                          |                              | December 29, |         | December 30,
|                                          |                              | 2002         |         | 2001        
|                                          |                              |              |         |             
|Leasehold improvements                    |                              | $            | 9,953   |              |  | $ | 11,485  |       
|Furniture, fixtures, and equipment        |                              |              | 10,810  |              |  |   | 12,272  |       
|Vehicles                                  |                              |              | 1,885   |              |  |   | 1,952   |       
|                                          |                              |              |         |              |  |   |         |       
|                                          | Total property and equipment |              |         | 22,648       |  |   |         | 25,709 | 
|Accumulated depreciation and amortization |                              |              | (14,751 | )            |  |   | (12,154 | )     
|                                          |                              |              |         |              |  |   |         |       
|Property and equipment, net               |                              | $            | 7,897   |              |  | $ | 13,555  |       
|                                          |                              |              |         |              |  |   |         |       

Substantially all of the Companys assets
have been pledged as collateral pursuant to terms of the
Companys borrowing agreements.

Pursuant to a plan to close its four company
owned central kitchens and outsource production of the
Companys branded food products, the Los Angeles and
Chicago central kitchens were closed in late 2002. The Company
recorded a loss on disposition of these facilities of
approximately $1.2 million. During 2002, the Company
recorded an impairment write-down of long-lived assets of
approximately $2.3 million primarily related to certain
café locations. These write-downs consisted primarily of
leasehold improvements and, to a lesser extent, equipment. As a
result of shortening the estimated remaining lives of central
kitchens, the Company recorded additional depreciation expense
of approximately $0.9 million in 2002.

Note 4.     Notes
Payable and Other Borrowings

In June 2002, the Company entered into a
Securities Purchase Agreement with Laurus Master Fund, Ltd.
(Laurus) in connection with the issuance of a
$1.25 million 14% convertible note (the 14%
convertible note) to Laurus and a warrant to purchase
250,000 shares of common stock at exercise prices ranging from
$1.43 to $1.95. The 14% convertible note is collateralized by
all of the Companys assets, and was initially convertible
into 1,041,667 shares of common stock. Net proceeds to the
Company were $1.14 million after paying fees to
Laurus fund manager and attorneys. The Company recorded a
debt discount of approximately $225,000 related to the issuance
of the warrants and the beneficial conversion feature. The 14%
convertible note was convertible into common stock from the date
of issuance at an initial conversion price of $1.20 per share
(the Fixed Conversion Price). If the Company elected
to convert the note at a time when

49



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

the market price is less than $1.50 per share,
the conversion price would be at a discount to market. The
Company fully recognized the beneficial conversion feature of
approximately $112,000 as interest expense during 2002. In
December 2002, certain terms of the 14% convertible note were
amended to, among other things, change the Fixed Conversion
Price to $0.50 per share and defer principal payments until
March 2003.

Additionally in December 2002, the Company issued
to Laurus a warrant to purchase 150,000 shares of common
stock at an exercise price of $0.50 per share. The estimated
fair value of the warrant of $20,000 was recorded as deferred
debt issue costs. In January 2003, the 14% convertible note was
amended to provide that when the Company provides Laurus with a
conversion notice with respect to a scheduled repayment date,
Laurus may elect to calculate the conversion price for such
issuance and receive such shares of common stock in advance of
the scheduled repayment date. In March 2003, certain terms of
the notes were amended to, among other things, change the Fixed
Conversion Price to $0.10 per share and defer principal
payments, under certain conditions, to July 2003. The amendment
to the 14% convertible note suspends the Companys
obligation to make monthly payments of principal until the
latter of (i) June 2, 2003 and (ii) the first
business day of the month following the earlier of June 30,
2003 or the closing of the sale of securities to Deutsche Bank
or any of its affiliates suspends the right of Laurus to
demand conversion, until the earlier of June 30, 2003 or
the closing on an investment by Deutsche Bank or any of its
affiliates, and restructures the repayment schedule for the
remaining payments over a seven-month period following the
resumption of principal payments. Additionally, in March 2003,
terms of the 250,000 warrants issued in June 2002 were amended
to, among other things, change the exercise price to $0.10 per
share and suspend the right of Laurus to exercise the warrant
until the earlier of June 30, 2003 or the closing on an
investment by Deutsche Bank or any of its affiliates. As a
result of the amended conversion price for the notes and
exercise price for the warrants being less than the market price
of the common stock on the amendment date, the Company will
recognize the estimated fair value of the beneficial conversion
feature as interest expense and an increase in common stock and
additional paid-in capital in 2003.

As described in Note 12, in March 2003 the
Company issued a $2 million promissory note, series D
preferred stock and warrants to purchase Company common stock to
an affiliate of Flying Food Group, L.L.C. (FFG) in
consideration for cash and conversion of outstanding demand
notes (the Demand Notes) issued to FFG. At
December 29, 2002, the Company had borrowed $1,025,000
pursuant to the Demand Notes, which bore interest at an annual
rate of 10%. All of the Companys assets were pledged as
collateral for these notes.

In September 2002, the Company entered into a
$500,000 note payable borrowing from a commercial bank. The note
is collateralized by the pledge of a security interest in a
certificate of deposit in such amount owned by the
Companys Chief Executive Officer and bears interest,
payable monthly, at an annual rate of 3.59%. The note was
initially due March 31, 2003, which has since been extended
to March 31, 2004.

Notes payable consists of the following (in
thousands):

|                                                         |                     |              |       |              |  |   |    |    | 
|-------------------------------------------------------- | ------------------- | ------------ | ----- | ------------ |  | - | -- | -- | 
|                                                         |                     | December 29, |       | December 30,
|                                                         |                     | 2002         |       | 2001        
|                                                         |                     |              |       |             
|Demand notes payable to related party                    |                     | $            | 1,025 |              |  | $ |   |   
|14% convertible note, net of original issue
    discount |                     |              | 890   |              |  |   |   |   
|Note payable to bank                                     |                     |              | 500   |              |  |   |   |   
|Other                                                    |                     |              |      |              |  |   | 37 |   
|                                                         |                     |              |       |              |  |   |    |   
|                                                         | Total notes payable |              | $     | 2,415        |  |   | $  | 37 | 
|                                                         |                     |              |       |              |  |   |    |   

In August 2002, the Company entered into a
one-year $1.0 million revolving credit line based upon and
collateralized by the Companys accounts receivable. The
Company pays a daily fee of 0.0667% computed on the outstanding
daily balance. As of December 29, 2002, approximately
$270,000 was available for borrowing.

50



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The Company had a line of credit agreement with a
bank for borrowings up to $2 million pursuant to which the
Company and its founder were jointly and severally obligated,
and borrowings were collateralized by all Company property,
equipment and inventory. Interest was charged at prime rate plus
0.75%. The line of credit agreement terminated in April 2002.

