---

---

SECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

---

FORM 10-Q

|(Mark One)
|----------
|x         
|          
|          
|          
|OR        
|          
|o         
|          
|          

Commission file number 0-20792

FRESH CHOICE, INC.(Exact name of registrant
as specified in its charter)

|Delaware                                                                      |  | 77-0130849                              
|----------------------------------------------------------------------------- |  | ----------------------------------------
|(State
  or other jurisdiction of
  incorporation or organization)            |  | (I.R.S.
  Employee
  Identification No.)
|                                                                              |  |                                         
|485 Cochrane Circle, Morgan Hill, California 95037                           
|(Address
  of principal executives
  offices)        (Zip Code)              
|                                                                             
|Registrants
  telephone number, including area
  code:        (408) 776-0799

|                                                                                   
|-----------------------------------------------------------------------------------
|Former
  name, former address and former fiscal year, if changed since last report.

|Indicate by check 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|xYesoNo                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                             
|Indicate by check mark
  whether the registrant is an accelerated filer (as defined in rule 12B-2 of
  the Exchange Act).                                                                                                                                                                                                                                    
|oYesxNo                                                                                                                                                                                                                                                                                                                                                      

|APPLICABLE
  ONLY TO CORPORATE ISSUERS:                                                                    
|-----------------------------------------------------------------------------------------------------------
|The number of shares of
  Common Stock, $.001 par value, outstanding as of October 1, 2004 was
  6,037,461.

---

---

FRESH CHOICE, INC.

INDEX

|PART I - FINANCIAL INFORMATION |                                                                                                                                                 |   
|------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | --
|                               |                                                                                                                                                 |   
|                               | Item 1 - Financial Statements                                                                                                                   |   
|                               |                                                                                                                                                 |   
|                               | Unaudited
  Condensed Consolidated Balance Sheets at September 5, 2004 and December 28,
  2003                                                  |   
|                               |                                                                                                                                                 |   
|                               | Unaudited
  Condensed Consolidated Statements of Operations for the Twelve and Thirty-Six
  Weeks ended September 5, 2004 and September 7, 2003 |   
|                               |                                                                                                                                                 |   
|                               | Unaudited
  Condensed Consolidated Statements of Cash Flows for the Thirty-Six Weeks
  ended September 5, 2004 and September 7, 2003            |   
|                               |                                                                                                                                                 |   
|                               | Notes to
  Unaudited Condensed Consolidated Financial Statements                                                                                |   
|                               |                                                                                                                                                 |   
|                               | Item 2 - Managements
  Discussion and Analysis of Financial Condition and Results of Operations                                                |   
|                               |                                                                                                                                                 |   
|                               | Item 3 - Quantitative
  and Qualitative Disclosures About Market Risk                                                                           |   
|                               |                                                                                                                                                 |   
|                               | Item 4- Controls
  and Procedures                                                                                                               |   
|                               |                                                                                                                                                 |   
|PART II - OTHER
  INFORMATION  |                                                                                                                                                 |   
|                               |                                                                                                                                                 |   
|                               | Item 1 - Legal
  Proceedings                                                                                                                    |   
|                               | Item 2 - Unregistered
  Sales of Equity Securities and Use of Proceeds                                                                          |   
|                               | Item 3 - Defaults
  Upon Senior Securities                                                                                                      |   
|                               | Item 4 - Submission
  of Matters to a Vote of Security Holders                                                                                  |   
|                               | Item 5 - Other
  Information                                                                                                                    |   
|                               | Item 6 - Exhibits
  and Reports on Form 8-K                                                                                                     |   
|                               |                                                                                                                                                 |   
|SIGNATURES                     |                                                                                                                                                 | 33
|                               |                                                                                                                                                 |   
|INDEX TO
  FORM 10-Q EXHIBITS  |                                                                                                                                                 | 34
|                               |                                                                                                                                                 |   

2

---

---

PART I.  FINANCIAL INFORMATION

Item 1 - Financial StatementsFRESH CHOICE, INC. (Debtor in Possession as of July 12, 2004)CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except share and per
share amounts)

|(Unaudited)                                                                                                                                                                                                             |  | September. 5,
  2004 |   | December 28,
  2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | - | ------------------- | -
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|ASSETS:                                                                                                                                                                                                                 |  |                      |   |                     |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|CURRENT
  ASSETS:                                                                                                                                                                                                       |  |                      |   |                     |  
|Cash
  and cash equivalents                                                                                                                                                                                             |  |                      | $ | 2,647               |  
|Assets
  held for sale                                                                                                                                                                                                  |  |                      |   | 3,490               |  
|Inventories                                                                                                                                                                                                             |  |                      |   | 367                 |  
|Prepaid
  expenses and other current assets                                                                                                                                                                             |  |                      |   | 732                 |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|Total
  current assets                                                                                                                                                                                                  |  |                      |   | 7,236               |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|PROPERTY AND
  EQUIPMENT, net                                                                                                                                                                                           |  |                      |   | 15,232              |  
|DEPOSITS AND
  OTHER ASSETS                                                                                                                                                                                             |  |                      |   | 1,072               |  
|ASSETS FROM
  DISCONTINUED OPERATIONS                                                                                                                                                                                   |  |                      |   | 233                 |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|TOTAL ASSETS                                                                                                                                                                                                            |  |                      | $ | 23,773              |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY:                                                                                                                                                                                 |  |                      |   |                     |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|LIABILITIES                                                                                                                                                                                                             |  |                      |   |                     |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|CURRENT
  LIABILITIES:                                                                                                                                                                                                  |  |                      |   |                     |  
|Accounts
  payable                                                                                                                                                                                                      |  |                      | $ | 547                 |  
|Other
  accrued expenses                                                                                                                                                                                                |  |                      |   | 3,628               |  
|Accrued
  salaries and wages                                                                                                                                                                                            |  |                      |   | 1,481               |  
|Sales
  tax payable                                                                                                                                                                                                     |  |                      |   | 572                 |  
|Current
  portion of long-term obligations                                                                                                                                                                              |  |                      |   | 2,351               |  
|Liabilities
  subject to compromise                                                                                                                                                                                     |  |                      |   | 10,070              |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|Total
  current liabilities                                                                                                                                                                                             |  |                      |   | 18,649              |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|CAPITAL
  LEASE OBLIGATIONS                                                                                                                                                                                             |  |                      |   | -                   |  
|LONG-TERM
  DEBT                                                                                                                                                                                                        |  |                      |   | 110                 |  
|OTHER
  LONG-TERM LIABILITIES                                                                                                                                                                                           |  |                      |   | 1,900               |  
|LIABILITIES
  FROM DISCONTINUED OPERATIONS                                                                                                                                                                              |  |                      |   | 431                 |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|Total
  liabilities                                                                                                                                                                                                     |  |                      |   | 21,091              |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|STOCKHOLDERS
  EQUITY:                                                                                                                                                                                                 |  |                      |   |                     |  
|Convertible
  preferred stock, $.001 par value;
            3.5 million
  shares authorized; shares
            outstanding:  2004 and 2003 - 1,187,906;
            liquidation
  preference; 2004-$9,287; 2003-$8,826 |  |                      |   | 5,175               |  
|Common
  stock - $.001 par value;
            15 million shares
  authorized; shares
            outstanding: 2004
  - 6,037,461;  2003 - 6,017,190                                                                     |  |                      |   | 42,744              |  
|Accumulated
  deficit                                                                                                                                                                                                   |  |                      |   | (45,237             | )
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|Total
  stockholders equity                                                                                                                                                                                            |  |                      |   | 2,682               |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  
|TOTAL
  LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                            |  |                      | $ | 23,773              |  
|                                                                                                                                                                                                                        |  |                      |   |                     |  

The
December 28, 2003 amounts are derived from the Companys audited financial
statements.
See accompanying notes to condensed consolidated financial statements.

3

---

---

FRESH CHOICE, INC. (Debtor in Possession as of
July 12, 2004)CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In thousands, except per share amounts)(Unaudited)

|                                                                                                                            |  | Twelve Weeks Ended |   | Thirty-Six Weeks Ended |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | - | ---------------------- | -
|                                                                                                                            |  |                    |   |                        |  
|                                                                                                                            |  | September 5, 2004  |   | September 7, 2003      |  
|                                                                                                                            |  |                    |   |                        |  
|                                                                                                                            |  |                    |   |                        |  
|NET SALES                                                                                                                   |  |                    | $ | 15,142                 |  
|                                                                                                                            |  |                    |   |                        |  
|COSTS AND EXPENSES:                                                                                                         |  |                    |   |                        |  
|Cost of sales                                                                                                               |  |                    |   | 3,447                  |  
|Restaurant operating
  expenses:                                                                                            |  |                    |   |                        |  
|Labor                                                                                                                       |  |                    |   | 4,945                  |  
|Occupancy
  and other                                                                                                       |  |                    |   | 5,081                  |  
|General and
  administrative expenses                                                                                       |  |                    |   | 1,270                  |  
|Depreciation and
  amortization                                                                                             |  |                    |   | 571                    |  
|Store closure and asset
  impairment expenses                                                                               |  |                    |   | 407                    |  
|                                                                                                                            |  |                    |   |                        |  
|Total costs and
  expenses                                                                                                  |  |                    |   | 15,721                 |  
|                                                                                                                            |  |                    |   |                        |  
|                                                                                                                            |  |                    |   |                        |  
|OPERATING INCOME (LOSS)                                                                                                     |  |                    |   | (579                   | )
|                                                                                                                            |  |                    |   |                        |  
|Chapter 11 related reorganization expenses                                                                                  |  |                    |   | (546                   | )
|Interest expense, net                                                                                                       |  |                    |   | (95                    | )
|                                                                                                                            |  |                    |   |                        |  
|                                                                                                                            |  |                    |   |                        |  
|INCOME (LOSS) FROM CONTINUING
       OPERATIONS BEFORE INCOME TAXES                                                         |  |                    |   | (1,220                 | )
|Provision for income taxes                                                                                                  |  |                    |   | -                      |  
|                                                                                                                            |  |                    |   |                        |  
|INCOME (LOSS) FROM 
  CONTINUING
       OPERATIONS                                                                          |  |                    |   | (1,220                 | )
|LOSS FROM DISCONTINUED OPERATIONS
       NET OF TAX                                                                         |  |                    |   | (3,539                 | )
|                                                                                                                            |  |                    |   |                        |  
|NET INCOME (LOSS)                                                                                                           |  |                    | $ | (4,759                 | )
|                                                                                                                            |  |                    |   |                        |  
|Basic net loss per common share:                                                                                            |  |                    |   |                        |  
|Income (loss) from
  continued operations                                                                                   |  |                    | $ | (0.20                  | )
|Loss from discontinued
  operations                                                                                         |  |                    |   | (0.59                  | )
|                                                                                                                            |  |                    |   |                        |  
|Basic net loss per common share:                                                                                            |  |                    | $ | (0.79                  | )
|                                                                                                                            |  |                    |   |                        |  
|Shares used in computing basic per share amounts                                                                            |  |                    |   | 6,037                  |  
|                                                                                                                            |  |                    |   |                        |  
|Diluted net loss per common share:                                                                                          |  |                    |   |                        |  
|Income (loss) from
  continued operations                                                                                   |  |                    | $ | (0.20                  | )
|Loss from discontinued
  operations                                                                                         |  |                    |   | (0.59                  | )
|                                                                                                                            |  |                    |   |                        |  
|Diluted net loss per common share:                                                                                          |  |                    | $ | (0.79                  | )
|                                                                                                                            |  |                    |   |                        |  
|Shares used in computing diluted per share amounts
       from continuing operations                                        |  |                    |   | 6,037                  |  
|                                                                                                                            |  |                    |   |                        |  
|Shares used in computing diluted per share amounts
       from discontinued operations and net loss
       per common share |  |                    |   | 6,037                  |  
|                                                                                                                            |  |                    |   |                        |  

See accompanying notes to condensed consolidated financial statements.

4

---

---

|FRESH CHOICE, INC. (Debtor in Possession as of July 12, 2004)                                                                                         |  |                        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                       |  |                        |  
|(In thousands)                                                                                                                                        |  |                        |  
|(Unaudited)                                                                                                                                           |  | Thirty-Six Weeks Ended |  
|                                                                                                                                                      |  |                        |  
|                                                                                                                                                      |  | September 5,
  2004    |  
|                                                                                                                                                      |  |                        |  
|                                                                                                                                                      |  |                        |  
|OPERATING ACTIVITIES OF CONTINUING OPERATIONS :                                                                                                       |  |                        |  
|Inome (loss)
  from continuing operations                                                                                                             |  |                        | $
|Adjustments
  to reconcile income (loss) from continuing operations to net cash
       provided by operating activities from
  continuing operations: |  |                        |  
|Depreciation
  and amortization                                                                                                                       |  |                        |  
|Non-cash
  store closure and asset impairment expenses                                                                                                |  |                        |  
|Chapter
  11 related reorganization expenses                                                                                                          |  |                        |  
|Issuance
  of common stock for consulting services                                                                                                    |  |                        |  
|Loss
   on disposal of property and equipment                                                                                                         |  |                        |  
|Deferred
  rent                                                                                                                                       |  |                        |  
|Change
  in operating assets and liabilities:                                                                                                         |  |                        |  
|Inventories                                                                                                                                           |  |                        |  
|Prepaid
  expenses and other current assets                                                                                                           |  |                        |  
|Accounts
  payable                                                                                                                                    |  |                        |  
|Accrued
  salaries and wages                                                                                                                          |  |                        |  
|Liabilities
  subject to compromise                                                                                                                   |  |                        |  
|Other
  accrued expenses                                                                                                                              |  |                        |  
|                                                                                                                                                      |  |                        |  
|Net
  cash provided by operating activities of continuing operations                                                                                  |  |                        |  
|                                                                                                                                                      |  |                        |  
|NET CASH
  USED FOR REORGANIZATION ITEMS                                                                                                              |  |                        |  
|                                                                                                                                                      |  |                        |  
|INVESTING
  ACTIVITIES:                                                                                                                               |  |                        |  
|Capital
  expenditures                                                                                                                                |  |                        |  
|Proceeds
  from sale of property and equipment                                                                                                        |  |                        |  
|Deposits
  and other assets                                                                                                                           |  |                        |  
|                                                                                                                                                      |  |                        |  
|Net
  cash used in investing activities                                                                                                               |  |                        |  
|                                                                                                                                                      |  |                        |  
|FINANCING
  ACTIVITIES:                                                                                                                               |  |                        |  
|Common
  stock sales                                                                                                                                  |  |                        |  
|Bank
  borrowings                                                                                                                                     |  |                        |  
|Long-term
  debt - repayments                                                                                                                         |  |                        |  
|Capital
  lease obligations - repayments                                                                                                              |  |                        |  
|                                                                                                                                                      |  |                        |  
|Net
  cash provided (used) by financing activities                                                                                                    |  |                        |  
|                                                                                                                                                      |  |                        |  
|CASH
  PROVIDED BY CONTINUING OPERATIONS                                                                                                              |  |                        |  
|CASH USED BY
  DISCONTINUED OPERATIONS                                                                                                                |  |                        |  
|                                                                                                                                                      |  |                        |  
|INCREASE (DECREASE) IN
  CASH AND CASH EQUIVALENTS                                                                                                    |  |                        |  
|CASH AND
  CASH EQUIVALENTS:                                                                                                                          |  |                        |  
|                                                                                                                                                      |  |                        |  
|Beginning
  of period                                                                                                                                 |  |                        |  
|                                                                                                                                                      |  |                        |  
|End
  of period                                                                                                                                       |  |                        | $
|                                                                                                                                                      |  |                        |  
|Supplemental
  Disclosure of Cash Flow Information:                                                                                                   |  |                        |  
|Cash
  paid during the period for interest                                                                                                            |  |                        | $
|                                                                                                                                                      |  |                        |  
|Cash
  paid during the period for income taxes                                                                                                        |  |                        | $
|                                                                                                                                                      |  |                        |  

