<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             -----------------------

                                    FORM 10-Q
(Mark One)

[X]     QUARTERLY REPORT under SECTION 13 OR 15(d) of the SECURITIES EXCHANGE
        ACT OF 1934

        For the quarter ended        September 6, 1998
                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

        For the transition period from ______________ to ______________.

                         Commission file number 0-20792

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

           DELAWARE                                           77-0130849
 (State or other jurisdiction of                          (I.R.S. Employee
 incorporation or organization)                          Identification No.)

          2901 TASMAN DRIVE - SUITE 109, SANTA CLARA, CALIFORNIA 95054
              (Address of principal executives offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 986-8661

--------------------------------------------------------------------------------
              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.

                                                      [X] Yes     [ ] No

          APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
                        DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of Common Stock, $.001 par value, outstanding as of October
4, 1998 was 5,694,920.



<PAGE>   2

                               FRESH CHOICE, INC.

                                      INDEX


<TABLE>
<CAPTION>                                                                                                                    
PART I - FINANCIAL INFORMATION
<S>                                                                                                                    <C>  
     Item 1 - Financial Statements

         Condensed Consolidated Balance Sheets at September 6, 1998
         and December 28, 1997..........................................................................................3

         Condensed Consolidated Statements of Operations for the Twelve and Thirty-Six Weeks
         ended September 6, 1998 and September 7, 1997 .................................................................4

         Condensed Consolidated Statements of Cash Flow for the Thirty-Six Weeks
         ended September 6, 1998 and September 7, 1997..................................................................5

         Notes to Unaudited Condensed Consolidated Financial Statements.................................................6

     Item 2 - Management's Discussion and Analysis of Financial Condition
         and Results of Operations......................................................................................9

     Item 3 - Quantitative and Qualitative Disclosures About Market Risk...............................................18

PART II - OTHER INFORMATION

     Item 1 - Legal Proceedings........................................................................................19
     Item 2 - Changes in Securities....................................................................................19
     Item 3 - Defaults Upon Senior Securities..........................................................................19
     Item 4 - Submission of Matters to a Vote of Security Holders......................................................19
     Item 5 - Other Information........................................................................................19
     Item 6 - Exhibits and Reports on Form 8-K.........................................................................19


SIGNATURES ............................................................................................................20


INDEX TO FORM 10-Q EXHIBITS............................................................................................21
</TABLE>



                                       2
<PAGE>   3

                          PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS


FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 September 6,      December 28,
                                                                                    1998               1997
                                                                                  --------           --------
                                                                                 (Unaudited)             *
<S>                                                                              <C>               <C>
ASSETS

CURRENT ASSETS:
       Cash and cash equivalents                                                  $    911           $  2,415
       Receivables                                                                      77                124
       Inventories                                                                     527                461
       Pre-opening costs                                                                65                130
       Prepaid expenses and other current assets                                       660                544
                                                                                  --------           --------
       Total current assets                                                          2,240              3,674

PROPERTY AND EQUIPMENT, net                                                         32,855             30,842

LEASE ACQUISITION COSTS, net                                                           429                481

DEPOSITS AND OTHER ASSETS                                                              620                611
                                                                                  --------           --------
TOTAL ASSETS                                                                      $ 36,144           $ 35,608
                                                                                  ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       Line of credit borrowings                                                  $  1,118           $     --
       Accounts payable                                                              2,965              2,271
       Accrued salaries and wages                                                    1,408              1,286
       Sales tax payable                                                               774                525
       Other accrued expenses                                                        2,079              2,101
       Acquisition payable related to purchase of restaurants                           --                600
       Restructuring reserve                                                            --                721
       Current portion of capital lease obligations                                    253                 --
                                                                                  --------           --------
       Total current liabilities                                                     8,597              7,504

CAPITAL LEASE OBLIGATIONS                                                              860                 --

OTHER LONG-TERM LIABILITIES                                                          1,423              1,786
                                                                                  --------           --------
       Total liabilities                                                            10,880              9,290
                                                                                  --------           --------