Note 5.     Mandatorily
Redeemable Convertible Preferred Stock and Stockholders
Equity

The Companys initial public offering of
2 million shares of common stock was effective May 1,
2001, and the offering closed on May 7, 2001. Net proceeds
after deduction of expenses totaled approximately
$13.6 million.

Immediately prior to the closing date of the
initial public offering, all of the redeemable convertible
preferred stock outstanding automatically converted into common
stock at their respective conversion rates. The conversion
resulted in the issuance of approximately 3,816,000 shares of
common stock. Mandatorily redeemable convertible preferred stock
activity from December 26, 1999 through May 7, 2001,
the closing date of the Companys initial public offering
was as follows (in thousands):

|                                                                |  |          |    |          |  |          |         |        |  |        |    |        |  |       |         |   |  |  |        |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | -------- | -- | -------- |  | -------- | ------- | ------ |  | ------ | -- | ------ |  | ----- | ------- | - |  |  | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                |  |          |    |          |  |          |         |       
|                                                                |  | Series A |    | Series B |  | Series C |         |       
|                                                                |  |          |    |          |  |          |         |       
|                                                                |  | Shares   |    | Amount   |  | Shares   |         | Amount |  | Shares |    | Amount |  | Total
|                                                                |  |          |    |          |  |          |         |        |  |        |    |        |  |      
|Balance at December 26, 1999                                    |  |          | 5  |          |  | $        | 10,369  |        |  |        | 5  |        |  | $     | 21,782  |   |  |  | 2,741  |   |  | $ | 15,874  |   |  | $ | 48,025  |  
|Issuance of Series C preferred stock, net of
    issuance costs |  |          |   |          |  |          |        |        |  |        |   |        |  |       |        |   |  |  | 375    |   |  |   | 2,235   |   |  |   | 2,235   |  
|Issuance of Series C preferred stock for
    services           |  |          |   |          |  |          |        |        |  |        |   |        |  |       |        |   |  |  | 5      |   |  |   | 30      |   |  |   | 30      |  
|Accretion of mandatorily redeemable preferred
    stock         |  |          |   |          |  |          | 615     |        |  |        |   |        |  |       | 1,322   |   |  |  |       |   |  |   | 1,382   |   |  |   | 3,319   |  
|Stock repurchased or redeemed                                   |  |          | (3 | )        |  |          |        |        |  |        | (2 | )      |  |       |        |   |  |  |       |   |  |   |        |   |  |   |        |  
|                                                                |  |          |    |          |  |          |         |        |  |        |    |        |  |       |         |   |  |  |        |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                    |  |          | 2  |          |  |          | 10,984  |        |  |        | 3  |        |  |       | 23,104  |   |  |  | 3,121  |   |  |   | 19,521  |   |  |   | 53,609  |  
|Issuance of Series C preferred stock, net of
    issuance costs |  |          |   |          |  |          |        |        |  |        |   |        |  |       |        |   |  |  | 508    |   |  |   | 3,034   |   |  |   | 3,034   |  
|Issuance of Series C preferred stock for
    services           |  |          |   |          |  |          |        |        |  |        |   |        |  |       |        |   |  |  | 19     |   |  |   | 154     |   |  |   | 154     |  
|Accretion of mandatorily redeemable preferred
    stock         |  |          |   |          |  |          | 226     |        |  |        |   |        |  |       | 493     |   |  |  |       |   |  |   | 565     |   |  |   | 1,284   |  
|Conversion of preferred stock to common stock                   |  |          | (2 | )        |  |          | (11,210 | )      |  |        | (3 | )      |  |       | (23,597 | ) |  |  | (3,648 | ) |  |   | (23,274 | ) |  |   | (58,081 | )
|                                                                |  |          |    |          |  |          |         |        |  |        |    |        |  |       |         |   |  |  |        |   |  |   |         |   |  |   |         |  
|Balance at December 30, 2001                                    |  |          |   |          |  | $        |        |        |  |        |   |        |  | $     |        |   |  |  |       |   |  | $ |        |   |  | $ |        |  
|                                                                |  |          |    |          |  |          |         |        |  |        |    |        |  |       |         |   |  |  |        |   |  |   |         |   |  |   |         |  

In connection with a $3 million private
placement offering of shares of Series C preferred stock in
January and February 2001, the Company issued approximately
500,000 shares at $6.00 per share. At the dates of such
issuances, the Company determined that the fair value of its
common stock exceeded the conversion price of the convertible
preferred stock. As a result, the Company recorded a beneficial
conversion feature in accordance with EITF 00-27
Application of Issue 98-5 to Certain Convertible
Instruments upon issuance of the preferred stock as the
difference between conversion price and the fair value of common
stock multiplied by the number of shares into which the security
was convertible. The beneficial conversion feature is analogous
to a dividend and was being recognized as a return to the
preferred shareholders over the period from date of issuance to
the redemption date using the effective interest method. As of
May 1, 2001, the beneficial conversion feature of
approximately $3 million was fully amortized upon
conversion of Series C preferred stock to common stock.
This beneficial conversion feature was recognized as a dividend,
increasing the net loss attributable to common stockholders.

51



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Warrants outstanding to purchase 907,240 shares
of Series C preferred stock were converted into warrants to
purchase 947,817 shares of common stock on May 7,
2001. In February 2001, the Company modified the warrants to
remove the automatic expiration date upon an initial public
offering, thereby allowing the warrant holders the ability to
exercise the warrants through the original expiration date. This
modification initially resulted in a non-cash charge to expense
of approximately $635,000 at the time of the initial public
offering, related to approximately 100,000 warrants held by
an officer of the Company. This charge to expense was reversed
later during 2001 when the market price of the Companys
common stock dropped to a level below the exercise price of
$5.74. Through December 29, 2002, the market price of
Companys stock remained below the exercise price.