See accompanying notes to condensed consolidated financial statements

5

---

---

FRESH
CHOICE, INC. (Debtor
in Possession as of July 12, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve and Thirty-Six Weeks Ended September 5, 2004 and September 7,
2003
(Unaudited)

1.     CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

The
accompanying condensed consolidated financial statements have been prepared by
the Company without audit and reflect all adjustments, consisting of normal
recurring adjustments and accruals, which are, in the opinion of management,
necessary for a fair statement of financial position and the results of
operations for the interim periods.  The
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission, but omit certain information and footnote
disclosures necessary to present the statements in accordance with accounting
principles generally accepted in the United States of America.  Certain amounts for the fiscal year ended
December 28, 2003 balance sheet have been reclassified to conform to the
September 5, 2004 presentation.  For
further information, refer to the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 28, 2003.

On
July 12, 2004 (the Petition Date), Fresh Choice, Inc. (the Company) filed a
voluntary petition for relief (the Filing) under Chapter 11 (Chapter 11) of
title 11 of the United States Code (the Bankruptcy Code) in the United States
Bankruptcy Court for the Northern District of California (the Bankruptcy
Court). The case has been assigned No. 04-54318 (Chapter 11 Case).  The Company is operating its business and
managing its property as a debtor in possession of its assets pursuant to the
Bankruptcy Code and the Companys existing directors and officers continue to
oversee operation of the Companys business as a debtor in possession.

Financial Statement Presentation

The
accompanying Condensed Consolidated Financial Statements have been prepared in
accordance with AICPA Statement of Position 90-7 (SOP 90-7), Financial
Reporting by Entities in Reorganization under the Bankruptcy Code, and on a
going concern basis, which contemplates continuity of operations, timely
payment for services by customers, control of operating costs and expenses and
the realization of asset sales and liquidation of liabilities and
commitments.  The bankruptcy filing and
related circumstances, including the closure of ten stores, the Companys
default on certain pre-petition debt, the losses from operations, as well as
current economic conditions, raise substantial doubts about the Companys
ability to continue as a going concern, accordingly, such realization of assets
and liquidation of liabilities are subject to uncertainty.  In connection with a plan of reorganization,
the Company may liquidate or settle liabilities for amounts other than those
reflected in the Condensed Consolidated Financial Statements.  Further a plan of reorganization could
materially change the amounts and classifications reported in the consolidated
historical financial statements, which do not give effect to any adjustments to
the carrying value of assets or amounts of liabilities that might be necessary
as a consequence of a plan of reorganization.

As
reflected in the Condensed Consolidated Financial Statements, Liabilities
subject to compromise refer to the Companys liabilities incurred prior to the
commencement of the Chapter 11 Case or claims arising from the rejection of
certain real property leases.  These
claims are either unsecured or there is uncertainty about whether
the claims are secured or unsecured or whether, in the case of the capital
leases, they constitute true leases or are disguised financing agreements under
the Uniform Commercial Code. The amounts of
the various liabilities that are subject to compromise are set forth
below.  These amounts represent the
Companys estimate of known or potential claims to be resolved in connection
with the Chapter 11 Case.  Such claims
remain subject to future adjustment. 
Adjustments may result from negotiations, actions of the Bankruptcy
Court, further developments with respect to disputed claims, rejection of
executory contracts and unexpired leases, the determination as to the value of
any collateral securing claims, proofs of claim, or other events.  Payment terms for these amounts will be
established in connection with the Chapter 11 Case.

6

---

---

Pursuant
to the Bankruptcy Code, the Company has filed schedules with the Bankruptcy
Court setting forth the assets and liabilities of the Company.  Differences between amounts recorded by the
Company and claims filed by creditors with the Bankruptcy Court will be
investigated and resolved as part of the Chapter 11 Case.  Bar dates for the filing of proofs of claim
against the Company have been set for November 9, 2004 for all creditors other
than governmental units, and 180 days after the Petition Date for governmental
units. As of October 1, 2004, the ultimate number and allowed amounts of such
claims were not known.

The
Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including certain pre-petition
employee wages, salaries, benefits and other employee obligations and certain
other pre-petition claims.  The
pre-petition liabilities that have been approved by the Bankruptcy Court to be
paid are not included in Liabilities subject to compromise on the
accompanying condensed consolidated balance sheets at September 5, 2004.

The liabilities subject to compromise in the condensed consolidated debtor in
possession balance sheet consist of the following items at September 5, 2004:

|(In
  thousands)                                                           |  | September 5,2004 |  
|-------------------------------------------------------------------------- |  | ---------------- | -
|                                                                           |  |                  |  
|                                                                           |  |                  |  
|Accounts
  payable                                                         |  |                  | $
|Estimated
  allowable claims for rejection of unexpired real estate leases |  |                  |  
|Sales taxes
  payable                                                      |  |                  |  
|Capital
  lease obligations                                                |  |                  |  
|Accrued
  expenses                                                         |  |                  |  
|                                                                           |  |                  |  
|                                                                           |  |                  | $
|                                                                           |  |                  |  

As
part of the Filing, the Company rejected certain leases as allowed by the
Bankruptcy Code.  The Company has
recorded a liability of $3.9 million for the estimated maximum amount of
allowable claims under the Bankruptcy Code for the ten restaurants closed in
early July and the one restaurant closed in March, whose leases were either
rejected or otherwise terminated.  The
ultimate allowance (or disallowance) of any claims relating to the termination
or rejection of any leases shall be determined in accordance with the
Bankruptcy Code and applicable bankruptcy law. 
The liability is included in liabilities subject to compromise in the
accompanying condensed consolidated balance sheets.

The
Chapter 11 related reorganization items in the condensed consolidated
statements of operations for the twelve and thirty-six week periods ended September
5, 2004 consists of $528,000 of estimated professional fees, including the US
Trustee fees, and $18,000 for the accrual of estimated retention payments under
the Companys non-senior executive key employee retention plans.

Pursuant
to the Bankruptcy Code, schedules have been filed by the Company with the
Bankruptcy Court setting forth the assets and liabilities of the Company.  Differences between amounts recorded and
schedules by the Company estimating the Companys liabilities to its creditors
and claims filed by creditors in the Bankruptcy Court will be investigated and
resolved as part of the Chapter 11 Case.

2.     STOCK-BASED COMPENSATION

The
Company accounts for stock-based awards to employees using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. 
The Company accounts for stock-based awards to non employees in
accordance with Statement of Financial Accounting Standards (SFAS) No. 123
Accounting for Stock-Based Compensation and Emerging Issues Task Force
(EITF) 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.

7

---

---

The
following table illustrates the effect on net loss and net loss per common
share if the Company had applied fair value recognition provisions of SFAS No.
123 to stock based employee compensation.

|                                                                                                                              |  | Twelve Weeks Ended  |   | Thirty-Six Weeks Ended |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | - | ---------------------- | -
|                                                                                                                              |  |                     |   |                        |  
|(In thousands, except per share data)                                                                                         |  | September 5,
  2004 |   | September 7,
  2003    |  
|                                                                                                                              |  |                     |   |                        |  
|                                                                                                                              |  |                     |   |                        |  
|Net loss                                                                                                                      |  |                     | $ | (4,759                 | )
|Deduct: Total stock-based employee
       compensation expense determined under
       fair value based method for all awards |  |                     |   | (37                    | )
|                                                                                                                              |  |                     |   |                        |  
|Pro forma net loss                                                                                                            |  |                     | $ | (4,796                 | )
|                                                                                                                              |  |                     |   |                        |  
|                                                                                                                              |  |                     |   |                        |  
|Net loss per common share:                                                                                                    |  |                     |   |                        |  
|Basic and diluted- as reported                                                                                                |  |                     | $ | (0.79                  | )
|                                                                                                                              |  |                     |   |                        |  
|Basic and diluted-pro forma                                                                                                   |  |                     | $ | (0.79                  | )
|                                                                                                                              |  |                     |   |                        |  

3.     NET LOSS PER COMMON SHARE

Basic
net loss per common share excludes dilution and is computed by dividing net
income by the weighted average of its common shares outstanding for the
period.  Diluted net loss per common
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.  The Company converts common stock options
and warrants into potential dilutive shares using the treasury stock method and
converts preferred stock into potential dilutive shares using the if
converted method.

A
reconciliation of the components of basic and diluted net income per share
follows:

|                                                           |  | Twelve Weeks Ended |   | Thirty-Six Weeks Ended |  
|---------------------------------------------------------- |  | ------------------ | - | ---------------------- | -
|                                                           |  |                    |   |                        |  
|(In
  thousands, except per share data)                    |  | September 5, 2004  |   | September 7, 2003      |  
|                                                           |  |                    |   |                        |  
|                                                           |  |                    |   |                        |  
|Basic Net Loss Per Common
  Share                          |  |                    |   |                        |  
|Income
  (loss) from continuing operations                 |  |                    | $ | (1,220                 | )
|Loss
  from discontinued operations                        |  |                    |   | (3,539                 | )
|                                                           |  |                    |   |                        |  
|Net
  Loss                                                 |  |                    | $ | (4,759                 | )
|                                                           |  |                    |   |                        |  
|Weighted
  average common shares outstanding               |  |                    |   | 6,037                  |  
|                                                           |  |                    |   |                        |  
|Basic
  income (loss) per share from continuing operations |  |                    | $ | (0.20                  | )
|Basic
  loss per share from discontinued operations        |  |                    |   | (0.59                  | )
|                                                           |  |                    |   |                        |  
|Basic
  net loss per common share                          |  |                    | $ | (0.79                  | )
|                                                           |  |                    |   |                        |  
|                                                           |  |                    |   |                        |  
|Diluted Net Loss Per Common
  Share                        |  |                    |   |                        |  
|Income
  (loss) from continuing operations                 |  |                    | $ | (1,220                 | )
|Loss
  from discontinued operations                        |  |                    |   | (3,539                 | )
|                                                           |  |                    |   |                        |  
|Net
  Loss                                                 |  |                    | $ | (4,759                 | )
|                                                           |  |                    |   |                        |  
|Weighted
  average common shares outstanding               |  |                    |   | 6,037                  |  
|Dilutive
  shares:                                         |  |                    |   |                        |  
|Stock
  options                                            |  |                    |   | -                      |  
|Convertible
  preferred stock                              |  |                    |   | -                      |  
|                                                           |  |                    |   |                        |  
|Total
  shares and dilutive shares                         |  |                    |   | 6,037                  |  
|                                                           |  |                    |   |                        |  
|Diluted income (loss) per share from continuing operations |  |                    | $ | (0.20                  | )
|Diluted
  loss per share from discontinued operations      |  |                    |   | (0.59                  | )
|                                                           |  |                    |   |                        |  
|Diluted
  net loss per common share                        |  |                    | $ | (0.79                  | )
|                                                           |  |                    |   |                        |  

8

---

---

The following table presents the total
dilutive securities, which the Company excluded for each period presented from
its diluted EPS computation because the exercise price of the securities
exceeded the average fair value of the Companys common stock or the Company
had a net loss and therefore, these securities were anti-dilutive:

|                                |  | Twelve Weeks Ended |       | Thirty-Six Weeks Ended | 
|------------------------------- |  | ------------------ | ----- | ---------------------- | 
|                                |  |                    |       |                        | 
|(In thousands)                  |  | September 5, 2004  |       | September 7, 2003      | 
|                                |  |                    |       |                        | 
|                                |  |                    |       |                        | 
|Potential
  Dilutive Securities |  |                    |       |                        | 
|Stock
  options excluded        |  |                    | 1,142 |                        | 
|Stock
  warrants                |  |                    | 100   |                        | 
|Convertible
  preferred stock   |  |                    | 1,188 |                        | 

4.     ASSETS
HELD FOR SALE

Assets
held for sale is the net book value of the real property of four restaurants,
which are currently listed for sale. 
Three of these restaurants had been written down to estimated net
realizable value, net of costs to sell, in the second quarter of 2004.
Depreciation expense is no longer being recorded on these real property assets.
The estimated net realizable value, net of costs to sell, is reviewed and is
further written down in the period it is determined to be necessary.  The operations of these four restaurants are
included in discontinued operations.