STOCKHOLDERS' EQUITY
       Convertible preferred stock, $.001 par value;  3.5 million shares
              authorized; shares outstanding: 1998 and 1997 -1,187,906               5,175              5,175
       Common stock, $.001 par value; 15 million shares authorized;
              shares outstanding: 1998-5,694,920; 1997-5,682,193                    42,170             42,139
       Accumulated deficit                                                         (22,081)           (20,996)
                                                                                  --------           --------
       Total stockholders' equity                                                   25,264             26,318
                                                                                  --------           --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                        $ 36,144           $ 35,608
                                                                                  ========           ========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements

*See Note 1.



                                       3
<PAGE>   4

FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

<TABLE>
<CAPTION>
                                                         Twelve Weeks Ended        Thirty-Six Weeks Ended
                                                       ----------------------      ----------------------
                                                     September 6,  September 7,  September 6,  September 7,
                                                         1998          1997          1998          1997
                                                       --------      --------      --------      --------
<S>                                                  <C>           <C>           <C>           <C>
NET SALES                                              $ 18,644      $ 18,334      $ 52,202      $ 51,819

COSTS AND EXPENSES:
        Cost of sales                                     4,886         4,861        13,723        13,966
        Restaurant operating expenses:
              Labor                                       5,879         5,445        16,920        15,821
              Occupancy and other                         5,683         5,076        16,175        15,328
        Depreciation and amortization                       889           723         2,558         2,121
        General and administrative expenses               1,219         1,199         3,780         4,049
                                                       --------      --------      --------      --------
              Total costs and expenses                   18,556        17,304        53,156        51,285
                                                       --------      --------      --------      --------

OPERATING INCOME (LOSS)                                      88         1,030          (954)          534

        Interest income                                      --            39             8           128
        Interest expense                                    (59)           (4)         (139)          (13)
                                                       --------      --------      --------      --------
        Interest income (expense), net                      (59)           35          (131)          115
                                                       --------      --------      --------      --------
INCOME (LOSS) BEFORE INCOME TAXES                            29         1,065        (1,085)          649

        Provision for (benefit from) income taxes            --            --            --            --
                                                       --------      --------      --------      --------
NET INCOME (LOSS)                                      $     29      $  1,065      $ (1,085)     $    649
                                                       ========      ========      ========      ========
Basic net income (loss) per share                      $   0.01      $   0.19      $  (0.19)     $   0.11
                                                       ========      ========      ========      ========
Shares used in computing basic per share amounts          5,695         5,669         5,688         5,664
                                                       ========      ========      ========      ========

Diluted net income (loss) per share                    $   0.00      $   0.16      $  (0.19)     $   0.09
                                                       ========      ========      ========      ========
Shares used in computing diluted per share amounts        6,885         6,860         5,688         6,855
                                                       ========      ========      ========      ========
</TABLE>


See accompanying notes to unaudited condensed consolidated financial statements



                                       4
<PAGE>   5

FRESH CHOICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
(Unaudited)


<TABLE>
<CAPTION>
                                                                                  Thirty-Six Weeks Ended
                                                                                 -------------------------
                                                                               September 6,      September 7,
                                                                                   1998             1997
                                                                                 -------           -------
<S>                                                                            <C>               <C>
OPERATING ACTIVITIES:
Net income (loss)                                                                $(1,085)          $   649
Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
         Depreciation and amortization                                             2,698             2,274
         Loss on disposal of property                                                197                69
         Deferred rent                                                              (350)             (315)
         Change in operating assets and liabilities:
            Receivables                                                               47                49
            Inventories                                                              (66)              (28)
            Pre-opening costs                                                        (42)               --
            Prepaid expenses and other current assets                               (116)             (190)
            Accounts payable                                                         694               805
            Accrued salaries and wages                                               122               (79)
            Other accrued expenses                                                  (373)             (236)
            Restructuring reserve                                                   (721)             (864)
                                                                                 -------           -------
     Net cash provided by operating activities                                     1,005             2,134
                                                                                 -------           -------