Note 6.     Stock
Options

The Company maintains the BRIAZZ 1996 Stock
Option Plan (the Plan) to provide for granting of
incentive stock options and nonqualified stock options to
employees, directors, consultants and certain other
non-employees as determined by the Plan Administrator. The
Company has authorized 1,165,000 shares of common stock for
issuance under the Plan. The date of grant, option price,
vesting period and other terms specific to options granted under
the Plan are determined by the Plan Administrator. Options
granted under the Plan generally expire ten years from date of
grant and vest over periods ranging from date of grant to five
years. The following summarizes stock option activity from
December 26, 1999 to December 29, 2002 (shares in
thousands, except exercise price):

|                                       |                   |        |       |                |   |   |       |      | 
|-------------------------------------- | ----------------- | ------ | ----- | -------------- | - | - | ----- | ---- | 
|                                       |                   |        |       | Weighted-     
|                                       |                   |        |       | average       
|                                       |                   | Shares |       | exercise price
|                                       |                   |        |       |               
|Options outstanding, December 26, 1999 |                   |        | 405   |                |   | $ | 11.52 |     
|                                       | Options granted   |        |       | 144            |   |   |       | 1.50 | 
|                                       | Options exercised |        |       | (1             | ) |   |       | 1.50 | 
|                                       | Options forfeited |        |       | (27            | ) |   |       | 9.54 | 
|                                       |                   |        |       |                |   |   |       |     
|Options outstanding, December 31, 2000 |                   |        | 521   |                |   |   | 8.83  |     
|                                       | Options granted   |        |       | 465            |   |   |       | 4.13 | 
|                                       | Options exercised |        |       | (4             | ) |   |       | 1.56 | 
|                                       | Options forfeited |        |       | (74            | ) |   |       | 5.45 | 
|                                       |                   |        |       |                |   |   |       |     
|Options outstanding, December 30, 2001 |                   |        | 908   |                |   |   | 7.00  |     
|                                       | Options granted   |        |       | 235            |   |   |       | 1.01 | 
|                                       | Options forfeited |        |       | (93            | ) |   |       | 3.63 | 
|                                       |                   |        |       |                |   |   |       |     
|Options outstanding, December 29, 2002 |                   |        | 1,050 |                |   |   | 5.96  |     
|                                       |                   |        |       |                |   |   |       |     

Option expiration dates range from January 2006
to November 2012.

The fair value of options granted were estimated
using an option-price model with the following assumptions:

|                                         |  |              |           |              |  |              |           |   |  |  |           |  
|---------------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- | - |  |  | --------- | -
|                                         |  |             
|                                         |  | Years Ended 
|                                         |  |             
|                                         |  | December 29, |           | December 30, |  | December 31,
|                                         |  | 2002         |           | 2001         |  | 2000        
|                                         |  |              |           |              |  |             
|Risk-free interest rate                  |  |              | 4.0 - 5.2 | %            |  |              | 4.7 - 5.3 | % |  |  | 5.7 - 6.5 | %
|Expected lives                           |  |              | 7 years   |              |  |              | 7 years   |   |  |  | 7 years   |  
|Expected volatility (employee grants)    |  |              | 45        | %            |  |              | 45        | % |  |  | 0         | %
|Expected volatility (nonemployee grants) |  |              | N/A       |              |  |              | 45        | % |  |  | 0         | %

52



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Weighted-average fair value and exercise price of
options granted were as follows during years ended December:

|                        |                   |                  |   |            |  |      |   |      |  |      |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|----------------------- | ----------------- | ---------------- | - | ---------- |  | ---- | - | ---- |  | ---- | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                        |                   |                 
|                        |                   | Weighted-Average
|                        |                   |                 
|                        |                   |                  |   |           
|                        |                   | Exercise Price   |   | Fair Value
|                        |                   |                  |   |           
|                        |                   | 2002             |   | 2001       |  | 2000 |   | 2002 |  | 2001 |   | 2000
|                        |                   |                  |   |            |  |      |   |      |  |      |   |     
|Exercise price at grant |                   |                  |   |            |  |      |   |      |  |      |   |      |  |  |   |      |  |  |   |      |  |  |   |     
|                        | Lower than market |                  | $ |           |  |      | $ | 4.67 |  |      | $ | 1.50 |  |  | $ |     |  |  | $ | 7.42 |  |  | $ | 9.66 | 
|                        | Equal to market   |                  | $ | 1.01       |  |      | $ | 4.10 |  |      | $ |     |  |  | $ | 0.55 |  |  | $ | 2.25 |  |  | $ |     | 

The following table summarizes information about
options outstanding at December 29, 2002 (shares in
thousands):

|               |  |                     |       |                     |  |          |         |           |  |          |          |  |  |  |     |  |  |   |          | 
|-------------- |  | ------------------- | ----- | ------------------- |  | -------- | ------- | --------- |  | -------- | -------- |  |  |  | --- |  |  | - | -------- | 
|               |  |                     |       |                    
|               |  | Options outstanding |       | Options exercisable
|               |  |                     |       |                    
|               |  |                     |       | Weighted-           |  |          |         | Weighted-
|               |  |                     |       | Remaining           |  | Average  |         |           |  | Average 
|               |  |                     |       | Contractual         |  | Exercise |         |           |  | Exercise
|Exercise Price |  | Shares              |       | Life                |  | Price    |         | Shares    |  | Price   
|               |  |                     |       |                     |  |          |         |           |  |         
|$ 0.69         |  |                     | 116   |                     |  |          | 9.6     |           |  | $        | 0.69     |  |  |  | 116 |  |  | $ | 0.69     | 
|0.95-1.00      |  |                     | 8     |                     |  |          | 8.9     |           |  |          | 0.97     |  |  |  | 8   |  |  |   | 0.97     | 
|1.26           |  |                     | 78    |                     |  |          | 9.3     |           |  |          | 1.26     |  |  |  |    |  |  |   | 1.26     | 
|1.50-1.66      |  |                     | 399   |                     |  |          | 6.6     |           |  |          | 1.51     |  |  |  | 299 |  |  |   | 1.50     | 
|2.34           |  |                     | 77    |                     |  |          | 8.6     |           |  |          | 2.34     |  |  |  | 19  |  |  |   | 2.34     | 
|4.70-6.00      |  |                     | 370   |                     |  |          | 8.4     |           |  |          | 4.95     |  |  |  | 181 |  |  |   | 5.12     | 
|$600-$3,900    |  |                     | 2     |                     |  |          | 3.6-6.1 |           |  |          | 1,819.00 |  |  |  | 2   |  |  |   | 1,819.95 | 
|               |  |                     |       |                     |  |          |         |           |  |          |          |  |  |  |     |  |  |   |          | 
|               |  |                     | 1,050 |                     |  |          |         |           |  |          |          |  |  |  | 625 |  |  |   |          | 
|               |  |                     |       |                     |  |          |         |           |  |          |          |  |  |  |     |  |  |   |          | 

During fiscal 2001 and 2000, the Company granted
stock options to employees (which vest over four years) and
directors at exercise prices deemed to be below the fair value
of the underlying stock on the date of grant. Deferred stock
compensation is being amortized generally over a four-year
vesting period. As a result of these grants, the Company
recorded deferred stock compensation of approximately $209,000
and $1.2 million in fiscal 2001 and 2002, respectively.