5.     OTHER
ACCRUED EXPENSES

The
components of other accrued expenses are as follows:

|(In thousands)                                       |  | September 5,
  2004 |   | December 28,
  2003 | 
|---------------------------------------------------- |  | ------------------- | - | ------------------- | 
|                                                     |  |                     |   |                     | 
|                                                     |  |                     |   |                     | 
|Accrued
  workers compensation                      |  |                     | $ | 932                 | 
|Unredeemed
  gift certificates                       |  |                     |   | 546                 | 
|Deferred
  vendor allowances                         |  |                     |   | 403                 | 
|Accrued
  utilities                                  |  |                     |   | 301                 | 
|Accrued
  advertising                                |  |                     |   | 172                 | 
|Accrued
  property taxes                             |  |                     |   | 71                  | 
|Accrued
  insurance                                  |  |                     |   | 104                 | 
|Accrued
  professional fees                          |  |                     |   | 109                 | 
|Accrued
  Chapter 11 related reorganization expenses |  |                     |   | 432                 | 
|Accrued rent                                         |  |                     |   | 382                 | 
|Other                                                |  |                     |   | 176                 | 
|                                                     |  |                     |   |                     | 
|                                                     |  |                     | $ | 3,628               | 
|                                                     |  |                     |   |                     | 

9

---

---

6.     ASSETS
AND LIABILITIES FROM DISCONTINUED OPERATIONS

The
components of assets and liabilities from discontinued operations are as
follows:

|(In thousands)                              |  | September
  5,
  2004 |   | December
  28,
  2003 | 
|------------------------------------------- |  | --------------------- | - | --------------------- | 
|                                            |  |                       |   |                       | 
|ASSETS:                                     |  |                       |   |                       | 
|                                            |  |                       |   |                       | 
|CURRENT ASSETS:                             |  |                       |   |                       | 
|Inventories                                 |  |                       | $ | 33                    | 
|Prepaid
  expenses and other current assets |  |                       |   | 6                     | 
|                                            |  |                       |   |                       | 
|Total
  current assets                      |  |                       |   | 39                    | 
|                                            |  |                       |   |                       | 
|PROPERTY AND EQUIPMENT,
  net               |  |                       |   | 190                   | 
|                                            |  |                       |   |                       | 
|DEPOSITS AND OTHER ASSETS                   |  |                       |   | 4                     | 
|                                            |  |                       |   |                       | 
|ASSETS FROM DISCONTINUED
  OPERATIONS       |  |                       | $ | 233                   | 
|                                            |  |                       |   |                       | 
|LIABILITIES                                 |  |                       |   |                       | 
|                                            |  |                       |   |                       | 
|CURRENT LIABILITIES:                        |  |                       |   |                       | 
|Accounts
  payable                          |  |                       | $ | 154                   | 
|Other
  accrued expenses                    |  |                       |   | 52                    | 
|Accrued
  salaries and wages                |  |                       |   | 92                    | 
|Sales
  tax payable                         |  |                       |   | 39                    | 
|Current
  portion of long-term obligations  |  |                       |   | -                     | 
|                                            |  |                       |   |                       | 
|Total
  current liabilities                 |  |                       |   | 337                   | 
|                                            |  |                       |   |                       | 
|CAPITAL LEASE OBLIGATIONS                   |  |                       |   | -                     | 
|                                            |  |                       |   |                       | 
|OTHER LONG-TERM
  LIABILITIES               |  |                       |   | 95                    | 
|                                            |  |                       |   |                       | 
|LIABILITIES FROM DISCONTINUED
  OPERATIONS  |  |                       | $ | 431                   | 
|                                            |  |                       |   |                       | 

7.     BORROWING
ARRANGEMENTS

The Company has a $2,200,000 loan (the
Loan), with a commercial bank.  Under
the terms of the Loan, the Company issued a promissory note (the Note) in the
amount of $2,200,000.  The Note is
secured by a deed of trust on certain Company-owned real estate, which is
currently held for sale.  The Note bears
interest at the prime rate (4.5% at September 5, 2004) plus 0.625%.  The Note has a fifteen-year amortization
period and matures after 84 monthly payments of principal and interest.  All unpaid principal and interest shall be
due and payable on the Notes maturity date of September 2, 2008.

On
September 5, 2004 the Company had $1,850,000 of debt outstanding under the Loan
described above, all of which was included in the current portion of long-term
obligations as the Company was not in compliance with certain covenants and the
bank had the right, subject to the automatic stay in effect during the Chapter 11 Case, to demand payment of the balance due. The Deed of Trust requires the Company to maintain a minimum debt
service coverage ratio and to maintain a minimum tangible net worth.

In
March 2004 the Company amended its $2,000,000 revolving line of credit
(the  Agreement) with its bank to
increase the amount to $3,000,000 and extend the Agreement to May 17,
2005.  Borrowings bear interest at the
prime rate (4.5% at September 5, 2004) plus 0.5%.  Certain of the Companys personal property collateralize
borrowings under the Agreement.  On
September 5, 2004 the Company had $500,000 in borrowings outstanding under the
Agreement which was included in the current portion of long-term obligations as
the Company was not in compliance with certain covenants under the agreement
and the bank had the right, subject to the automatic stay in effect during the Chapter 11 Case, to demand payment
of the balance due.   In addition, the Company
had $2,322,000 utilized to support outstanding letters of credit required under
its workers compensation program.  The
letters of credit, which are scheduled to expire March 1, 2005, will
automatically extend for a one-year period.

10

---

---

The
amended Agreement requires the Company to maintain (i) a minimum tangible net
worth, (ii) a minimum debt service coverage ratio and (iii) a maximum debt to
tangible net worth ratio.  The Agreement
also limits the Companys fixed asset acquisitions and requires approval before
paying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires the
outstanding principal balance of the loan to be zero for at least one period of
thirty consecutive days during the term of the loan.

Covenant
compliance is reported quarterly and the Company was not in compliance with
certain financial covenants under the amended Agreement at September 5, 2004.

The
Company had capital lease obligations at September 5, 2004 that totaled
$2,486,000, all of which were included in liabilities subject to compromise as
there is uncertainty about whether these claims are secured or unsecured or
whether the capital leases constitute true leases or are disguised financing
agreements under the Uniform Commercial Code. 
Three of these capital lease obligations, totaling $935,000, were
rejected as of July 12, 2004 and the equipment returned to the lessor pursuant
to section 365(d)(10) of the Bankruptcy Code. The Company did not make the July
1, 2004 or the August 1, 2004 payments on the remaining equipment leases, which
gave the leasing companies the right, subject to the automatic stay in effect
during the Chapter 11 Case, to demand payment of the remaining lease payments.

Long-Term
Debt consists of an $111,000 note for site construction costs of which $1,000
was included in the current portion of long-term obligations.

At
September 5, 2004 the current portion of long-term obligations consisted of:

| | (In thousands)                                   |  |                 |  
| | ------------------------------------------------ |  | --------------- | -
| |                                                  |  | Current Portion |  
| |                                                  |  |                 |  
| | Secured Note                                     |  |                 | $
| | Secured Line of Credit                           |  |                 |  
| | Other Note Payable                               |  |                 |  
| |                                                  |  |                 |  
| | Total Current Portion oflong-
  term obligations |  |                 | $
| |                                                  |  |                 |  

The
Companys other long-term liabilities include deferred rent of $1,467,000 at
September 5, 2004.  The Companys
deferred rent liability consists of the net cumulative rent expensed in excess
of rent payments since inception of these leases. In addition other long term
liabilities includes $163,000 of deferred income at September 5, 2004 from a
gain on the 1993 sale and leaseback of a building and land for one of the
Companys restaurants.  The Company is
amortizing the gain over the 20-year initial term of the lease. The remaining
balance of $270,000 in other long-term liabilities is the non-current portion
of certain employee benefit plans.

8.     STORE
CLOSURE AND ASSET IMPAIRMENT EXPENSES

In
the second quarter ended June 13, 2004, the Company recorded a non-cash
impairment charge of $6,953,000 ($2,804,000 for continuing operations and
$4,149,000 for discontinued operations) for the write-down of buildings,
leasehold improvements and equipment to fair value for eighteen of the
Companys restaurants. The Company closed ten of these restaurants in the third
quarter (eight of which had been impaired prior to the second quarter). The ten
closed restaurants were operating at negative cash flows and were projected to
incur future negative cash flows.  The
Company intends to either sell or discontinue operations at the other eight
impaired restaurants. Fifteen of the impaired or closed locations are located
in Southern California, Texas and Washington, which are outside of the
Companys core northern California markets. 
The impairment charge for the eighteen restaurants was required because
the carrying amounts of the impaired assets were not recoverable from their
currently projected undiscounted cash flows. 
The impairment loss was calculated as the difference between the
carrying amount and fair value of the assets. In addition, the Company closed
one previously impaired restaurant in the second quarter and recorded a
$300,000 charge in continuing operations for the estimated cash costs associated
with the restaurant closure and settlement of the lease obligation.

11

---

---

In
the third quarter ended September 5, 2004 the Company recorded a $3,626,000
($407,000 for continuing operations and $3,219,000 for discontinued operations)
store closure and asset impairment charge which consisted of; (i) a $3,492,000
charge to record or adjust the expected cash liability to the maximum amount of
allowable claims under the Bankruptcy Code for leases either rejected or
otherwise terminated for eleven closed restaurants, (ii) a $443,000 non-cash
credit for the reversal of the remaining deferred rent for these eleven
rejected leases, (iii) a charge of $177,000 for the cash costs associated with
the restaurant closures, and (iv) a non- cash asset impairment charge of
$400,000 for the write-down of buildings, leasehold improvements and equipment
to fair value primarily for three of the Companys restaurants, one of which
had been previously partially impaired. 
The impairment charge for the three restaurants was required because the
lease terms were amended to allow for an earlier termination and therefore the
carrying amounts of the impaired assets were not recoverable from their
currently projected undiscounted cash flows. 
The impairment loss was calculated as the difference between the
carrying amount and fair value of the assets. 
The Company may incur additional impairment charges in the future if
sales deteriorate at other restaurants or additional leases are amended to
allow for early termination.  In
addition, as the Company closes restaurants in the future, the Company may
incur significant store closure and lease termination charges in the period
such restaurants close.

9.     CONVERTIBLE
PREFERRED STOCK

The
Companys outstanding Series B non-voting convertible preferred stock is
currently held by one entity and is convertible, at the holders option, into
Series A voting convertible preferred stock on a one-for-one basis.  Although no Series A preferred stock is
currently outstanding, holders of Series A preferred stock, if any, would be
entitled to vote  with common
stockholders on all matters submitted to a vote of stockholders.  When and if issued, the holders of a  majority of the outstanding Series A
preferred stock would have a separate right to approve certain corporate
actions.  All shares of Series A and
Series B preferred stock are senior to the Companys common stock with respect
to dividends and with respect to distributions on liquidation.  Upon any liquidation, after an event of
default, the holders of Series A and Series B preferred stock are entitled to
be paid in full an amount equal to $4.63 per share, together with all accrued
dividends at an annual rate of $0.56 per share calculated from the first date
of an event of default, which occurred in fiscal 1998.

In
fiscal 1998, the Company failed to achieve a specified earnings target, which
constituted an event of default of the terms of the preferred stock agreement
and which triggered the right of the Series A preferred stockholders, if any,
to elect a majority of the Companys Board of Directors.  The holder of the Series B preferred stock
has not initiated any action to convert such shares into shares of Series A
preferred stock nor has it exercised its right to elect a majority of the Board
of Directors.  The holder has entered
into a letter agreement waiving this right until the date that such holder
elects to sell, transfer, convey or otherwise dispose of all its shares.

10.     DISCONTINUED
OPERATIONS

When
a restaurant is closed or held for sale, the Company makes an evaluation as to
whether its results should be reflected as discontinued operations in
accordance with Statement of Financial Accounting Standard 144-Accounting for
the Impairment or Disposal of Long-Lived Assets.

12

---

---

During
the second quarter, the Company closed one restaurant.  The Company did not consider the closure of
this restaurant in the second quarter a discontinued operation as a significant
portion of the closed restaurant sales were absorbed by another currently
operating restaurant.  A summary the
results of operations for this restaurant, whose results are included in
continuing operations for the twelve and thirty-six weeks ended September 5,
2004 and September 7, 2003 is as follows:

| |                                             |  | Twelve
  Weeks Ended |   | Thirty-Six
  Weeks Ended |  
| | ------------------------------------------- |  | -------------------- | - | ------------------------ | -
| |                                             |  |                      |   |                          |  
| | (In thousands)                              |  | September 5, 2004    |   | September 7, 2003        |  
| |                                             |  |                      |   |                          |  
| |                                             |  |                      |   |                          |  
| | Net sales                                   |  |                      | $ | -                        |  
| | Cost of sales                               |  |                      |   | -                        |  
| | Restaurant operating
  expenses:            |  |                      |   |                          |  
| | Labor                                       |  |                      |   | -                        |  
| | Occupancy and other                         |  |                      |   | -                        |  
| | Depreciation and
  amortization             |  |                      |   | -                        |  
| | Store closure and asset impairment expenses |  |                      |   | 7                        |  
| |                                             |  |                      |   |                          |  
| | Total costs and expenses                    |  |                      |   | 7                        |  
| |                                             |  |                      |   |                          |  
| | Operating loss                              |  |                      | $ | (7                       | )
| |                                             |  |                      |   |                          |  

During
the third quarter, the Company closed ten restaurants and listed four other
restaurants for sale.  These fourteen
restaurants were deemed to be discontinued operations under the Companys
policies. The consolidated condensed financial statements present these
restaurants operations as discontinued operations. A summary the results of
operations for theses fourteen restaurants for the twelve and thirty-six weeks
ended September 5, 2004 and September 7, 2003 is as follows:

|                                            |  | Twelve
  Weeks Ended |   | Thirty-Six
  Weeks Ended |  
|------------------------------------------- |  | -------------------- | - | ------------------------ | -
|                                            |  |                      |   |                          |  
|(In thousands)                              |  | September 5, 2004    |   | September 7, 2003        |  
|                                            |  |                      |   |                          |  
|                                            |  |                      |   |                          |  
|Net sales                                   |  |                      | $ | 1,623                    |  
|Cost of sales                               |  |                      |   | 471                      |  
|Restaurant operating expenses:              |  |                      |   |                          |  
|Labor                                       |  |                      |   | 756                      |  
|Occupancy and other                         |  |                      |   | 692                      |  
|Depreciation and amortization               |  |                      |   | 9                        |  
|Store closure and asset impairment expenses |  |                      |   | 3,219                    |  
|Restaurant opening costs                    |  |                      |   | -                        |  
|Interest expense                            |  |                      |   | 15                       |  
|                                            |  |                      |   |                          |  
|                                            |  |                      |   |                          |  
|Total costs and expenses                    |  |                      |   | 5,162                    |  
|                                            |  |                      |   |                          |  
|Loss from discontinued operations           |  |                      | $ | (3,539                   | )
|                                            |  |                      |   |                          |  

The
Company anticipates it will have additional discontinued operations as leases
expire or other restaurants are closed as part of the Companys reorganization
process.  Any future restaurant closures
will be evaluated as to whether they should be treated as discontinued
operations based upon the Companys accounting policies.