INVESTING ACTIVITIES:
     Capital expenditures                                                         (4,741)           (2,490)
     Deposits and other assets                                                       (29)             (229)
                                                                                 -------           -------
     Net cash used in investing activities                                        (4,770)           (2,719)
                                                                                 -------           -------

FINANCING ACTIVITIES:
     Common stock sales                                                               31                45
     Line of credit borrowings, net                                                1,118                --
     Capital lease obligations - borrowings                                        1,265                --
     Capital lease obligations - repayments                                         (152)              (79)
     Other note payable                                                               (1)               (1)
                                                                                 -------           -------
     Net cash provided by (used in) financing activities                           2,261               (35)
                                                                                 -------           -------
DECREASE IN CASH AND CASH EQUIVALENTS                                             (1,504)             (620)

CASH AND CASH EQUIVALENTS:
     Beginning of period                                                           2,415             5,647
                                                                                 -------           -------
     End of period                                                               $   911           $ 5,027
                                                                                 =======           =======
Supplemental Disclosure of Cash Flow Information:
     Cash paid during the period for interest                                    $   101           $    15
                                                                                 -------           -------
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
     Acquisition payable related to purchase of restaurants                      $    --           $   600
                                                                                 -------           -------
</TABLE>



See accompanying notes to unaudited condensed consolidated financial statements



                                       5
<PAGE>   6

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve Weeks and Thirty-Six Weeks Ended September 6, 1998 and September
7, 1997


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 generally accepted accounting
principles. 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, 1997.

2.      NET INCOME (LOSS) PER SHARE

                During December 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share" which requires a
dual presentation of basic and diluted earnings per share (EPS). Basic EPS for
the periods presented is computed by dividing net income (loss) by the weighted
average of common shares outstanding. Diluted EPS 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 retroactively
restated prior period earnings per share (EPS) for the change.

                A reconciliation of the components of basic and diluted net
income (loss) per common share follows:


<TABLE>
<CAPTION>
                                                Twelve Weeks Ended            Thirty-Six Weeks Ended
                                              ----------------------          -------------------------
                                            September 6,   September 7,     September 6,      September 7,
(In thousands, except per share data)          1998            1997             1998              1997
                                              ------          ------          --------           ------
<S>                                         <C>            <C>              <C>               <C>
 Net income (loss)                            $   29          $1,065          $ (1,085)          $  649
                                              ======          ======          ========           ======

Basic Net Income (Loss) Per Share

 Average common shares outstanding             5,695           5,669             5,688            5,664
                                              ======          ======          ========           ======
Diluted Net Income (Loss) Per Share

 Average common shares outstanding             5,695           5,669             5,688            5,664
 Diluted shares:
    Stock options                                  2               3                --                3
    Convertible preferred stock                1,188           1,188                --            1,188
                                              ------          ------          --------           ------
    Total diluted shares                       6,885           6,860             5,688            6,855
                                              ======          ======          ========           ======
 Basic net income (loss) per share            $ 0.01          $ 0.19          $  (0.19)          $ 0.11
                                              ======          ======          ========           ======
 Diluted net income (loss) per share          $ 0.00          $ 0.16          $  (0.19)          $ 0.09
                                              ======          ======          ========           ======
</TABLE>



                Diluted EPS presented for the thirty-six weeks ended September
6, 1998 is the same as basic EPS since the Company had net losses and,
therefore, all potential dilutive securities are antidilutive and are excluded
from the computation. The following table presents the total dilutive securities
which the Company excluded for each period presented from its diluted EPS
computation because either the exercise price of the securities exceeded the
average fair value of the Company's common stock or the Company had net losses,
and, therefore, these securities were anti-dilutive:



                                       6
<PAGE>   7

<TABLE>
<CAPTION>
                                             Twelve Weeks Ended            Thirty-Six Weeks Ended
                                         --------------------------     ---------------------------
                                         September 6,  September 7,     September 6,   September 7,
(In thousands)                               1998          1997              1998          1997
                                         ------------  ------------     -------------  ------------
<S>                                      <C>           <C>              <C>            <C>
Potential Dilutive Securities

    Stock options                          560            586                 564            586
    Stock warrants                         732            732                 732            732
    Convertible preferred stock             --             --               1,188             --
</TABLE>



3.      INCOME TAXES

                The Company recorded no income tax benefit from its operating
losses during the thirty-six weeks ended September 6, 1998 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 and non-deductible asset write-downs in connection with its
restructuring. The Company will continue to provide a valuation allowance for
its deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized. The Company
recorded no tax provision for its operating income during the thirty-six weeks
ended September 7, 1997 due to the availability of net operating loss
carryforwards to offset taxable income.

4.      BANK LINE OF CREDIT

                At September 6, 1998, the Company had $1,118,000 borrowed under 
a bank line of credit at the prime rate (8.5% at September 6, 1998) plus 1.25% 
and had $1,283,500 borrowed at October 21, 1998. The Company failed to achieve 
certain minimum earnings for the third quarter of 1998 as specified in its bank 
line of credit agreement, and, as a result, borrowings under the line of credit 
are payable on demand. In addition the bank reduced the maximum amount 
available under the line of credit from $2,850,000 to $1,283,500. Borrowings 
under the line of credit are secured by the Company's personal property and by 
executed deeds of trust on certain Company-owned real estate. The Company and 
its bank are currently negotiating an amended line of credit agreement. 
Management believes the Company will be able to negotiate an amended agreement 
with the bank or refinance the borrowings with another lender in the near 
future.

5.      ACQUISITION PAYABLE RELATED TO PURCHASE OF RESTAURANTS

                During the third quarter of 1998, the Company paid the remaining
liability related to its purchase in May 1997 of the Zoopa trade name and three
Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington.

6.      RESTRUCTURING RESERVE

                As of September 6, 1998, the Company had completed the
restructuring plan previously announced at the end of fiscal year 1995 and had
no restructuring reserve balances. During the second quarter of 1998, the
Company settled its one remaining cash obligation related to the lease
settlement for a previously closed restaurant and reversed approximately $32,000
of excess reserve to other restaurant operating expenses. The



                                       7
<PAGE>   8

Company closed no restaurants in 1997, but identified one other restaurant,
which was previously impaired in connection with the Company's restructuring
plan, for closure in 1998 at the expiration of its lease term. The restaurant
closed in the second quarter of 1998 with no material impact on the Company's
financial position, results of operations or cash flows. The following table
sets forth the Company's restructuring reserve and the respective balances at
December 28, 1997 and September 6, 1998:


<TABLE>
<CAPTION>
                                             Balance       Utilized         Reserve         Balance
(In thousands)                           December 28,       to date        Reversed     September 6,
                                                1997        in 1998         in 1998            1998
                                                ----        -------         -------            ----
<S>                                      <C>               <C>             <C>          <C>
1995 Reserve:

Estimated cash costs associated with
restaurant closures and settlement of
lease obligations                              $ 721          $(689)          $ (32)          $   --
                                               =====          =====           =====           ======
</TABLE>


7.      SUBSEQUENT EVENT

                Subsequent to the end of the third quarter, the Board of
Directors authorized the closing of up to four previously-impaired restaurants
over the next year; in addition, the Company identified two other restaurants
where it does not intend to renew the leases. In the fourth quarter, the Company
expects to record a non-cash impairment charge of $500,000 to $700,000 for the
write-down of the related restaurant assets and a charge of $1,600,000 to
$2,200,000 to cover the estimated cash costs associated with the restaurant
closures and settlement of lease obligations. The four restaurants expected to
be closed had store level operating losses of approximately $307,000 for the
first 36 weeks of 1998.