Note
7.     Leases

The Company leases cafés, central kitchens
and office facilities and certain office equipment under terms
of operating leases, which typically cover five years, some of
which have options for an additional five year term. Rents are
either fixed base amounts, variable amounts determined as a
percentage of sales, or a combination of base and percentage of
sales. Lease provisions also require additional payments for
maintenance and other expenses. Rent is expensed on a
straight-line basis over the term of the lease. Differences
between the amount paid and expensed is recorded as a deferred
credit. Other accrued liabilities include $391,000 and $166,000
of deferred rent at December 29, 2002 and December 30,
2001, respectively. Rent expense approximated $3.1 million,
$2.6 million and $2.6 million, during fiscal 2002,
2001 and 2000,

53



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

respectively. The Company also leases certain of
its vehicles pursuant to capital leases. Minimum annual
commitments for leases at December 29, 2002 are as follows
(in thousands):

|                                               |  |           |        |         |  |   |     | 
|---------------------------------------------- |  | --------- | ------ | ------- |  | - | --- | 
|                                               |  | Operating |        | Capital
|                                               |  |           |        |        
|2003                                           |  | $         | 2,702  |         |  | $ | 148 | 
|2004                                           |  |           | 2,633  |         |  |   | 139 | 
|2005                                           |  |           | 2,462  |         |  |   | 114 | 
|2006                                           |  |           | 2,000  |         |  |   | 52  | 
|2007                                           |  |           | 1,218  |         |  |   | 28  | 
|Thereafter                                     |  |           | 2,808  |         |  |   |     | 
|                                               |  |           |        |         |  |   |     | 
|                                               |  | $         | 13,823 |         |  |   | 481 | 
|                                               |  |           |        |         |  |   |     | 
|Less: amount representing interest             |  |           | (138   | )      
|                                               |  |           |        |        
|Present value of future minimum lease payments |  |           | 343    |        
|Current                                        |  |           | (109   | )      
|                                               |  |           |        |        
|Non-current                                    |  | $         | 234    |        
|                                               |  |           |        |        

Note 8.     Income
Taxes

No provision for income taxes has been recorded
in fiscal 2002, 2001, and 2000 due to losses incurred. A
valuation allowance has been recorded against deferred tax
assets as of December 29, 2002 and December 30, 2001,
as it has not been determined that it is more likely than not
that these deferred tax assets will be realized. As of
December 29, 2002, the Company has net operating loss
carryforwards of approximately $54 million for federal
income tax purposes, which expire beginning 2011 through 2022.
As a result of ownership changes, the Company may be subject to
annual limitations on the amount of net operating loss which can
be utilized in any tax year.

Deferred income taxes consist of the following
(in thousands):

|                                 |  |              |         |              |  |   |         |  
|-------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                 |  | December 29, |         | December 30,
|                                 |  | 2002         |         | 2001        
|                                 |  |              |         |             
|Net operating loss carryforwards |  | $            | 20,077  |              |  | $ | 15,673  |  
|Property and equipment           |  |              | 1,689   |              |  |   | 1,203   |  
|Other                            |  |              | 1,438   |              |  |   | 507     |  
|                                 |  |              |         |              |  |   |         |  
|                                 |  |              | 23,204  |              |  |   | 17,383  |  
|Less: Valuation allowance        |  |              | (23,204 | )            |  |   | (17,383 | )
|                                 |  |              |         |              |  |   |         |  
|Net deferred tax assets          |  | $            |        |              |  | $ |        |  
|                                 |  |              |         |              |  |   |         |  

The valuation allowance increased by
approximately $5.8 million, $2.6 million and
$3.4 million during Fiscal 2002, 2001 and 2000,
respectively.

Note 9.     Segment
Information

The Company manages its business through four
reportable segments: Retail, Branded Sales, Kitchens and General
and Administrative. Retail consists of sales generated through
the Companys cafés. Branded Sales consists of two
subgroups: 1) box lunch, catering and vending and
2) wholesale and grocery. Branded Sales subgroups consist
of sales which are aggregated because they have similar economic
characteristics. Kitchens consist of unallocated cost of
products and packaging, along with unallocated costs of kitchen

54



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

operations. General and Administrative consists
of costs incurred by the corporate office as well as those
administrative costs incurred by Retail. Management evaluates
segment performance primarily based on sales and segment
operating income (loss). Information regarding the
Companys assets is not disaggregated by segment or
otherwise. The following table presents certain financial
information for each segment (amounts in thousands):

|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |        |  
|---------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------ | ------- | ------------ | - | ------------ | ------- | ------ | - | - | ------- | ------ | -
|                                                                       |                                                                        |             
|                                                                       |                                                                        | Years Ended 
|                                                                       |                                                                        |             
|                                                                       |                                                                        | December 29, |         | December 30, |   | December 31,
|                                                                       |                                                                        | 2002         |         | 2001         |   | 2000        
|                                                                       |                                                                        |              |         |              |   |             
|Retail                                                                 |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Net Sales                                                              |                                                                        | $            | 22,327  |              |   | $            | 22,737  |        |   | $ | 23,624  |       
|Cost of food and packaging                                             |                                                                        |              | (8,136  | )            |   |              | (8,266  | )      |   |   | (8,759  | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       |                                                                        |              | 14,191  |              |   |              | 14,471  |        |   |   | 14,865  |       
|Cost of operations                                                     |                                                                        |              | (14,413 | )            |   |              | (12,117 | )      |   |   | (11,976 | )     
|Provision for asset impairment, store closure and
    loss on disposal |                                                                        |              | (2,342  | )            |   |              | (26     | )      |   |   | (63     | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Income (loss) from operations                                          |                                                                        | $            | (2,564  | )            |   | $            | 2,328   |        |   | $ | 2,826   |       
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|EBITDA                                                                 |                                                                        | $            | 1,822   |              |   | $            | 3,801   |        |   | $ | 4,570   |       
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Branded Sales                                                          |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       | Box Lunch, Catering and Vending                                        |              |         |              |   |              |         |        |   |   |         |        |  
|                                                                       | Net Sales                                                              |              | $       | 4,864        |   |              | $       | 5,471  |   |   | $       | 5,381  |  
|                                                                       | Cost of food and packaging                                             |              |         | (1,510       | ) |              |         | (1,875 | ) |   |         | (1,963 | )
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       |                                                                        |              | 3,354   |              |   |              | 3,596   |        |   |   | 3,418   |       
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       | Wholesale and Grocery                                                  |              |         |              |   |              |         |        |   |   |         |        |  
|                                                                       | Net Sales                                                              |              |         | 3,402        |   |              |         | 3,821  |   |   |         | 4,687  |  
|                                                                       | Cost of food and packaging                                             |              |         | (1,779       | ) |              |         | (1,917 | ) |   |         | (2,495 | )
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       |                                                                        |              | 1,623   |              |   |              | 1,904   |        |   |   | 2,192   |       
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       | Total Branded Sales                                                    |              |         |              |   |              |         |        |   |   |         |        |  
|                                                                       | Net Sales                                                              |              |         | 8,266        |   |              |         | 9,292  |   |   |         | 10,068 |  
|                                                                       | Cost of food and packaging                                             |              |         | (3,289       | ) |              |         | (3,792 | ) |   |         | (4,458 | )
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       |                                                                        |              | 4,977   |              |   |              | 5,500   |        |   |   | 5,610   |       
|                                                                       | Cost of operations                                                     |              |         | (4,346       | ) |              |         | (4,231 | ) |   |         | (3,939 | )
|                                                                       | Provision for asset impairment, store closure and
    loss on disposal |              |         | (13          | ) |              |         |       |   |   |         |       |  
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       | Income from operations                                                 |              | $       | 618          |   |              | $       | 1,269  |   |   | $       | 1,671  |  
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|                                                                       | EBITDA                                                                 |              | $       | 880          |   |              | $       | 1,472  |   |   | $       | 1,856  |  
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Kitchens                                                               |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Unallocated cost of food and packaging                                 |                                                                        | $            | (425    | )            |   | $            | (422    | )      |   | $ | (380    | )     
|Unallocated cost of operations                                         |                                                                        |              | (4,685  | )            |   |              | (3,295  | )      |   |   | (3,667  | )     
|Provision for asset impairment, store closure and
    loss on disposal |                                                                        |              | (1,073  | )            |   |              |        |        |   |   |        |       
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Loss from operations                                                   |                                                                        | $            | (6,183  | )            |   | $            | (3,717  | )      |   | $ | (4,047  | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|EBITDA                                                                 |                                                                        | $            | (3,556  | )            |   | $            | (3,136  | )      |   | $ | (3,410  | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|General and Administrative                                             |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|Loss from operations                                                   |                                                                        | $            | (6,415  | )            |   | $            | (6,837  | )      |   | $ | (6,581  | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       
|EBITDA                                                                 |                                                                        | $            | (5,910  | )            |   | $            | (6,382  | )      |   | $ | (6,366  | )     
|                                                                       |                                                                        |              |         |              |   |              |         |        |   |   |         |       