13

---

---

11.     RECENTLY
ISSUED ACCOUNTING STANDARDS

In
January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
FIN No. 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN No. 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN No. 46 was revised in December 2003
and is effective for the first financial reporting period ending after March
15, 2004.  The Company adopted the
provisions of FIN No. 46 for the fiscal quarter ending March 21, 2004, which
did not have a material impact on the financial statements.

Item
2 - Managements Discussion and Analysis of Financial Condition and Results of
Operations

The
following discussion is intended to highlight significant changes in the
Company's financial position and results of operations for the twelve and
thirty-six weeks ended September 5, 2004. 
The interim financial statements and this Management's Discussion and
Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Consolidated Financial Statements and Notes thereto for
the fiscal year ended December 28, 2003 and the related Management's Discussion
and Analysis of Financial Condition and Results of Operations, both of which
are contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 28, 2003.

Certain
statements set forth in this discussion and analysis of financial condition and
results of operations including, among others, the Companys ability to
continue as a going-concern and trends in or expectations regarding the
Companys operations constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.  Such statements are based on currently
available operating, financial and competitive information and are subject to
various risks and uncertainties.  Actual
future results and trends may differ materially depending on a variety of
factors as set forth under the heading Business Risks, including the ability
of the Company to successfully reorganize its remaining operations and
restructure its financial affairs under Chapter 11 of the Bankruptcy Code; the
ability of the Company to return to positive comparable-store sales and achieve
profitability; and the Companys ability to secure and retain services of
experienced personnel during the Chapter 11 proceedings.

Forward-looking
statements reflect the expectations of the Company at the time they are made,
and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made.  The Company undertakes no obligation to
update any forward-looking statements. 
Although the Company believes it has an appropriate business strategy
and the resources necessary for its operations, future revenue and margin
trends cannot be reliably predicted and the Company may alter its business
strategies to address changing conditions.

On
July 12, 2004, the Company filed a voluntary petition for relief under chapter
11 of title 11 of the Bankruptcy Code in the Bankruptcy Court. The case has
been assigned No. 04-54318.  The Company
is operating its business and managing its property as a debtor in possession
of its assets and the Companys existing directors and officers continue to
oversee operation of the Companys business as a debtor in possession.

Consequences
of the Chapter 11 Filing

As
a consequence of the Filing, all pending claims against the Company are stayed
automatically by section 362 of the Bankruptcy Code, and absent further order
of the Bankruptcy Court, no party may take any action to recover any
pre-petition claims, enforce any lien against or obtain possession of any
property from the Company.   In
addition, pursuant to Section 365 of the Bankruptcy Code, the Company may
reject or assume pre-petition executory contracts and unexpired leases. The
non-debtor parties to these contracts or leases may file claims with the
Bankruptcy Court in accordance with the Chapter 11 reorganization process.

As provided by the
Bankruptcy Code, the Company initially will have the exclusive right for 120
days following the Petition Date to propose a plan of reorganization.  If the Company fails to file a plan of
reorganization during such period or any extension thereof, or if such plan is
not accepted by the requisite numbers of creditors and equity holders entitled
to vote on the plan within 180 days after the Petition Date or any extension
thereof, other parties in interest may be permitted to propose their own plan
or plans of reorganization for the Company. 
The Company is unable to predict at this time what the treatment of
creditors and equity holders of the Company will be under any proposed plan or
plans of reorganization.

14

---

---

The
Bankruptcy Court may confirm a plan of reorganization only upon making certain
findings required by the Bankruptcy Code, and a plan may be confirmed over the
dissent of non-accepting creditors and equity security holders if certain
requirements of the Bankruptcy Code are met. 
The payment rights and other entitlements of pre-petition creditors and
the Companys stockholders may be substantially altered by any plan of
reorganization confirmed in the Chapter 11 Case.   There can be no assurance that there will be sufficient assets
to satisfy the Companys pre-petition liabilities in whole or that the
Companys equity securities will have any continuing value. As between our two
classes of equity securities, preferred stock and common stock, the preferred
stockholder is entitled to receive a substantial preference payment before the
common stockholders receive any distributions, so it is entirely possible that
most or all amounts available to satisfy equity securities holders claims will
be distributed to the preferred stockholder with common stockholders possibly
receiving little or nothing for their securities.  Under a plan of reorganization, pre-petition creditors could
receive less than 100% of the face value of their claims and the Companys
equity securities could be cancelled. 
In addition, the Company has not yet proposed a plan of
reorganization.  It is not possible to
predict the outcome of the Chapter 11 Case, the terms and provisions of any plan
of reorganization, or the effect of the Chapter 11 reorganization process on
the claims of the creditors of the Company or the interests of the Companys
equity security holders.

The
Company believes it may need to obtain additional financing to fund the
operations during the Chapter 11 proceedings and the Company is pursuing
raising debtor in possession financing. 
In addition the Company is pursuing the sale of certain assets.  There can be no assurance that additional
financing will be available on terms acceptable to the Company, or at all.  Failure to raise sufficient additional
financing, if it is needed, would have a material adverse effect on the
Companys ability to operate as a going concern or to restructure in Chapter
11.

In
addition, the ability of the Company to continue as a going concern (including
its ability to meet post-petition obligations of the Company) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, any orders entered by the Bankruptcy
Court concerning matters outside of the ordinary course of business, and
obtaining confirmation of a plan of reorganization under the Bankruptcy
Code.  The consolidated financial
statements contain no adjustments related to this uncertainty.

On
July 21, 2004, the Companys securities were delisted from the NASDAQ National
Market.  The Companys common stock
currently trades on the NASD OTC listing system under the symbol SALDQ.OB.

Background of
Filing

The
Companys operations have produced losses on declining same store sales for
much of the past three years.  In
addition, the Companys new restaurants, opened during the same time period,
have not performed up to the Companys expectations and have suffered
significant losses.  The Companys
comparable store sales improved in the first quarter of 2004 and the Company
expected that this positive trend would continue into the second and third
quarters, traditionally the Companys strongest sales periods.

The
Companys comparable store sales did not continue to improve as the Company
expected.  Instead, comparable store
sales were down 4.8% in the second quarter of 2004 versus the same quarter a
year-ago.  In fact, the sales trend grew
worse during the second quarter with comparable store sales down, versus the
comparable year-ago period, 2.3% in the first four-week period of the second
quarter, 3.5% in the second four-week period and 8.6% in the last four-week
period of the quarter.

In
addition, sales at the Companys newer restaurants did not improve as expected
and continued to perform below expectations. 
Average restaurant sales at the Companys five newer locations, open for
both lunch and dinner and not included in comparable store sales, were 46.1%
below the comparable store sales average for the second quarter.

These
declining sales trends resulted in reduced cash flow.  As a result of the reduced cash flow, the Company failed to
achieve the required minimum debt service coverage or maximum debt to tangible
net worth ratios required under the Companys lending agreements.  Failure to achieve these covenants gave the
bank the right, subject to the automatic stay in effect during the Chapter 11
Case, to declare the Companys loans in default and to demand payment of the
$1,850,000 of outstanding debt under its secured loan and the $500,000
outstanding debt under its revolving line of credit.

15

---

---

As
sales continued to deteriorate, the Companys revised then-existing internal
projections indicated the Company would not generate sufficient cash to cover
operating and capital requirements for the remainder of fiscal 2004.  The Company, therefore, decided to close ten
cash flow negative restaurants in early July and file for protection under
Chapter 11 of the Bankruptcy Code on July 12, 2004.

Financial Statement
Presentation

The
accompanying Condensed Consolidated Financial Statements have been prepared in
accordance with AICPA Statement of Position 90-7 (SOP 90-7), Financial
Reporting by Entities in Reorganization under the Bankruptcy Code, and on a
going concern basis, which contemplates continuity of operations, timely
payment for services by customers, control of operating costs and expenses and
the realization of asset sales and liquidation of liabilities and
commitments.  The bankruptcy filing and
related circumstances, including the closure of ten stores, the Companys
default on certain pre-petition debt, the losses from operations, as well as
current economic conditions, raise substantial doubts about the Companys
ability to continue as a going concern, accordingly, such realization of assets
and liquidation of liabilities are subject to uncertainty.  In connection with its plan of
reorganization, the Company may liquidate or settle liabilities for amounts
other than those reflected in the Condensed Consolidated Financial Statements.  Further, a plan of reorganization could materially
change the amounts and classifications reported in the consolidated historical
financial statements, which do not give effect to any adjustments to the
carrying value of assets or amounts of liabilities that might be necessary as a
consequence of a plan of reorganization.

As
part of the Filing, the Company rejected certain leases as allowed by the
Bankruptcy Code.  The Company has
recorded a liability of $3.9 million for the estimated maximum amount of
allowable claims under the Bankruptcy Code for the ten restaurants closed in
early July and the one restaurant closed in March, whose real property leases
were either rejected or otherwise terminated. 
The ultimate allowance (or disallowance) of any claims relating to the
termination or rejection of any leases shall be determined in accordance with
the Bankruptcy Code and applicable bankruptcy law.  The liability is included in liabilities subject to compromise in
the accompanying condensed consolidated balance sheets.

The
Chapter 11 related reorganization items in the condensed consolidated
statements of operations for the twelve and thirty-six week periods ended
September 5, 2004 consists of $528,000 of estimated professional fees,
including US Trustee fees, and $18,000 for the accrual of estimated retention
payments under the Companys non-senior executive key employee retention
plans.

Pursuant
to the Bankruptcy Code, schedules have been filed by the Company with the
Bankruptcy Court setting forth the assets and liabilities of the Company.  Differences between amounts recorded and
schedules by the Company estimating the Companys liabilities to its creditors
and claims filed by creditors in the Bankruptcy Court will be investigated and
resolved as part of the Chapter 11 Case.

The
Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of its pre-petition obligations, including certain pre-petition
employee wages, salaries, benefits and other employee obligations and certain
other pre-petition claims.

Liquidity
and Capital Resources

The
Companys operations have produced losses on declining same store sales for
much of the past three years.  These
declining sales trends resulted in reduced cash flow and an increased net
working capital deficit.  As sales
deteriorated in the second quarter of 2004, the Companys revised internal
projections, at that time, indicated the Company would not generate sufficient
cash to cover operating and capital requirements for the remainder of fiscal
2004.  The Company, therefore, decided
to close ten cash flow negative restaurants in early July and file for
protection under Chapter 11 of the Bankruptcy Code on July 12, 2004.

16

---

---

The
Company believes it may need to obtain additional financing to fund the
operations during the Chapter 11 proceedings and the Company is pursuing
raising debtor in possession financing. 
In addition, the Company is pursuing the sale of certain assets.  There can be no assurance that additional
financing will be available on terms acceptable to the Company, or at all.  Failure to raise sufficient additional
financing, if it is needed, would have a material adverse effect on the
Companys ability to operate as a going concern or to restructure in Chapter
11.

In
addition, the ability of the Company to continue as a going concern (including
its ability to meet post-petition obligations of the Company) and the
appropriateness of using the going concern basis for its financial statements
are dependent upon, among other things, any orders entered by the Bankruptcy
Court concerning matters outside of the ordinary course of business, and
obtaining confirmation of a plan of reorganization under the Bankruptcy Code.  The consolidated financial statements
contain no adjustments related to this uncertainty.

The
Companys primary capital requirements had been for the expansion of its
restaurant operations and remodeling of its restaurants.  The Company has traditionally financed these
requirements with funds from equity offerings, cash flow from operations,
landlord allowances, capital equipment leases and short-term bank debt.  The Company does not have significant trade
receivables or inventory and receives trade credit based upon negotiated terms
in purchasing food and supplies.

The
Company has a $2,200,000 loan (the Loan), with a commercial bank.  Under the terms of the Loan, the Company
issued a promissory note (the Note) in the amount of $2,200,000.  The Note is secured by a deed of trust on
certain Company-owned real estate, which is currently held for sale.  The Deed of Trust requires the Company to
maintain a minimum debt service coverage ratio and to maintain a minimum tangible
net worth.  The Note bears interest at
the prime rate (4.5% at September 5, 2004) plus 0.625%.  The Note has a fifteen-year amortization
period and matures after 84 monthly payments of principal and interest.  All unpaid principal and interest shall be
due and payable on the Notes maturity date of September 2, 2008.

On
September 5, 2004 the Company had $1,850,000 of debt outstanding under the Loan
described above, all of which was included in the current portion of long-term
obligations at September 5, 2004 as the Company was not in compliance with the
minimum debt service ratio and the bank had the right, subject to the automatic
stay in effect during the Chapter 11 Case, to demand payment of the balance
due.

In
March 2004 the Company amended its $2,000,000 revolving line of credit
(the  Agreement) with its bank to
increase the amount to $3,000,000 and extend the Agreement to May 17,
2005.  Borrowings bear interest at the
prime rate (4.5% at September 5, 2004) plus 0.5%.  Certain of the Companys personal property collateralize
borrowings under the Agreement.  On
September 5, 2004 the Company had $500,000 in borrowings outstanding under the
Agreement which was included in the current portion of long-term obligations as
the Company was not in compliance with certain covenants under the agreement
and the bank had the right, subject to the automatic stay in effect during the
Chapter 11 Case, to demand payment of the balance due.   In addition, the Company had $2,322,000
utilized to support outstanding letters of credit required under its workers
compensation program.  The letters of
credit, which are scheduled to expire March 1, 2005, will automatically extend
for a one-year period.

The
amended Agreement requires the Company to maintain (i) a minimum tangible net
worth, (ii) a minimum debt service coverage ratio and (iii) a maximum debt to
tangible net worth ratio.  The Agreement
also limits the Companys fixed asset acquisitions and requires approval before
paying dividends or repurchasing outstanding shares of stock.  In addition the Agreement requires the
outstanding principal balance of the loan to be zero for at least one period of
thirty consecutive days during the term of the loan.

Covenant
compliance is reported quarterly and the Company was not in compliance with
certain financial covenants under the amended Agreement at September 5, 2004.

17

---

---

The
Company had capital lease obligations at September 5, 2004 that totaled
$2,486,000, all of which was included in liabilities subject to compromise as
there is uncertainty about whether these secured claims are secured or
unsecured or whether the capital leases constitute true leases or are disguised
financing agreements under the Uniform Commercial Code.  Three of these capital lease obligations,
totaling $935,000, were rejected as of July 12, 2004 and the equipment returned
to the lessor pursuant to section 365 (d)(10) of the Bankruptcy Code. The
Company did not make the July 1, 2004 or the August 1, 2004 payments on the
remaining equipment leases, which gave the leasing companies the right, subject
to the automatic stay in effect during the Chapter 11 Case, to demand payment
of the remaining lease payments.