8.      RECENTLY ISSUED ACCOUNTING STANDARD

                In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities", which requires companies to expense the costs of
start-up activities and organization costs as incurred. The Company has
historically capitalized restaurant pre-opening costs, which consist of the
direct costs associated with opening new restaurants including the costs of
hiring and training the initial workforce, and amortizes them over a twelve
month period. SOP 98-5 is required to be adopted effective for the Company's
fiscal year beginning December 28, 1998 and will require the Company to expense
the unamortized portion of restaurant start-up costs at the time of adoption.
The Company has $65,000 of unamortized pre-opening costs as of September 6, 1998
and anticipates it will have approximately $100,000 of unamortized pre-opening
costs at the time SOP 98-5 is adopted.

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 will have a separate
right to approve certain corporate actions. In the event of a failure by the
Company to achieve earnings (before interest, taxes, depreciation and
amortization) of at least $5,500,000 in 1998 (subject to adjustment under
certain circumstances by the Company's board of directors), Series A preferred
stockholders, if any, would be entitled to elect a majority of the Company's
Board of Directors. Based on its year-to-date financial performance, the Company
does not expect to achieve this earnings target.



                                       8
<PAGE>   9

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
thirty-six weeks ended September 6, 1998. 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, 1997 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, 1997.

                Certain statements set forth in this discussion and analysis of
financial condition and results of operations including anticipated store
openings, planned capital expenditures 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 herein. Among the risks and uncertainties are the Company's successful
efforts to close, sell or improve operating results of underperforming stores
which depend on many factors not within the Company's control such as the
negotiation of settlements of existing lease obligations under acceptable terms.
In addition, the Company's plans to open new restaurants could be affected by
the Company's ability to locate suitable restaurant sites, construct new
restaurants in a timely manner and obtain additional financing.


Liquidity and Capital Resources

                The Company's primary capital requirements have been 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, equipment lease
financing and short-term bank debt. The Company does not have significant
receivables or inventory and receives trade credit based upon negotiated terms
in purchasing food and supplies.

                For the thirty-six weeks ended September 6, 1998, the Company
invested $4,741,000 in property and equipment, primarily for new and remodeled
restaurants, which was funded from existing cash balances, cash flow from
operations, equipment lease financing and short-term bank borrowings. The
Company opened one new restaurant in Houston, Texas in the second quarter of
1998 and one other restaurant in Fort Worth, Texas after the close of the third
quarter. In addition, the Company has executed lease commitments for an
additional restaurant in San Antonio, Texas and in Houston, Texas. The Company
remodeled eight restaurants during the first half of 1998 and does not currently
have plans to remodel additional restaurants in 1998.

                During the third quarter of 1998, the Company paid the remaining
liability related to its purchase in May 1997 of the Zoopa trade name and three
Zoopa restaurants in Bellevue, Tacoma and Tukwila, Washington.

                At September 6, 1998, the Company had $1,118,000 borrowed under 
a bank line of credit at the prime rate (8.5% at September 6, 1998) plus 1.25% 
and had $1,283,500 borrowed at October 21, 1998. The Company failed to achieve 
certain minimum earnings for the third quarter of 1998 as specified in its bank 
line of credit agreement, and, as a result, borrowings under the line of credit 
are payable on demand. In addition the bank reduced the maximum amount 
available under the line of credit from $2,850,000 to $1,283,500. Borrowings 
under the line of credit are secured by the Company's personal property and by 
executed deeds of trust on certain Company-owned real estate. The Company and 
its bank are currently negotiating an amended line of credit agreement. 
Management believes the Company will be able to negotiate an amended agreement 
with the bank or refinance the borrowings with another lender in the near 
future.