55



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                                                                       |  |              |         |              |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- | -
|                                                                       |  |             
|                                                                       |  | Years Ended 
|                                                                       |  |             
|                                                                       |  | December 29, |         | December 30, |  | December 31,
|                                                                       |  | 2002         |         | 2001         |  | 2000        
|                                                                       |  |              |         |              |  |             
|Total                                                                  |  |              |         |              |  |              |         |   |  |   |         |  
|Net Sales                                                              |  | $            | 30,593  |              |  | $            | 32,029  |   |  | $ | 33,692  |  
|Cost of food and packaging                                             |  |              | (11,850 | )            |  |              | (12,480 | ) |  |   | (13,597 | )
|                                                                       |  |              |         |              |  |              |         |   |  |   |         |  
|                                                                       |  |              | 18,743  |              |  |              | 19,549  |   |  |   | 20,095  |  
|Cost of operations                                                     |  |              | (29,859 | )            |  |              | (26,480 | ) |  |   | (26,163 | )
|Provision for asset impairment, store closure and
    loss on disposal |  |              | (3,428  | )            |  |              | (26     | ) |  |   | (63     | )
|                                                                       |  |              |         |              |  |              |         |   |  |   |         |  
|Loss from operations                                                   |  | $            | (14,544 | )            |  | $            | (6,957  | ) |  | $ | (6,131  | )
|                                                                       |  |              |         |              |  |              |         |   |  |   |         |  
|EBITDA                                                                 |  | $            | (6,764  | )            |  | $            | (4,245  | ) |  | $ | (3,350  | )
|                                                                       |  |              |         |              |  |              |         |   |  |   |         |  

In the table above, EBITDA represents earnings
before interest expense, income taxes, depreciation,
amortization loss on disposal of assets, and provision for asset
impairment and store closure. In fiscal 2002 and 2001, interest
income was also excluded. EBITDA data is included because
management understands that such information is considered by
certain investors as an additional basis on which to evaluate a
companys ability to pay interest, repay debt and make
capital expenditures. Because all companies do not calculate
EBITDA identically, the above presentation of EBITDA is not
necessarily comparable to similarly entitled measures of other
companies. EBITDA is not intended to represent and should not be
considered more meaningful than, or an alternative to, measures
of operating performance as determined in accordance with
generally accepted accounting principles. A reconciliation of
net loss to EBITDA is as follows:

|          |                                                  |              |         |              |   |              |        |       |   |   |        |       | 
|--------- | ------------------------------------------------ | ------------ | ------- | ------------ | - | ------------ | ------ | ----- | - | - | ------ | ----- | 
|          |                                                  |             
|          |                                                  | Years Ended 
|          |                                                  |             
|          |                                                  | December 29, |         | December 30, |   | December 31,
|          |                                                  | 2002         |         | 2001         |   | 2000        
|          |                                                  |              |         |              |   |             
|Net loss  |                                                  | $            | (15,129 | )            |   | $            | (6,802 | )     |   | $ | (6,287 | )    
|Add back: |                                                  |              |         |              |   |              |        |       |   |   |        |      
|          | Depreciation and amortization                    |              |         | 4,352        |   |              |        | 2,686 |   |   |        | 2,657 | 
|          | Loss on disposal of assets                       |              |         | 1,172        |   |              |        |      |   |   |        |      | 
|          | Provision for asset impairment and store closure |              |         | 2,256        |   |              |        | 26    |   |   |        | 63    | 
|          | Interest expense                                 |              |         | 637          |   |              |        | 125   |   |   |        | 217   | 
|          | Interest income                                  |              |         | (52          | ) |              |        | (280  | ) |   |        | N/A   | 
|          |                                                  |              |         |              |   |              |        |       |   |   |        |      
|EBITDA    |                                                  | $            | (6,764  | )            |   | $            | (4,245 | )     |   | $ | (3,350 | )    
|          |                                                  |              |         |              |   |              |        |       |   |   |        |      

Note
10.     Commitments and
Contingencies

The Company is subject to various legal
proceedings and claims that arise in the ordinary course of
business. Company management currently believes that resolution
of such legal matters will not have a material adverse impact on
the Companys financial position, results of operations or
cash flows.

Note 11.     Related
Parties

The Companys $500,000 note payable to a
bank is collateralized by the pledge of a certificate of deposit
in such amount owned by the Companys founder.

As further described in Note 12, in March
2003, the Company issued securities to FFG, such that, subject
to shareholder approval, FFG could own approximately 66.67% of
the Companys common stock on a fully-diluted, post
conversion basis.