Long-Term
Debt consists of an $111,000 note for site construction costs of which $1,000
was included in the current portion of long-term obligations.

At
September 5, 2004 the current portion of long-term obligations consisted of:

|(In thousands)                                    |  |                 |  
|------------------------------------------------- |  | --------------- | -
|                                                  |  | Current Portion |  
|                                                  |  |                 |  
|Secured Note                                      |  |                 | $
|Secured Line of Credit                            |  |                 |  
|Other Note Payable                                |  |                 |  
|                                                  |  |                 |  
|Total Current Portion of long-
  term obligations |  |                 | $
|                                                  |  |                 |  

The
Companys other long-term liabilities include deferred rent of $1,467,000 at
September 5, 2004.  The Companys
deferred rent liability consists of the net cumulative rent expensed in excess
of rent payments since inception of these leases. In addition other long term
liabilities includes $163,000 of deferred income at September 5, 2004 from a
gain on the 1993 sale and leaseback of a building and land for one of the
Companys restaurants.  The Company is
amortizing the gain over the 20-year initial term of the lease. The remaining
balance of $270,000 in other long-term liabilities is the non-current portion
of certain employee benefit plans.

Net
cash provided by operating activities of continuing operations for the first
thirty-six weeks of 2004 was $4,379,000 and consisted of:

|(In thousands)                                                                                                                              |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|                                                                                                                                            |  |   |        |  
|Loss from continuing
  operations                                                                                                           |  | $ | (4,179 | )
|Adjustments to reconcile
  loss from continuing operations to net 
     cash provided by operating activities from continuing
  operations: |  |   |        |  
|Depreciation
  and amortization                                                                                                             |  |   | 1,908  |  
|Non-cash
  store closure and asset impairment expenses                                                                                      |  |   | 3,425  |  
|Chapter
  11 related reorganization expenses                                                                                                |  |   | 546    |  
|Change
  in operating assets and liabilities                                                                                                |  |   | 3,083  |  
|Change
  in deferred rent and other                                                                                                         |  |   | (404   | )
|                                                                                                                                            |  |   |        |  
|Net cash provided by
  operating activities from continuing operations                                                                      |  | $ | 4,379  |  
|                                                                                                                                            |  |   |        |  

Net
cash provided by operating activities of continuing operations for the first
thirty-six weeks of 2004 included a change in operating assets and liabilities
of $3,083,000.  The change in operating
assets and liabilities of $3,083,000 was primarily due to the timing of
payments, which have been impacted by the Companys filing for protection under
Chapter 11 of the Bankruptcy Code.

18

---

---

Net
cash used for reorganization items for the first thirty-six weeks of 2004
included:

| |                                   |  | September 5,2004 |  
| | --------------------------------- |  | ---------------- | -
| |                                   |  |                  |  
| |                                   |  |                  |  
| | Retainers paid to
  professionals |  |                  | $
| | Professional fees paid            |  |                  |  
| | Vendor deposits                   |  |                  |  
| |                                   |  |                  |  
| | Total                             |  |                  | $
| |                                   |  |                  |  

During
the same period the Companys continuing operations invested $777,000 in
property and equipment, consisting primarily of restaurant equipment and the
remodeling of one restaurant.

Cash
used by discontinued operations for the first thirty-six weeks of 2004 and 2003
is comprised of the following for the fourteen restaurants deemed to be
discontinued operations:

| |                                                               |  | Thirty-Six Weeks Ended |  
| | ------------------------------------------------------------- |  | ---------------------- | -
| |                                                               |  |                        |  
| |                                                               |  | September 5,2004       |  
| |                                                               |  |                        |  
| |                                                               |  |                        |  
| | Loss from discontinued
  operations                           |  |                        | $
| | Depreciation and
  amortization                               |  |                        |  
| | Non-cash store closure and
  asset
       impairment expenses |  |                        |  
| | Deferred rent                                                 |  |                        |  
| | Change in operating assets
  and liabilities:                 |  |                        |  
| | Inventories                                                   |  |                        |  
| | Prepaid
  expenses and other current assets                   |  |                        |  
| | Accounts
  payable                                            |  |                        |  
| | Accrued
  salaries and wages                                  |  |                        |  
| | Other
  accrued expenses                                      |  |                        |  
| | Capital expenditures                                          |  |                        |  
| | Deposits and other assets                                     |  |                        |  
| | Capital lease borrowings                                      |  |                        |  
| | Capital lease repayments                                      |  |                        |  
| |                                                               |  |                        |  
| |                                                               |  |                        | $
| |                                                               |  |                        |  

19

---

---

The
Companys contractual obligations as of September 5, 2004 are as follows:

| | (In thousands)                       |  |       |        
| | ------------------------------------ |  | ----- | -------
| |                                      |  | Total |        
| |                                      |  |       |        
| | Secured Note                         |  | $     | 1,850  
| | Secured Line of Credit               |  |       | 500    
| | Other Note Payable                   |  |       | 111    
| | Liabilities Subject to
  Compromise  |  |       | 10,070 
| | Operating Leases                     |  |       | 108,139
| |                                      |  |       |        
| | Total Contractual Cash
  Obligations |  | $     | 120,670
| |                                      |  |       |        

The
Companys outstanding Series B non-voting convertible preferred stock is
currently held by one entity and is convertible, at the holders option, into
Series A voting convertible preferred stock on a one-for-one basis.  Although no Series A preferred stock is
currently outstanding, holders of Series A preferred stock, if any, would be
entitled to vote with common stockholders on all matters submitted to a vote of
stockholders.  When and if issued, the
holders of a majority of the outstanding Series A preferred stock will have a
separate right to approve certain corporate actions.   All shares of Series A and Series B preferred stock are senior
to the Companys common stock with respect to dividends and with respect to
distributions on liquidation.  Upon any
liquidation, after an event of default, the holders of Series A and Series B
preferred stock are entitled to be paid in full an amount equal to $4.63 per
share, together with all accrued dividends at an annual rate of $0.56 per share
calculated from the first date of an event of default, which occurred in fiscal
1998.

In
fiscal 1998, the Company failed to achieve a specified earnings target (before
interest, taxes, depreciation and amortization) of at least $5.5 million which
constituted an event of default of the terms of the preferred stock agreement
and which triggered the right of the Series A preferred stockholders to elect a
majority of the Companys Board of Directors. 
The holder of the Series B preferred stock has not initiated any action
to convert such shares into shares of 
Series A preferred stock nor has it exercised its right to elect a
majority of the Board of Directors.  In
December 2003 such holder entered into a letter agreement whereby the holder of
the Series B preferred stock agreed to not convert any of its shares of Series
B preferred stock into Series A preferred stock so long as the holder owns the
Series B preferred shares.

The
Companys ability to emerge from bankruptcy is dependent upon the success of
its plans to increase cash from operations by (i) consolidating its operations
primarily to its core northern California markets, (ii) increasing sales in
those remaining restaurants while (iii) reducing costs to an appropriate level
given the reduced size of the Company.  See Business Risks included herein.

Post
Filing Liquidity

On
July 12, 2004 the Company filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code, and, as a result, all pending claims against the
Company are stayed automatically. 
Accordingly, subject to the requirements of Bankruptcy Code Section 365,
the Company may reject or assume pre-petition executory contracts and leases as
allowed by the Bankruptcy Code.  The
Company has rejected the real and personal property leases at eleven closed
restaurants, to the extent that such leases had not been previously terminated,
and is currently reviewing all other pre-petition executory contracts to
determine which other agreements it will assume or reject.

20

---

---

Currently,
subject to resolution of outstanding leases claims and its ability to raise
interim financing, the Company believes that all known, non-disputed,
non-contingent claims can be paid in full. 
However, there is no assurance that there will be sufficient assets to
satisfy the Companys pre-petition liabilities in whole.  Under a plan of reorganization, pre-petition
creditors could receive less than 100% of the face value of their claims.  Although it is possible that the Company
will have excess assets after payment of liabilities and its equity securities
will continue to have value, it is entirely possible, under certain scenarios
post Chapter 11, that one or more classes of equity securities will have
diminished or no value at all.  It is
not possible to predict the outcome of the Chapter 11 Case, the terms and
provisions of any plan of reorganization, or the effect of the Chapter 11
reorganization process on the claims of the Companys creditors or the
interests of the Companys equity security holders.

Impact
of Inflation

Many
of the Companys employees are paid hourly rates related to the federal and
state minimum wage laws.  Accordingly,
increases in the minimum wage could materially increase the Companys labor
costs.  In addition, the cost of food
commodities utilized by the Company is subject to market supply and demand
pressures.  Shifts in these costs may
have a significant impact on the Companys food costs.  The Company anticipates that increases in
these costs may be offset through pricing and other cost control efforts;
however, there is no assurance that the Company would be able to pass such
costs on to its guests or that even if it were able to do so, it could do so in
a short period of time.

Business
Risks

Certain
characteristics and dynamics of the Company's business and of financial markets
in general create risks to the Company's long-term success and to predictable
financial results.  These risks include:

Bankruptcy
Filing.  On July 12, 2004, the Company
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code.  As a result, the Company is
presently operating its business as a debtor in possession.  Currently, neither the Company nor its
creditors have proposed a plan of reorganization and there can be no assurance
that the Bankruptcy Court will confirm any plan of reorganization that the
Company or its creditors committee may propose.  As provided by the Bankruptcy Code, the Company initially has the
exclusive right to propose a plan of reorganization for 120 days following the
filing of its Chapter 11 petition.  If
the Company fails to file a plan of reorganization during such period or any
extension thereof, or if such plan is not accepted by the requisite numbers of
creditors and equity holders entitled to vote on the plan within 180 days of
the Filing Date or any extension of such period, other parties in interest in
the Chapter 11 Case may be permitted to propose their own plan or plans of
reorganization.   The failure to have a
plan of reorganization approved by the Bankruptcy Court could result in a
liquidation of the Companys remaining assets. 
Furthermore, there can be no assurance that there will be any improvement
in the Companys financial condition or results of operations upon consummation
of a plan of reorganization.  During the
Chapter 11 Case, the Company has incurred, and will continue to incur,
significant costs associated with the reorganization, including, but not
limited to, professional fees and other cash demands typical in bankruptcy
proceedings.  These costs, which will be
expensed as incurred, are expected to significantly affect the Companys
results of operations and decrease assets available for use in the
reorganization.  Further, the Chapter 11
filing, and the potential adverse publicity associated with it, may have
adverse effects on the Companys business and ability to reorganize.  Customers counts in the Companys remaining
restaurants declined following the announcement of the Chapter 11 filing, and,
although improved since, may decline further as the result of publicity
surrounding the filing.  In addition,
the Companys current vendors may attempt to cancel services or renegotiate
existing arrangements as a result of the Chapter 11 filing.

In
addition, the Company has not yet proposed its plan of reorganization, and it
is uncertain at this time what will be the effect of the plan on its creditors
and stockholders.  The Company does not
know if the plan will provide for payment of the whole or part of the claims of
its creditors, nor whether the current equity securities will remain
intact.  Moreover, the Company may be
unable to develop, prosecute, confirm and consummate a plan of reorganization,
and may incur unanticipated expenses of and liabilities associated with
bankruptcy.  The Company may also incur
additional, unknown claims, as part of its bankruptcy proceeding that it cannot
currently determine.  If such claims are
filed, they would reduce the amount available for distribution to the Companys
creditors and stockholders.

21

---

---

Operating
Losses and Historical Declines in Comparable Store Sales.  The Companys quarterly and annual operating
results and same store sales have fluctuated significantly in the past and are
likely to fluctuate significantly in the future.  The Company has reported a loss for the last two years and for
the first thirty-six weeks of 2004 and there can be no assurance that the Company
will be profitable over the long or short term.

The
Companys comparable store sales decreased for the three fiscal years of 2001
through 2003 and have decreased 3.2% (for the thirty-eight comparable stores in
continuing operations) in the first thirty-six weeks of 2004.  This negative trend has continued with
comparable store sales for the thirty-nine comparable stores in continuing
operations down 3.8% for the first four-week period of the fourth quarter.  There can be no assurance that the
comparable store sales declines experienced in 2001 through 2003, and through
the first thirty-six weeks of 2004, will not continue or not decline further.

Operating as a Going Concern.  The accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue
to operate as a going concern, which contemplates continuity of operations,
timely payment for services by customers, control of operating costs and
expenses and the realization of asset sales and liquidation of liabilities and
commitments.  The bankruptcy filing and
related circumstances, including the closure of ten stores, the Companys
default on certain pre-petition debt, the losses from operations, as well as
current economic conditions, raise substantial doubts about the Companys
ability to continue as a going concern. 
The appropriateness of reporting on a going concern basis is dependent
upon, among other things, the availability of sufficient capital to meet
expenses, confirmation of a plan of reorganization, future profitable
operations, customer and employee retention and the ability to generate
sufficient cash from operations and financing sources to meet the Companys
obligations as they become due.  The
Company has assumed all of the foregoing. 
Should some or all of these assumptions prove to be unfounded or prove
to be untrue in the future, the Companys results of operations and financial
condition will be adversely affected and its ability to continue as a going
concern will be doubtful.

NASDAQ Delisting.  In July 2004 the Companys common stock was
delisted from the NASDAQ National Market. 
The Companys common stock is quoted on the NASD Over-the-Counter (OTC)
bulletin board quotation service.  This
has reduced the market and liquidity of the Companys common stock and
consequently the ability of stockholders and broker/dealers to purchase and
sell shares of the Companys stock in an orderly manner or at all.  The volume of trading in the Companys stock
has continued to decline since its bankruptcy filing.  Trading in the Companys common stock through market makers and
quotation on the OTC Bulletin Board entails other risks.  Due in part to the decreased trading price
of the Companys common stock and absence of analyst coverage, the trading
price of the Companys common stock is highly volatile, and market makers may
not be able to execute trades as quickly as they could when the common stock
was listed on the NASDAQ National Market.

Ability to Obtain Additional Financing.  The Company believes it may need to obtain
additional financing to fund the operations during the Chapter 11 proceedings
and the Company is pursuing raising debtor in possession financing.  In addition the Company is pursuing the sale
of certain assets.  There can be no
assurance that additional financing will be available on terms acceptable to
the Company, or at all.  Failure to
raise sufficient additional financing, if it is needed, would have a material
adverse effect on the Companys ability to operate as a going concern or to
restructure in Chapter 11.

Employee Retention During Bankruptcy.  The success of the Company depends on the
efforts of key management personnel. 
The Company's success will depend on its ability to motivate and retain
its key crewmembers and to attract qualified personnel, particularly general
managers, for its restaurants during the Chapter 11 proceedings.  In addition, the loss of the services of any
other key administrative personnel could materially adversely affect the
Companys ability to manage its affairs while in bankruptcy.  The Company has received approval of certain
key employee retention and severance plans from the Bankruptcy Court, which
provides cash incentives and certain benefits to key non-senior members of our
management team including restaurant managers in locations scheduled to be
closed or sold.  During the third
quarter the Company accrued $18,000 for expected retention bonuses under these
programs.

Loan Covenants.  The Company did not meet certain financial covenants as required
under the Companys lending agreements. 
Failure to meet these covenants gives the bank the right, subject to the
automatic stay in effect during the Chapter 11 Case, to declare the loans in
default and to demand payment of the $1,850,000 of outstanding debt under its
secured loan and the $500,000 outstanding debt under its revolving line of
credit.

22

---

---

Lease Renewals.  As existing restaurant leases expire, the Company must negotiate
new leases or lease extensions in order to continue operations at existing
restaurants.  There can be no assurance
that the Company will be able to renew these leases on favorable terms or at
all.  If the Company is unable to obtain
favorable terms on new leases or extensions on existing leases, it would
increase costs and reduce the Company's operating margins.  Moreover, if the Company is unable to renew
existing leases and is unable to find suitable alternate locations, the
Company's revenue and operating results would be adversely affected. The
Company has been verbally informed that the lease at one of its locations will
not be renewed upon expiration on December 31, 2004.

Geographic Concentration.  As of October 1, 2004, 37 of the Company's
46 restaurants were located in California, primarily in Northern
California.  Accordingly, the Company is
susceptible to fluctuations in its business caused by adverse economic
conditions in this region.  In addition,
net sales at certain of the Company's restaurants have been adversely affected
when a new Company restaurant has been opened in relatively close geographic
proximity.  There can be no assurance
that expansion within existing or future geographic markets will not adversely
affect the individual financial performance of Company restaurants in such
markets or the Company's overall results of operations.  In addition, given the Company's present
geographic concentration in Northern California, adverse weather conditions,
changes in the work force, increased utility costs or other external factors in
the region or negative publicity relating to an individual Company restaurant
could have a more pronounced adverse effect on results of operations than if
the Company's restaurants were more broadly dispersed.

Sensitivity to Economic Conditions and Consumer
Spending.  The restaurant
industry historically has been subject to substantial cyclical variation.  The California economy has slowed and there
has been a downturn in the general economy and a decline in consumer spending
in the restaurant industry.  A continued
decline could have a material adverse effect on the Companys financial
performance, as restaurant sales tend to decline during recessionary
periods.  A prolonged economic downturn
could alter customers purchasing decisions, which most likely would have a
material adverse impact on the Companys revenue and results of operations.

Seasonality and Quarterly FluctuationsThe
Company's restaurants have typically experienced seasonal fluctuations, as
disproportionate amounts of net sales and net income are generally realized in
the second and third fiscal quarters. 
Because of the seasonality of the Companys business, the fourth quarter
has the lowest average sales of any quarter of the year.  The decline in average sales results in a
substantial decline in the Companys cash flow due to the significant amount of
fixed and semi-fixed costs inherent in operating restaurants.  In addition, the Company's quarterly results
of operations have been, and may continue to be, materially impacted by the
timing of new restaurant openings, restaurant closings and impairment
charges.  The fourth quarter normally
includes 16 weeks of operations as compared with 12 weeks for each of the three
prior quarters.  As a result of these
factors, net sales and net income in the fourth quarter are not comparable to
results in each of the first three fiscal quarters, and net sales can be
expected to decline in the first quarter of each fiscal year in comparison to
the fourth quarter of the prior fiscal year.

Expansion.  If the Company successfully emerges from bankruptcy, the Company
believes future growth depends to a significant degree on its ability to open
new restaurants and to operate such restaurants profitably.  The Company currently has no development
plans for 2004 or beyond.

Restaurant Industry.  The restaurant industry is affected by
changes in consumer tastes, as well as national, regional and local economic
conditions and demographic trends.  The
performance of individual restaurants, including the Company's restaurants, may
be affected by factors such as traffic patterns, demographic considerations,
and the type, number and location of competing restaurants.  In addition, factors such as inflation,
increased food, labor and crewmember benefit costs, and the availability of
experienced management and hourly crewmembers may also adversely affect the
restaurant industry in general and the Company's restaurants in
particular.  Restaurant operating costs
are affected by increases in the minimum hourly wage, unemployment tax rates,
and various federal, state and local governmental regulations, including those
relating to the sale of food and alcoholic beverages.  There can be no assurance that the restaurant industry in
general, and the Company in particular, will be successful.

23

---

---

Competition.  The Company's restaurants compete with the rapidly growing
mid-price, full-service casual dining segment; with traditional limited-service
buffet, soup, and salad restaurants; and, increasingly, with fast-casual and
quick-service outlets.  The Company's
competitors include national and regional chains, as well as local
owner-operated restaurants.  Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, price, dining experience,
restaurant location and the ambiance of facilities.  Many of the Company's competitors have been in existence longer
than the Company, have a more established market presence, and have
substantially greater financial, marketing and other resources than the
Company, which may give them certain competitive advantages.  The Company believes that its ability to
compete effectively will continue to depend in large measure upon its ability
to offer a diverse selection of high-quality, fresh food products with an
attractive price/value relationship.  In
addition, if and when the Company resumes expansion, it expects intense
competition for restaurant sites, which may result in the Company having
difficulty leasing desirable sites on terms that are acceptable to the
Company.  The Company expects that in
some cases competitors may be willing to pay more than the Company for
sites.

Control by Major Shareholder.  Crescent Real Estate Equities Limited
Partnership (Crescent) holds 1,187,906 shares of Series B non-voting
convertible preferred stock, which is convertible into Series A voting
convertible preferred stock at any time at the option of the holder.  Upon conversion, holders of Series A
preferred stock would be entitled to vote with common stockholders and would
have a separate right to approve certain corporate actions, such as amending
the Companys Certificate of Incorporation or Bylaws, effecting a merger or
sale of the Company, or making a fundamental change in the Companys business
activity.  In addition, because the
Company did not achieve a specified earnings target in 1998, the holders of
Series A preferred stock, if any, would have the right to elect a majority of
the Companys Board of Directors. 
Crescent has entered into a letter agreement waiving this right until
the date that Crescent elects to sell, transfer, convey or otherwise dispose of
all its shares.  These factors could
have the effect of delaying, deferring or preventing a change in control of the
Company and, as a result, could discourage acquisition bids for the Company and
limit the price that investors are willing to pay for shares of common stock.

Critical
Accounting Policies

Our
accounting policies are more fully described in Note 1 of the Companys audited
December 28, 2003 financial statements. 
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (US GAAP)
requires management to make estimates and assumptions that affect reported
amounts of assets, liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities as of the dates and for the periods
presented.  Management believes the
following accounting policies, among others, represent its more critical or
complex estimates and assumptions used in preparation of its consolidated
financial statements.

The
Company evaluates its estimates and assumptions on an on-going basis and
believes its estimates and assumptions are reasonable based on historical
experience and other factors.  However,
actual results could differ from those estimates and these differences could be
material to the consolidated financial statements.  The accounting policies management has identified as critical or
complex accounting policies are described below.

Long-lived assets impairment.  The Company reviews its long-lived assets
related to each restaurant annually for impairment, or whenever events or
changes in circumstances indicate that the carrying amount of a restaurant and
the related equipment may not be recoverable. 
The Company considers a history of operating losses to be its primary
indicator of potential impairment; therefore new restaurants are generally not
identified for impairment until a sufficient operating history has been
developed.  Assets are grouped and
evaluated for impairment at the lowest level for which there are identifiable
cash flows, the individual restaurants. 
Impairment evaluations require an estimation of cash flows over the
remaining useful life of the restaurants. 
If the long-lived assets of a restaurant, generally consisting of
leasehold improvements and equipment, are not recoverable based upon forecasted
undiscounted cash flows, the Company writes down an impaired restaurant to its
estimated fair value, which becomes its new cost basis.  Generally, management considers the present
value of a restaurants projected future cash flows and estimated sales values
of a restaurants long-lived assets in determining fair value.  Considerable management judgment is necessary
to estimate projected future operating cash flows and the fair value of
impaired assets.  Accordingly, if actual
results vary from such estimates, significant future impairment could result.

24

---

---

In
the second quarter of 2004, the Company identified ten restaurants where the projected
undiscounted cash flows, based upon recent results, indicated that the carrying
amount of fixed assets would not be recovered. 
In the third quarter the Company either closed or put up for sale six of
these restaurants.  The impairment
charge related to these restaurants was $6,060,000.  Additional impairment charges of $893,000 were recorded for eight
restaurants closed in the third quarter, whose assets had been partially
impaired, prior to the second quarter, as it was determined based upon revised
projections, which reflected deteriorating results, that the carrying value of
the remaining equipment would not be recovered.

In
the third quarter of 2004, the Company identified three additional restaurants
whose lease terms were amended to allow for an earlier termination and
therefore the projected undiscounted cash flows indicated that the carrying
amount of fixed assets would not be recovered.   The impairment charge related to these restaurants was
$400,000.  If sales continue to
deteriorate in other restaurants additional impairment charges may be
required.

In
addition, US GAAP requires that the operating losses of underperforming
restaurants be recorded in the periods incurred.  US GAAP also requires that reserves for store closures and lease
termination costs for any restaurant to be closed not be recognized until a
restaurant ceases operations. 
Accordingly, the Company recorded a charge of $300,000 in the second
quarter for the estimated cash costs associated with the restaurant closure and
settlement of lease obligation for the restaurant closed in the second
quarter.  The Company recorded a charge
of $3,626,000 in the third quarter which consisted of; (i) a $3,492,000 charge
to record or adjust the expected cash liability from rejection of the leases
for eleven closed restaurants under Section 502 (B)(6) of the Bankruptcy Code,
(ii) a $443,000 non-cash credit for the reversal of the remaining deferred rent
for these eleven rejected leases, and (iii) a charge of $177,000 for the cash
costs associated with the restaurant closures. 
Additionally, as the Company closes restaurants in the future, prior to
lease expirations, the Company may incur significant store closure and lease
termination charges in the period such restaurants close.

Workers compensation claims accrual.  The Company records estimates for workers
compensation claims under its workers compensation program.  The Company evaluates the adequacy of these
accruals by evaluating information periodically provided by its insurance
carrier regarding the Companys historical experience and trends relating to
insurance claims and payments and general industry experience regarding the
expectation of future trends in claims development. If such information
indicates that the accruals are overstated or understated, the Company will
reduce or provide additional accruals as appropriate. If a greater number of
claims occur in comparison to the amount of claims estimated or medical costs
increase beyond anticipated costs, additional charges may be required in the
period such determination was made.  The
accrual for such claims was $932,000 at September 5, 2004 versus $836,000 at
December 28, 2003.

Discontinued operations.  Considerable management judgment is
necessary to determine whether a closed restaurant should be classified as
discontinued operations.  In general,
the Company considers the extent to which the restaurants operations and cash
flow are expected to be absorbed by other currently operated restaurants or
replaced with a new restaurant in making this determination.  A closed restaurant, or group of
restaurants, which is located in an isolated market and not replaced, would
generally be classified as discontinued operations.  The Company did not consider the closure of the restaurant in the
second quarter a discontinued operation as a significant portion of the closed
restaurant sales were absorbed by another currently operating restaurant.  Management has determined that the ten
restaurants closed in the third quarter as well as the four restaurants held
for sale should be classified as discontinued operations.  Management anticipates that it will have
discontinued operations in future quarters.

Liabilities subject to compromise.  Liabilities subject to compromise consist of
the Companys liabilities incurred prior to the commencement of the Chapter 11
Case or claims arising from the rejection of certain real property leases.  These claims are either unsecured or there
is uncertainty about whether the claims are secured or unsecured or whether, in
the case of the capital leases, they constitute true leases or are disguised
financing agreements under the Uniform Commercial Code. These amounts represent
the Companys estimate of known or potential claims to be resolved in
connection with the Chapter 11 Case. 
Such claims remain subject to future adjustment.  Adjustments may result from negotiations,
actions of the Bankruptcy Court, further developments with respect to disputed
claims, rejection of executory contracts and unexpired leases, the
determination as to the value of any collateral securing claims, proofs of
claim, or other events.  Payment terms
for these amounts will be established in connection with the Chapter 11 Case.

25

---

---

Estimated allowable claims for rejection of certain
real estate leases.  The
Company records the estimated maximum amount of allowable claims under the
Bankruptcy Code for real property leases that are either rejected or otherwise
terminated.  The ultimate allowance (or
disallowance) of any claims relating to the termination or rejection of any
leases shall be determined in accordance with the Bankruptcy Code and
applicable bankruptcy law.

Assets held for sale.  The Company records as assets held for sale
the lower of either the net book value or the estimated net realizable value,
net of costs to sell, of real property that is currently listed for sale.  If the net book value exceeds the estimated
net realizable value, net of costs to sell, of a property the property is
impaired.  Three of the four restaurants
currently held for sale were written down to estimated net realizable value,
net of costs to sell, in the second quarter of 2004. Depreciation expense is no
longer being recorded on these real property assets. The estimated net
realizable value, net of costs to sell, is reviewed and is further written down
in the period it is determined to be necessary.

Income taxes.   The Companys net deferred tax assets consist primarily of the
tax benefit related to operating loss carryforwards, alternative minimum tax
credits and asset write-downs, in connection with store asset impairments, that
are not deductible for tax purposes until the assets are disposed.  The Company has provided valuation
allowances against its deferred net tax assets based on managements most
recent assessment that it is not deemed more likely than not that the deferred tax
assets will be realized.  If future assessments
by management were to determine that the Company would be able to realize its
deferred tax assets in excess of their net recorded amounts, an adjustment to
the deferred tax assets could result in an increase in net income in the period
such determination was made.

Property and equipment.  Property and equipment are stated at
cost.  Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets which range from 5 to 30 years or the lease term of a restaurant
including option periods, as appropriate, not to exceed 25 years.