56



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

In December 2002, the Company entered into a Food
Production Agreement, pursuant to which the Company now
purchases its food products from FFG in the Chicago, Los Angeles
and Seattle markets. The agreement provides that the
Companys rights and remedies for any breach by FFG of its
representations, warranties and covenants under the agreement
are limited to (i) actual damages of up to $50,000 if
FFGs failure to assume food production in a particular
market results in us being unable to take advantage of a
subleasing opportunity for its central kitchen in that market,
(ii) the Companys ability to reject nonconforming
products or recover the actual costs of nonconforming products,
(iii) indemnification by FFG for any claims or other
liabilities arising from any personal injury resulting from the
use of nonconforming products, and (iv) the Companys
ability to terminate the agreement as to a specific geographic
market in which a breach has occurred. The agreement provides
that the Company is not entitled to any additional damages in
the event of a breach by FFG, including actual or consequential
damages resulting from lost sales or lost profits. In addition,
the Company is not entitled to terminate the agreement in the
event of a breach by FFG, except by terminating the agreement as
to the specific geographic market in which the breach occurred.
The agreement has a term of ten years subject to earlier
termination (i) by FFG upon 180-days notice if the
Company fails to obtain shareholder approval for the issuance of
common stock upon the conversion of shares of Series D
Preferred Stock held by FFGs affiliate by April 30,
2003 or (ii) by either party if the other party becomes
insolvent. In addition, the agreement may be terminated in
specific markets (i) by the non-defaulting party in the
event of a default in a specific market by the other party or
(ii) by us if FFG is not able to resume production within
60 days of a Force Majeure event, until FFG can resume
production in the specific market. After the initial ten-year
term, the agreement renews automatically for successive one-year
terms unless terminated by either party on one-years
notice. Purchases from FFG approximated $450,000 during the
fiscal year ended December 29, 2002. In 2003, it is
expected that substantially all cost of food and packaging
expenses in these markets will be purchased from FFG.

Note
12.     Subsequent Events

In March 2003, the Company issued $2 million
of promissory notes, 100 shares of series D preferred stock
and warrants to purchase 1,193,546 shares of common stock to FFG
in consideration for approximately $550,000 cash and conversion
of $1.45 million of outstanding demand notes. All Company
assets are pledged as collateral for the notes. The notes bear
interest at 10% per year, payable monthly, and are due
March 6, 2004, subject to earlier maturity under certain
conditions. Subject to shareholder approval, series D
preferred stock would be convertible, at the option of the
holder, into approximately 66.67% of the Companys
outstanding common stock on a fully-diluted post-conversion
basis, such percentage being adjustable under certain
conditions. Upon the occurrence of any event of default under
the FFG note, the amount due and owing under the note shall be
increased to 130% of the then outstanding aggregate principal
amount of the note together with any accrued and unpaid interest
and fees. While any event of default is continuing, a default
rate of 14% will apply and FFG may declare all amounts owning
under the note immediately due and payable.

The Companys founder and Chief Executive
officer, has entered into a voting agreement with FFG in which
he has agreed to vote all shares of the Companys voting
capital stock that he owns of record or beneficially, or over
which he has voting authority or discretion to approve the
common stock issuable upon conversion of the series D
preferred stock. In addition, the Company agreed that by
April 5, 2005, FFG will receive voting agreements from the
beneficial holders of not less than 35% of the Companys
outstanding common stock, in which the holders agree to vote
their shares of the Companys common stock in favor of the
approval of the issuance of shares upon conversion of the
series D preferred stock. In the event that FFG does not
receive these agreements and does not waive this provision, an
event of default will exist under the terms of the note issued
to FFG.

In February 2003, the Company entered into a
letter of intent to sell senior secured notes and warrants to
purchase common stock (the DB securities) to DB
Advisors, LLC, an affiliate of Deutsche Bank, and other
investors. If completed, this financing would result in
additional cash proceeds of approximately $3.9 million

57



---



##### Table of Contents



BRIAZZ, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

and conversion of securities issued to FFG into
DB securities. The notes would bear interest at LIBOR plus 1%,
mature two years from date of closing and be collateralized by a
pledge of all Company assets. In addition to notes, investors
would receive warrants equal to approximately 78% of the common
shares of BRIAZZ on a fully-diluted, post-exercise basis with an
exercise price of $0.10 per share and members of management
would receive warrants to purchase 12% of the common shares of
BRIAZZ on a fully-diluted, post-exercise basis on the same terms
as the investors. Additionally, the investors would be entitled
to designate four of the five directors serving on the BRIAZZ
board of directors. The closing of the financing is subject to,
among other things, negotiation and execution of definitive
documents and satisfaction of conditions to closing, including
the receipt of BRIAZZ shareholder approval and the conversion by
FFG of its investment securities as described above.

Note
13.     Quarterly Financial Information
(Unaudited)

Summarized quarterly financial information in
fiscal years 2002 and 2001 is as follows (in thousands except
per share data):

|     |                                                   |       |   |         |   |       |   |        |   |  |   |        |   |  |   |        |  
|---- | ------------------------------------------------- | ----- | - | ------- | - | ----- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|     |                                                   | First |   | Second  |   | Third |   | Fourth
|     |                                                   |       |   |         |   |       |   |       
|2002 |                                                   |       |   |         |   |       |   |        |   |  |   |        |   |  |   |       
|     | Sales                                             |       | $ | 7,438   |   |       | $ | 8,109  |   |  | $ | 7,774  |   |  | $ | 7,272  |  
|     | Loss from operations(a)                           |       |   | (2,207  | ) |       |   | (2,410 | ) |  |   | (4,650 | ) |  |   | (5,278 | )
|     | Net loss                                          |       |   | (2,185  | ) |       |   | (2,527 | ) |  |   | (4,762 | ) |  |   | (5,656 | )
|     | Net loss per common share  basic and
    diluted |       | $ | (0.37   | ) |       | $ | (0.43  | ) |  | $ | (0.81  | ) |  | $ | (0.96  | )
|2001 |                                                   |       |   |         |   |       |   |        |   |  |   |        |   |  |   |       
|     | Sales                                             |       | $ | 8,263   |   |       | $ | 8,393  |   |  | $ | 7,944  |   |  | $ | 7,429  |  
|     | Loss from operations                              |       |   | (1,289  | ) |       |   | (1,164 | ) |  |   | (1,948 | ) |  |   | (2,556 | )
|     | Net loss                                          |       |   | (1,311  | ) |       |   | (1,052 | ) |  |   | (1,862 | ) |  |   | (2,577 | )
|     | Net loss per common share  basic and
    diluted |       | $ | (926.63 | ) |       | $ | (1.11  | ) |  | $ | (0.32  | ) |  | $ | (0.44  | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The third quarter of 2002 includes a
    $2.2 million provision primarily for asset impairment
    relating to cafés. The fourth quarter of 2002 includes a
    $1.2 million loss on disposal for the closure of Los
    Angeles and Chicago central kitchens, as well as a
    $0.9 million depreciation expense as a result of shortening
    the lives of Seattle and San Francisco kitchens.