26

---

---

Results of Operations

The
following table sets forth items in the Companys statements of operations as a
percentage of sales and certain operating data for the periods indicated:

|                                                                    |  | Twelve Weeks Ended |        | Thirty-Six Weeks Ended | 
|------------------------------------------------------------------- |  | ------------------ | ------ | ---------------------- | 
|                                                                    |  |                    |        |                        | 
|(Dollars in thousands)                                              |  | September 5, 2004  |        | September 7, 2003      | 
|                                                                    |  |                    |        |                        | 
|                                                                    |  |                    |        |                        | 
|NET
  SALES                                                         |  | $                  | 15,142 |                        | 
|COSTS
  AND EXPENSES:                                               |  |                    |        |                        | 
|Cost
  of sales                                                     |  |                    | 3,447  |                        | 
|Restaurant
  operating expenses:                                    |  |                    |        |                        | 
|Labor                                                               |  |                    | 4,945  |                        | 
|Occupancy
  and other                                               |  |                    | 5,081  |                        | 
|General
  and administrative expenses                               |  |                    | 1,270  |                        | 
|Depreciation
  and amortization                                     |  |                    | 571    |                        | 
|Store
  closure and asset impairment expenses                       |  |                    | 407    |                        | 
|                                                                    |  |                    |        |                        | 
|Total
  costs and expenses                                          |  |                    | 15,721 |                        | 
|                                                                    |  |                    |        |                        | 
|OPERATING
  INCOME (LOSS)                                           |  |                    | (579   | )                      | 
|                                                                    |  |                    |        |                        | 
|Chapter
  11 related reorganization expenses                        |  |                    | (546   | )                      | 
|Interest
  expense, net                                             |  |                    | (95    | )                      | 
|                                                                    |  |                    |        |                        | 
|INCOME
  (LOSS) FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES |  |                    | (1,220 | )                      | 
|                                                                    |  |                    |        |                        | 
|Provision
  for income taxes                                        |  |                    | -      |                        | 
|                                                                    |  |                    |        |                        | 
|INCOME
  (LOSS) FROM CONTINUING OPERATIONS                          |  |                    | (1,220 | )                      | 
|LOSS
  FROM DISCONTINUED OPERATIONS
     NET OF TAX                 |  |                    | (3,539 | )                      | 
|                                                                    |  |                    |        |                        | 
|NET
  LOSS                                                          |  | $                  | (4,759 | )                      | 
|                                                                    |  |                    |        |                        | 
|                                                                    |  |                    |        |                        | 
|Number
  of restaurants:                                            |  |                    |        |                        | 
|Open
  at beginning of period                                       |  |                    | 56     |                        | 
|                                                                    |  |                    |        |                        | 
|Open
  at end of period                                             |  |                    | 46     |                        | 
|                                                                    |  |                    |        |                        | 

Results of Operations: 
Twelve Weeks Ended September 5, 2004Compared to Twelve Weeks Ended September 7, 2003

Net
Sales.  Net sales from continuing operations for the
quarter ended September 5, 2004 were $15,142,000, a decrease of $1,169,000 or
7.2%, from sales of $16,311,000 for the quarter ended September 7, 2003. The
primary components of the net decrease in sales were:

|(In thousands)                                       |  |   |        |  
|---------------------------------------------------- |  | - | ------ | -
|                                                     |  |   |        |  
|Decrease in comparable Fresh Choice restaurant sales |  | $ | (992   | )
|Decrease in sales from closed restaurant             |  |   | (218   | )
|Increase in sales in Fresh Choice Express/Starbucks  |  |   | 41     |  
|                                                     |  |   |        |  
|                                                     |  | $ | (1,169 | )
|                                                     |  |   |        |  

27

---

---

The
Company had an average of 39.0 Fresh Choice restaurants included in continuing
operations in the third quarter of 2004 compared to 40.0 Fresh Choice
restaurants included in continuing operations in the third quarter of
2003.  Sales at the Companys 39
comparable Fresh Choice restaurants included in continuing operations, which
include restaurants open at least 18 months, decreased 6.3% in the third
quarter of 2004 versus the third quarter of 2003.  Comparable store guest counts decreased 6.6%, while the
comparable store average check increased 0.3% to $7.84, reflecting price
increases and lower coupon discounts.

Net
sales per Fresh Choice restaurant in continuing operations averaged $380,000 in
the third quarter of 2004, a decrease of 5.2% over net sales per restaurant of
$400,000 in the third quarter of 2003. 
The 5.2% decline in net sales per restaurant is primarily the result of
a 6.3% decrease in the 39 comparable Fresh Choice restaurants.

Cost
of Sales.  Cost of sales (food and beverage costs) was
22.8% of sales in the third quarter of 2004 compared to 21.6% in the third
quarter of 2003.  Food and beverage
costs increased as a percentage of sales due to increases in cost and menu
enhancements introduced to increase the value offering of the menu.

Restaurant Operating Expenses.  Restaurant operating expenses (labor,
occupancy and other) were 66.1% of sales in the third quarter of 2004 compared
to 61.6% of sales in the third quarter of 2003, an increase of 4.5% of sales.

Labor
costs as a percentage of sales were 32.6% for the third quarter of 2004
compared to 31.0% in the third quarter of 2003.  Labor costs, as a percentage of sales, were higher primarily due
to lower average restaurant sales, a higher average wage, and higher workers
compensation and medical benefits costs.

Occupancy
and other expenses as a percentage of sales were 33.5% for the third quarter of
2004 compared to 30.6% of sales in the third quarter of 2003, an increase of
2.9% of sales.  This increase is due
primarily to higher maintenance, advertising, rent, common area maintenance and
insurance costs combined with the impact as a percent of sales resulting from
the decline in comparable store sales.

Depreciation and Amortization.  Depreciation and amortization expenses in
the third quarter of 2004 were 3.8% of sales compared to 3.6% of sales in the
third quarter of 2003.  The increase, as
a percent of sales, is primarily the result of the decline in average
restaurant sales, which offset the benefit of the decline in depreciation
dollars resulting from the impairment of certain assets.

General and Administrative Expenses.  General and administrative expenses were
8.4% of sales in the third quarter of 2004 compared to 7.3% in the third
quarter of 2003.  The percentage
increase is primarily the result of higher legal expenses and the decline in
sales.

Store
Closure and Asset Impairment Expenses.  In the third quarter, the Company recorded a
store closure and asset impairment charge for continuing operations of
$407,000.  This charge was composed of:
(i) a non-cash charge of $400,000 primarily for the write-down of buildings,
leasehold improvements and equipment to fair value for three of the Companys
restaurants and (ii) a charge of $7,000 to reconcile the expected claim for the
rejection of the lease on the restaurant closed in the second quarter.  The impairment charge for the three
restaurants was required because the lease terms were amended to allow for an
earlier termination and therefore the carrying amounts of the impaired assets
were not recoverable from their currently projected undiscounted cash
flows.  The impairment loss was
calculated as the difference between the carrying amount and fair value of the
assets.

Chapter
11 Related Reorganization Expenses.  Chapter 11 related reorganization expenses
consist of $528,000 of estimated professional fees, including US Trustee fees,
and $18,000 for the accrual of estimated retention payments under the Companys
non-senior executive key employee retention plans.

Interest Expense, net.  Interest expense, net was  $95,000 in the third quarter of 2004
compared to $67,000 in the third quarter of 2003. This increase is due to the
write-off of $38,000 in unamortized lease commitment fees.  Interest expense consists of fees related to
securing the Companys borrowing arrangements and interest expense on
outstanding borrowings and capital lease obligations.

28

---

---

Income
Taxes.  The Company recorded no tax benefit from its
operating loss in the third quarter of 2004 or the third quarter of 2003 due to
valuation allowances against its net deferred tax assets.  The Companys net deferred tax assets
consist primarily of the tax benefit related to operating loss carryforwards,
alternative minimum tax credits and asset write-downs, in connection with store
asset impairments, that are not deductible for tax purposes until the assets
are disposed.  The Company will continue
to provide a full valuation allowance for its deferred tax assets until it
becomes more likely than not, in managements assessment, that any portion of
the Companys deferred tax assets will be realized.

Loss
from Discontinued Operations.The loss from discontinued operations
includes the revenue and expenses of fourteen restaurants.  Ten of these restaurants were cash
flow negative restaurants and were closed in early July just prior to filing
for protection under Chapter 11 of the Bankruptcy Code.  The other four are currently listed for sale and the real property is
classified as assets held for sale on the consolidated balance sheet of the
Company. In addition, the loss from discontinued operations includes a store
closure and asset impairment charge of $ 3,219,000. This charge consists of; (i) a $3,485,000 charge to record the
expected cash liability from rejection of the leases for ten closed
restaurants, (ii) a $443,000 non-cash credit for the reversal of the remaining
deferred rent for these ten rejected leases, and (iii) a charge of $177,000 for
the cash costs associated with the restaurant closures.  The impairment charge for these restaurants
was required because the carrying amounts of the impaired assets were not
recoverable from their currently projected undiscounted cash flows.  The impairment loss was calculated as the
difference between the carrying amount and fair value of the assets.

Results of Operations: 
Thirty-six Weeks Ended September 5, 2004Compared to Thirty-six Weeks Ended September 7, 2003

Net Sales.  Net
sales for the thirty-six weeks ended September 5, 2004 were $44,740,000 a
decrease of $1,858,000, or 4.0%, from sales of $46,598,000 for the thirty-six
weeks ended September 7, 2003. The primary components of the net decrease in
sales were:

|(In thousands)                                       |  |   |        |  
|---------------------------------------------------- |  | - | ------ | -
|                                                     |  |   |        |  
|Decrease in comparable Fresh Choice restaurant sales |  | $ | (1,404 | )
|Decrease in sales from closed restaurant             |  |   | (435   | )
|Decrease in new Fresh Choice restaurant sales        |  |   | (139   | )
|Increase in sales in Fresh Choice Express/Starbucks  |  |   | 120    |  
|                                                     |  |   |        |  
|                                                     |  | $ | (1,858 | )
|                                                     |  |   |        |  

The
Company had an average of 39.4 Fresh Choice restaurants in the first three
quarters of 2004 compared to 40.0 Fresh Choice restaurants in the first three quarters
of 2003.  Sales at the Companys 38
comparable Fresh Choice restaurants, which include restaurants open at least 18
months, decreased 3.2% in the first three quarters of 2004 versus the first
three quarters of 2003.  Comparable
store guest counts decreased 5.0%, while the comparable store average check
increased 1.8% to $7.90, reflecting price increases and lower coupon discounts.

Net
sales per Fresh Choice restaurant averaged $1,112,000 in the first three quarters of
2004, a decrease of 2.8% over net sales per restaurant of $1,143,000 in the
first three quarters of 2003.  The
2.8% decline in net sales per restaurant is primarily the result of a 3.2%
decrease in the 38 comparable Fresh Choice restaurants.

Cost
of Sales.Cost of
sales (food and beverage costs) was 22.2% of sales in the first three quarters
of 2004 compared to 22.0% in the first three quarters of 2003.  Food and beverage costs increased as a
percentage of sales due to increases in cost and menu enhancements introduced
to increase the value offering of the menu.

Restaurant Operating Expenses.Restaurant
operating expenses (labor, occupancy and other) were 65.3% of sales in the
first three quarters of 2004 compared to 63.0% of sales in the first three
quarters of 2003, an increase of 2.3% of sales.

29

---

---

Labor
costs as a percentage of sales were 33.0% for the first three quarters of 2004
compared to 31.9% in the first three quarters of 2003.  Labor costs, as a percentage of sales, were
higher primarily due to lower average restaurant sales, a higher average wage,
and higher workers compensation and medical benefits costs.

Occupancy
and other expenses as a percentage of sales were 32.3% for the first three
quarters of 2004 compared to 31.1% of sales in the first three quarters of
2003, an increase of 1.2% of sales.  This
increase is due primarily to higher, advertising, rent, common area maintenance
and insurance costs offset by lower utility costs, combined with the impact as
a percent of sales resulting from the decline in comparable store sales.

Depreciation and Amortization.  Depreciation and amortization expenses in
the third quarter of 2004 were 3.9% of sales, the same as the third quarter of 2003.  The percent of sales remained the same as
the decline in average restaurant sales offset the benefit of the decline in
depreciation dollars resulting from the impairment of certain assets.

General and Administrative Expenses.  General and administrative expenses were
8.3% of sales in the first three quarters of 2004, the same as the first three
quarters of 2003.

Store
Closure and Asset ImpairmentExpenses.  In the first three
quarters of 2004, the Company recorded a store closure and asset impairment
charge for continuing operations of $3,511,000.  This charge was composed of; (i) a $3,204,000 non-cash charge for
the write-down of buildings, leasehold improvements and equipment to fair value
primarily for eight of the Companys restaurants and (ii) a $307,000 charge for
the estimated cash costs associated with the closure and settlement of the
lease obligation for one previously impaired restaurant that closed in the
second quarter and is included in continuing operations as a significant
portion of the closed restaurant sales were absorbed by another currently
operating restaurant.  The impairment
charge for the eight restaurants was required because the carrying amounts of
the impaired assets were not recoverable from their currently projected
undiscounted cash flows.  The impairment
loss was calculated as the difference between the carrying amount and fair
value of the assets.

Chapter 11 Related
Reorganization Expenses.  Chapter 11 related reorganization expenses consist
of $528,000 of estimated professional fees, including US Trustee fees, and
$18,000 for the accrual of estimated retention payments under the Companys
non-senior executive key employee retention plans.

Interest Expense, net.  Interest expense, net was  $256,000 in the first three quarters of 2004
compared to $200,000 in the first three quarters of 2003. The first three
quarters of 2004 includes the write-off of $45,000 of unamortized loan fees for
the bank debt classified as current due to the Company not meeting certain loan
covenants and the write-off of $38,000 in unamortized lease commitment fees.
Interest expense consists of fees related to securing the Companys borrowing
arrangements and interest expense on outstanding borrowings and capital lease
obligations.

Income
Taxes.  The Company recorded no tax benefit from its
operating loss in the first thirty-six weeks of 2004 or the first thirty-six
weeks of 2003 due to valuation allowances against its net deferred tax
assets.  The Companys net deferred tax
assets consist primarily of the tax benefit related to operating loss
carryforwards, alternative minimum tax credits and asset write-downs, in
connection with store asset impairments, that are not deductible for tax
purposes until the assets are disposed. 
The Company will continue to provide a full valuation allowance for its
deferred tax assets until it becomes more likely than not, in managements
assessment, that any portion of the Companys deferred tax assets will be
realized.