58



---



##### Table of Contents






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

None.




PART III




Item 10.     Directors
and Executive Officers of the Registrant.

Information with respect to our directors and
executive officers is hereby incorporated by reference from our
proxy statement, under the caption Election of Directors
and Management Information, for our 2003 annual meeting of
stockholders to be filed pursuant to Regulation 14A
promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, which proxy statement is
anticipated to be filed no later than 120 days after the
end of our fiscal year ended December 29, 2002.




Item 11.     Executive
Compensation.

There is incorporated herein by reference the
information required by this Item to be included in the 2003
Proxy Statement under the caption Executive
Compensation which will be filed with the Securities and
Exchange Commission no later than 120 days after the close
of the fiscal year ended December 29, 2002.




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

There is incorporated herein by reference the
information required by this Item to be included in the 2003
Proxy Statement under the caption Voting Securities and
Principal Shareholders which will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended December 29, 2002.






|         |                                                                                    
|-------- | -----------------------------------------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions and Related Stockholder Matters.

There is incorporated herein by reference the
information required by this Item to be included in the 2003
Proxy Statement under the caption Certain Relationships
and Related Transactions which will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended December 29, 2002.






|         |                         
|-------- | ------------------------
|Item 14. | Controls and Procedures.

Evaluation of Disclosure Controls and
Procedures Under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and Chief Financial Officer, the Company evaluated the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Exchange Act as of a date (the
Evaluation Date) within 90 days prior to the
filing date of this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the Companys disclosure
controls and procedures were effective in timely alerting the
material information relating to the Company required to be
included in the Companys periodic SEC filings.

Changes in Internal Controls There were no significant changes made
in the Companys internal controls during the period
covered by this report or, to the Companys knowledge, in
other factors that could significantly affect these controls
subsequent to the Evaluation Date.

59



---



##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K.

(a) Financial Statements. The
following financial statements of Registrant and the Report of
Independent Accountants thereon are included herewith in
Item 8 above.

|                                                                                                                                   |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                   |  | Page
|                                                                                                                                   |  |     
|Report of Independent Accountants                                                                                                  |  |      | 40 | 
|Balance Sheets as of December 29, 2002 and
    December 30, 2001                                                                   |  |      | 41 | 
|Statements of Operations for the years ended
    December 29, 2002, December 30, 2001 and
    December 31, 2000                    |  |      | 42 | 
|Statement of Stockholders Equity (Deficit)
    for the years ended December 29, 2002, December 30,
    2001 and December 31, 2000 |  |      | 43 | 
|Statements of Cash Flows for the years ended
    December 29, 2002, December 30, 2001 and
    December 31, 2000                    |  |      | 44 | 
|Notes to the Financial Statements                                                                                                  |  |      | 45 | 

(b) Reports on Form 8-K

The Company furnished a Form 8-K on
October 15, 2002 to provide certain disclosures pursuant to
Item 9.

The Company filed a Form 8-K on
November 1, 2002 to report borrowings from FFG and
negotiations with FFG for additional financing. The Company also
furnished information pursuant to Item 9.

The Company filed a Form 8-K on
December 5, 2002 to report additional borrowings from FFG
and the closure of the Chicago central kitchen.

The Company filed a Form 8-K on
December 16, 2002 to report additional borrowings from FFG,
amendments to the Laurus convertible note and the issuance of
warrants to Laurus, and the closure of the Los Angeles central
kitchen.

(c) Exhibits.

|        |            |             |  |                                                                                                                                  
|------- | ---------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |            
|Number  |            | Description
|        |            |            
|        | 3.1(2)     |             |  | Amended and Restated Articles of Incorporation.                                                                                  
|        | 3.1.1      |             |  | Articles of Amendment filed March 5, 2003
    (including designation of Series D Convertible Preferred
    Stock).               
|        | 3.2        |             |  | Amended and Restated Bylaws.                                                                                                     
|        | 4.1(2)     |             |  | Specimen Stock Certificate for Common Stock.                                                                                     
|        | 4.2        |             |  | Specimen Stock Certificate for Series D
    Convertible Preferred Stock                                                          
|        | 10.1(1)(2) |             |  | 1996 Amended Stock Option Plan.                                                                                                  
|        | 10.2(1)(2) |             |  | Form of Option Agreement (1996 Plan 
    Fresh Options prior to February 2001).                                                 
|        | 10.3(1)(2) |             |  | Form of Option Agreement (1996 Plan 
    other options prior to February 2001).                                                 
|        | 10.4(1)(2) |             |  | 2001 Employee Stock Purchase Plan.                                                                                               
|        | 10.5(2)    |             |  | Form of Warrant (Series C Convertible
    Preferred Stock financing).                                                            
|        | 10.6(1)(2) |             |  | Employment Agreement between BRIAZZ and Charles
    William Vivian dated July 14, 1999.                                          
|        | 10.7(2)    |             |  | Form of Registration Rights Agreement among
    BRIAZZ and certain of our shareholders dated August 15,
    1997, as amended.    
|        | 10.8(2)    |             |  | Agreement between BRIAZZ and Stusser Realty Group
    Limited Partnership dated January 1998.                                    
|        | 10.9(2)    |             |  | Sublease between BRIAZZ and Stusser Electric
    Company regarding 3901 7th Avenue South, Seattle, WA dated
    February 6, 1998.