Loss
from Discontinued Operations.The loss from discontinued operations
includes the revenue and expenses of fourteen restaurants.  Ten of these restaurants were cash
flow negative restaurants and were closed in early July just prior to filing
for protection under Chapter 11 of the Bankruptcy Code.  The other four are currently listed for sale and the real property is
classified as assets held for sale on the consolidated balance sheet of the
Company. In addition, the loss from discontinued operations includes a store
closure and asset impairment charge of $ 7,368,000. This charge consists of; (i) a $3,485,000 charge to record the
expected cash liability from rejection of the leases for ten closed
restaurants, (ii) a $443,000 non-cash credit for the reversal of the remaining
deferred rent for these ten rejected leases, (iii) a charge of $177,000 for the
cash costs associated with the restaurant closures, and (iv) a non- cash asset
impairment charge of $4,149,000 for the write-down of buildings, leasehold
improvements and equipment to fair value for thirteen of the Companys
restaurants, eight of which had been previously partially impaired.  The impairment charge for these restaurants
was required because the carrying amounts of the impaired assets were not
recoverable from their currently projected undiscounted cash flows.  The impairment loss was calculated as the
difference between the carrying amount and fair value of the assets.

30

---

---

Item 3  - Quantitative and Qualitative Disclosures About Market Risk

The
Company is exposed to interest rate risk primarily through its borrowing
activities.  The Company has not used
derivative financial instruments to hedge such risks.  There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. 
The extent of this risk is not quantifiable or predictable because of
the variability of future interest rates and business financing
requirements.  If market rates were to
increase immediately by 10 percent from levels at September 5, 2004, the fair
value of the Companys borrowings would not be materially affected as
borrowings are primarily subject to variable interest rates.

Item 4  - Controls and Procedures

Under
the supervision and with the participation of management, including the
principal executive and principal financial officers, the Company evaluated the
effectiveness of its disclosure controls and procedures; as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended. Based on this evaluation, its principal executive officer and
principal financial officer concluded that the Companys disclosure controls
and procedures were effective as of the end of the period covered by this
quarterly report. There were no changes in internal control over financial
reporting that would require additional disclosure under Regulation S-K 308(c).

31

---

---

PART II.OTHER INFORMATION

|Item 1 - Legal Proceedings                                     | Not
  Applicable.
|-------------------------------------------------------------- | -----------------
|                                                               |                  
|Item 2 - Changes in Securities                                 | Not
  Applicable.
|                                                               |                  
|Item 3 - Defaults upon Senior Securities                       | Not
  Applicable.
|                                                               |                  
|Item 4 - Submission of Matters to a Vote of Security
  Holders | Not
  Applicable.
|                                                               |                  
|Item 5 - Other Information                                     | Not Applicable.  

Item 6 - Exhibits and Reports on
Form 8-K

|(a) | Exhibits.  The exhibits listed in the accompanying
  index to Form 10-Q Exhibits are filed or incorporated by reference as part of
  this report.                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Reports on
  Form 8-K.  The registrant filed the
  following report on Form 8-K during the quarter ended September 5, 2004.                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|    | -  On July 12, 2004, reporting the filing of
  a voluntary petition for bankruptcy protection under Chapter 11 of the U.S.
  Bankruptcy Code in the United States Bankruptcy Court for the Northern
  District of California.                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|    | -  On July 19, 2004 reporting that the
  Registrant received a Nasdaq Staff Determination indicating that as a result
  of its recent filing under Chapter 11 of the U.S. Bankruptcy Code the Nasdaq
  Staff had determined pursuant to Nasdaq Marketplace Rules 4300 and 4450(f)
  that its securities will be delisted from the Nasdaq National Market as of
  the opening of business on July 21, 2004.

32

---

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| | FRESH
  CHOICE, INC.                                  
| | ------------------------------------------------------
| | (Registrant)                                          
| |                                                       
| |                                                       
| | /s/ Tim G.
  OShea                                   
| |                                                       
| | Tim G.
  OShea                                       
| | President
  and Chief Operating Officer               
| | (Principal
  Executive Officer)                       
| |                                                       
| |                                                       
| | /s/ David E.
  Pertl                                  
| |                                                       
| | David E.
  Pertl                                      
| | Executive
  Vice President and Chief Financial Officer
| | (Principal
  Financial and Accounting Officer)        
| |                                                       

Dated:  October 20, 2004

33

---

---

INDEX TO FORM 10-Q EXHIBITS

|Exhibit
  No. |      | Description
|------------- | ---- | -----------
|              |      |            
|              |      |            
|3.1           | (1)  |            
|              |      |            
|3.2           | (8)  |            
|              |      |            
|3.3           | (10) |            
|              |      |            
|3.4           | (10) |            
|              |      |            
|3.5           | (10) |            
|              |      |            
|3.6           | (10) |            
|              |      |            
|4.1           | (10) |            
|              |      |            
|10.1          | (1)  |            
|              |      |            
|10.2          | (2)  | (3)        
|              |      |            
|10.3          | (2)  | (3)        
|              |      |            
|10.8          | (8)  |            
|              |      |            
|10.18         | (6)  |            
|              |      |            
|10.19         | (6)  |            
|              |      |            
|10.26         | (11) | (3)        
|              |      |            
|10.27         | (11) | (3)        
|              |      |            
|10.28         | (11) | (3)        
|              |      |            
|10.34         | (13) | (3)        
|              |      |            
|10.36         | (14) |            
|              |      |            
|10.37         | (14) | (3)        
|              |      |            
|10.43         | (17) | (3)        
|              |      |            
|10.44         | (17) | (3)        
|              |      |            
|10.45         | (17) | (3)        
|              |      |            
|10.46         | (17) | (3)        
|              |      |            
|10.47         | (17) | (3)        
|              |      |            
|10.48         | (17) |            
|              |      |            
|10.49         | (17) |            
|              |      |            

34

---

---

INDEX TO FORM 10-Q EXHIBITS(continued)

|10.50 | (17) |     | Revolving
  Loan Agreement dated October 5, 2001 with Mid-Peninsula Bank                                                                                                                                                                              
|----- | ---- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |      |     |                                                                                                                                                                                                                                                       
|10.51 | (17) |     | Pledge
  Agreement dated October 5, 2001 with Mid-Peninsula Bank                                                                                                                                                                                      
|      |      |     |                                                                                                                                                                                                                                                       
|10.52 | (17) |     | Promissory
  Note dated October 5, 2001 with Mid Peninsula Bank                                                                                                                                                                                       
|      |      |     |                                                                                                                                                                                                                                                       
|10.55 | (18) | (3) | Non
  Qualified Deferred Compensation Plan of Fresh Choice, Inc. effective as of
  December 1, 2001                                                                                                                                                   
|      |      |     |                                                                                                                                                                                                                                                       
|10.56 | (18) | (3) | Trust
  Agreement Under The Non Qualified Deferred Compensation Plan of Fresh Choice,
  Inc. dated December 17, 2001                                                                                                                                  
|      |      |    
|10.57 | (19) |     | Letter dated
  April 25, 2002 amending the Revolving Loan Agreement dated October 5, 2001
  with Mid-Peninsula Bank                                                                                                                                   
|      |      |     |                                                                                                                                                                                                                                                       
|10.58 | (20) |     | Change in
  Terms Agreement dated June 3, 2002 amending the Revolving Loan Agreement
  dated October 5, 2001 with Mid-Peninsula Bank                                                                                                                  
|      |      |     |                                                                                                                                                                                                                                                       
|10.59 | (21) |     | Letter dated
  December 10, 2002 amending the Revolving Loan Agreement dated October 5, 2001
  as amended June 3, 2002 with Mid-Peninsula Bank                                                                                                        
|      |      |     |                                                                                                                                                                                                                                                       
|10.60 | (21) | (3) | 2003 Home
  Office Incentive Plan                                                                                                                                                                                                                     
|      |      |     |                                                                                                                                                                                                                                                       
|10.61 | (22) |     | Letter dated
  April 7, 2003 amending the Revolving Loan Agreement dated October 5, 2001 as
  amended June 3, 2002 and December 10, 2002 with Mid-Peninsula Bank                                                                                      
|      |      |     |                                                                                                                                                                                                                                                       
|10.62 | (23) |     | Letter dated
  August 13, 2003 amending the Revolving Loan Agreement dated October 5, 2001
  as amended June 3, 2002, December 10, 2002 and April 7, 2003 with
  Mid-Peninsula Bank.                                                                  
|      |      |     |                                                                                                                                                                                                                                                       
|10.63 | (23) |     | Letter dated
  August 13, 2003 amending the Commercial Deed of Trust, Financial Security
  Agreement and Fixture Filing dated Aug 13, 2001 with Mid Peninsula Bank.                                                                                   
|      |      |     |                                                                                                                                                                                                                                                       
|10.64 | (24) |     | Letter dated
  November 19, 2003 amending the Revolving Loan Agreement dated October 5, 2001
  as amended June 3, 2002, December 10, 2002, April 7, 2003 and August 13, 2003
  with Mid-Peninsula Bank.                                               
|      |      |     |                                                                                                                                                                                                                                                       
|10.65 | (24) |     | Letter dated
  November 19, 2003 amending the Commercial Deed of Trust, Financial Security
  Agreement and Fixture Filing dated Aug 13, 2001 as amended August 13, 2003
  with Mid Peninsula Bank.                                                    
|      |      |     |                                                                                                                                                                                                                                                       
|10.66 | (24) | (3) | 2004 Home
  Office Incentive Plan.                                                                                                                                                                                                                    
|      |      |     |                                                                                                                                                                                                                                                       
|10.67 | (24) |     | Letter
  agreement dated December 11, 2003 whereby Crescent Real Estate Equities Ltd.
  (Crescent) agrees to not convert any of its shares of Series B Preferred
  into Series A Preferred so long as Crescent owns the Series B Preferred
  shares.
|      |      |     |                                                                                                                                                                                                                                                       
|10.68 | (25) |     | Change in
  Terms Agreement dated March 16, 2004 amending the Revolving Loan Agreement
  dated October 5, 2001 as amended June 3, 2002, December 10, 2002, April 7,
  2003, August 13,2003 and November 19, 2003 with Mid-Peninsula Bank.             

35

---

---

INDEX TO FORM 10-Q EXHIBITS  (continued)

|10.69 | (26) |  | Letter dated
  May 13, 2004 amending the terms of the Revolving Loan Agreement dated October
  5, 2001 (as subsequently amended) and the Commercial Deed Of Trust, Financing
  Statement, Security Agreement and Fixture Filing dated August 13, 2001 (as
  subsequently amended) with Mid-Peninsula Bank.
|----- | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |      |  |                                                                                                                                                                                                                                                                                                           
|10.70 | (27) |  | Separation
  Agreement and General Release of Claims between Everett F. Jefferson and
  Fresh Choice, Inc., effective September 20, 2004.                                                                                                                                                                 
|      |      |  |                                                                                                                                                                                                                                                                                                           
|31.1  |      |  | Certification
  by the Chief Executive Officer of his responsibility for financial reports
  under section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                 
|      |      |  |                                                                                                                                                                                                                                                                                                           
|31.2  |      |  | Certification
  by the Chief Financial Officer of his responsibility for financial reports
  under section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                 
|      |      |  |                                                                                                                                                                                                                                                                                                           
|32.1  |      |  | Certification
  by the Chief Executive Officer of his responsibility for financial reports
  under section 906 of the Sarbanes-Oxley Act                                                                                                                                                                  
|      |      |  |                                                                                                                                                                                                                                                                                                           
|32.2  |      |  | Certification
  by the Chief Financial Officer of his responsibility for financial reports
  under section 906 of the Sarbanes-Oxley Act.                                                                                                                                                                 

|(1)  | Incorporated by reference
  from the Exhibits with corresponding numbers filed with the Companys
  Registration Statement on Form S-1 (No. 33-53904) filed October 29, 1992, as
  amended by Amendment No. 1 to Form S-1 (No. 33-53904) filed December 7, 1992,
  except that Exhibit 3.1 is incorporated by reference from Exhibit 3.1C and
  Exhibit 3.2 is incorporated by reference from Exhibit 3.2B.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(2)  | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended September 4,
  1994.                                                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(3)  | Agreements
  or compensatory plans covering executive officers and directors of Fresh
  Choice, Inc.                                                                                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(6)  | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the
  Companys Annual Report on Form 10-K for the year ended December 31, 1995.                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(8)  | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on form 10-Q for the quarter ended March 24, 1996.                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(10) | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the Companys
  Quarterly Report on Form 10-Q for the quarter ended September 8, 1996.                                                                                                                                                                                                                                 
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(11) | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the
  Companys Annual Report on Form 10-K for the year ended December 29, 1996.                                                                                                                                                                                                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(13) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended June 14, 1998.                                                                                                                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                                                                                                                                            
|(14) | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the Companys
  Annual Report on Form 10-K for the year ended December 27, 1998.                                                                                                                                                                                                                                       

36

---

---

INDEX TO FORM 10-Q EXHIBITS (continued)

|(17) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended March 24, 2002.     
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                         
|(18) | Incorporated
  by reference from the Exhibits with corresponding numbers filed with the
  Companys Annual Report on Form 10-K for the year ended December 30, 2001.    
|     |                                                                                                                                                                         
|(19) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended March 24, 2002.     
|     |                                                                                                                                                                         
|(20) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended June 16, 2002.      
|     |                                                                                                                                                                         
|(21) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Annual Report on Form 10-K for the year ended December 29, 2002.        
|     |                                                                                                                                                                         
|(22) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended March 23, 2003.     
|     |                                                                                                                                                                         
|(23) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended September 7,
  2003.
|     |                                                                                                                                                                         
|(24) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Annual Report on Form 10-K for the year ended December 28, 2003.        
|     |                                                                                                                                                                         
|(25) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended March 21, 2004.     
|     |                                                                                                                                                                         
|(26) | Incorporated
  by reference from Exhibits with corresponding numbers filed with the
  Companys Quarterly Report on Form 10-Q for the quarter ended June 13, 2004.      
|     |                                                                                                                                                                         
|(27) | Incorporated
  by reference from Exhibit 99.1 filed with the Companys Report on Form 8-K
  dated September 24, 2004.                                                   

37

---

---