60



---



##### Table of Contents



|        |            |             |  |                                                                                                                                                                                                                                  
|------- | ---------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |            
|Number  |            | Description
|        |            |            
|        | 10.10(2)   |             |  | Sublease Amendment between BRIAZZ and Stusser
    Electric Company regarding 3901 7th Avenue South,
    Seattle, WA dated August 28, 2000.                                                                                       
|        | 10.12(2)   |             |  | Lease between BRIAZZ and Mission-Taylor
    Properties regarding 225 Mendell St., San Francisco, CA
    dated June 28, 1996.                                                                                                     
|        | 10.13(2)   |             |  | Amendment to Lease between BRIAZZ and
    Mission-Taylor Properties regarding 225 Mendell St., San
    Francisco, CA dated May 25, 2000.                                                                                         
|        | 10.14(2)   |             |  | Lease between BRIAZZ and Time Realty Investments,
    Inc. regarding 200 Center St., El Segundo, CA dated
    December 15, 1997.                                                                                                 
|        | 10.15      |             |  | Surrender of Possession and Termination of Lease
    Agreement dated December   , 2002 regarding lease
    between BRIAZZ and Time Realty Investments, Inc. regarding
    200 Center St., El Segundo, CA dated December 15, 1997.
|        | 10.16(2)   |             |  | Industrial Building Lease between BRIAZZ and
    Walnut Street Properties, Inc. regarding 1642 Lake Street,
    Chicago, IL dated April 7, 1997.                                                                                 
|        | 10.17(1)(2 | )           |  | Form of Option Agreement (1996 Plan 
    all options since February 2001).                                                                                                                                                      
|        | 10.18(2)   |             |  | Noncompetition Agreement between BRIAZZ and
    Victor D. Alhadeff dated October 18, 1996.                                                                                                                                       
|        | 10.19(3)   |             |  | Convertible Note made by BRIAZZ in favor of
    Laurus Master Fund, Ltd. dated June 18, 2002 in the
    principal amount of $1,250,000.                                                                                          
|        | 10.20(3)   |             |  | Common Stock Purchase Warrant issued by BRIAZZ to
    Laurus Master Fund, Ltd. dated June 18, 2002.                                                                                                                              
|        | 10.21(3)   |             |  | Security Agreement made by BRIAZZ in favor of
    Laurus Master Fund, Ltd. dated June 18, 2002.                                                                                                                                  
|        | 10.22      |             |  | Allonge dated December 2, 2002 to the
    Convertible Note issued by the Company to Laurus Master Fund,
    Ltd. on June 18, 2002.                                                                                               
|        | 10.24      |             |  | Common Stock Purchase Warrant issued by BRIAZZ to
    Laurus Master Fund, Ltd. dated December 2, 2002.                                                                                                                           
|        | 10.25      |             |  | Allonge dated January   , 2003 to
    the Convertible Note issued by BRIAZZ to Laurus Master Fund,
    Ltd. on June 18, 2002.                                                                                                    
|        | 10.26      |             |  | Allonge dated as of February 26, 2003 to the
    Convertible Note dated June 18, 2002 issued by BRIAZZ to
    Laurus Master Fund, Ltd. on June 18, 2002.                                                                         
|        | 10.27      |             |  | Allonge dated as of February 26, 2003 to the
    Warrant issued by BRIAZZ to Laurus Master Fund, Ltd. on
    June 18, 2002.                                                                                                      
|        | 10.28(4)   |             |  | Form of Secured Convertible Demand Note used in
    October 2002.                                                                                                                                                                
|        | 10.29      |             |  | Form of Secured Convertible Demand Note used in
    December 2002 and January 2003.                                                                                                                                              
|        | 10.30      |             |  | Food Production Agreement between Briazz and
    Flying Food Group, L.L.C. dated December 1, 2002.                                                                                                                               
|        | 10.31      |             |  | Amended Security Agreement between BRIAZZ, Flying
    Food Group, L.L.C. and New Management, Ltd., dated
    December 3, 2002.                                                                                                   
|        | 10.32      |             |  | Amended and Restated Purchase Agreement between
    BRIAZZ and Briazz Venture, L.L.C., dated March 5, 2003.                                                                                                                      
|        | 10.33      |             |  | $2,000,000 Senior Secured Note issued by BRIAZZ
    in favor of Briazz Venture, L.L.C., dated March 6, 2003.                                                                                                                     
|        | 10.34      |             |  | Warrant to purchase 1,193,546 shares of Common
    Stock issued by BRIAZZ to Briazz Venture, L.L.C. dated
    March 6, 2003.                                                                                                     
|        | 10.35      |             |  | Amendment dated March 6, 2003 between BRIAZZ
    and Briazz Venture, L.L.C. to Security Agreement dated
    December 3, 2002.                                                                                                    
|        | 10.36      |             |  | Voting Agreement between Briazz Venture, L.L.C.
    and Victor D. Alhadeff, dated as of March 6, 2003.                                                                                                                           

61



---



##### Table of Contents



|        |       |             |  |                                                                                                                                                                                           
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.37 |             |  | Registration Rights Agreement between BRIAZZ and
    Briazz Venture, L.L.C., dated March 6, 2003.                                                                                         
|        | 23.1  |             |  | Consent of Independent Accountants                                                                                                                                                        
|        | 99.1  |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002.



---



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(1) | Indicates management contract.                                                          
|   
|(2) | Incorporated by reference to our registration
    statement on Form S-1 (No. 333-54922).
|   
|(3) | Incorporated by reference to our Form 8-K
    filed on July 20, 2002.                   
|   
|(4) | Incorporated by reference to our Form 10-Q
    for the quarter ended September 29, 2002.

62



---



##### Table of Contents






SIGNATURES

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



| |             
| | ------------
| | BRIAZZ, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ VICTOR D. ALHADEFF

| |                                                                    
| | -------------------------------------------------------------------
| |                                                                    
| | Victor D. Alhadeff                                                 
| | Chief Executive Officer, Chief Financial
    Officer, and Secretary

Date: March 28, 2003.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report to be signed by the following
persons on behalf of the registrant in the capacities and on the
dates indicated.

|                                                     |  |                                                                                                |  |               
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Signature                                            |  | Title                                                                                          |  | Date          
|                                                     |  |                                                                                                |  |               
|/s/ VICTOR D. ALHADEFFVictor D. Alhadeff             |  | Chief Executive Officer,
    Chief Financial Officer, Secretary, and
    Chairman of the Board |  | March 28, 2003
|                                                    
|/s/ RICHARD FERSCHRichard Fersch                     |  | Director                                                                                       |  | March 28, 2003
|                                                    
|/s/ DAN KOURKOUMELISDan Kourkoumelis                 |  | Director                                                                                       |  | March 28, 2003
|                                                    
|/s/ CHARLES C. MATTESON, JR.Charles C. Matteson, Jr. |  | Director                                                                                       |  | March 28, 2003
|                                                    
|/s/ BILL VIVIANBill Vivian                           |  | Director                                                                                       |  | March 28, 2003

63



---



##### Table of Contents



CERTIFICATIONS

I, Victor D. Alhadeff, Chief Executive Officer,
Chief Financial Officer, Secretary and Chairman of the Board of
Directors of BRIAZZ, INC., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this Annual Report on Form 10-K of BRIAZZ, Inc.;                                                                                                                                                                                                                                                                            
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | /s/ VICTOR D. ALHADEFF                                                                                    
| |                                                                                                           
| | Victor D. Alhadeff                                                                                        
| | Chief Executive Officer, Chief Financial
    Officer, Secretary and Chairman of the Board of
    Directors

Date: March 28, 2003

64