                                       9
<PAGE>   10

                During the thirty-six weeks ended September 6, 1998, the Company
entered into equipment leases providing $1,265,000 in financing under capital
lease agreements that expire in 2001 and, after the close of the third quarter,
entered into an additional equipment lease providing $504,000 in financing under
a capital lease agreement that also expires in 2001.

                Operating activities during the thirty-six weeks ended September
6, 1998 provided $1,005,000 which was net of $689,000 in cash costs related to
the completion of the Company's 1995 restructuring plan and also net of the cash
paid for the remaining liability related to the Company's purchase in May 1997
of the Zoopa trade name and three Zoopa restaurants.

                Subsequent to the end of the third quarter, the Board of
Directors authorized the closing of up to four previously-impaired restaurants
over the next year; in addition, the Company identified two other restaurants
where it does not intend to renew the leases. In the fourth quarter, the Company
expects to record a non-cash impairment charge of $500,000 to $700,000 for the
write-down of the related restaurant assets and a charge of $1,600,000 to
$2,200,000 to cover the estimated cash costs associated with the restaurant
closures and settlement of lease obligations. The four restaurants expected to
be closed had store level operating losses of approximately $307,000 for the
first 36 weeks of 1998.

                Long-term debt at September 6, 1998 consisted of $1,113,000 of
capital lease obligations and a $117,000 note for site construction costs which
is included in other long-term liabilities on the balance sheet.

                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. In the event of a failure by the Company to achieve earnings (before
interest, taxes, depreciation and amortization) of at least $5,500,000 in 1998
(subject to adjustment under certain circumstances by the Company's board of
directors), Series A preferred stockholders, if any, would be entitled to elect
a majority of the Company's Board of Directors. Based on its year-to-date
financial performance, the Company does not expect to achieve this earnings
target. Upon achievement of certain per-share market price test, the Company may
force a mandatory conversion of the Series A preferred stock to common stock. No
shares of Series C preferred stock are currently outstanding, but an option to
purchase such shares is outstanding. All shares of preferred stock are senior to
the Company's common stock with respect to dividends and with respect to
distribution on liquidation.

                The Company's continued growth depends to a significant degree
on its ability to open new restaurants and to operate such restaurants
profitably. The Company has lease commitments on two additional locations and
currently has no plans for expansion beyond this. The Company intends to resume
its restaurant



                                       10
<PAGE>   11

expansion if and when its financial performance improves and financing is in
place. The Company's ability to implement an expansion strategy will depend upon
a variety of factors, including the success of efforts to restore profitability
and the Company's ability to obtain funds. See "Business Risks" included herein.
The Company believes its operating cash requirements can be met by existing cash
balances and cash provided by operations. The Company is seeking additional
financing to meet its required debt reductions under its line of credit, to
complete its capital requirements for committed restaurant expansion and to
provide greater flexibility toward its planned restaurant closures, improving
its operating performance and resuming restaurant expansion.

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. The Federal minimum
wage increased effective September 1, 1997, and the State of California minimum
wage increased effective March 1, 1998. In addition, the cost of food
commodities utilized by the Company are 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.


Year 2000 Software Requirements

                The Company has completed a review of all its restaurant and
corporate computer systems for compliance with the year 2000. The Company has
determined that certain of its existing computer systems use only two digits to
identify a year in the date field and, as a result, may improperly identify the
year 2000 in calculating and processing information. The Company recognizes this
system design could cause certain systems to potentially fail or create
erroneous results by or at the year 2000 but believes its current strategic
information plan is addressing the problem.

                The Company is currently in the process of migrating its
critical processing and information requirements to outsourced processing
companies whose software is represented to be year 2000 compliant. The Company
expects to complete this system migration, begun in 1997, during 1999 with no
significant incremental costs. In accordance with its strategic information
plan, the Company is already replacing certain restaurant systems, primarily its
restaurant point of sale system, used for capturing and transmitting data to the
outsourced systems, with year 2000 compliant systems. The Company expects to
have the critical restaurant systems in place by approximately the middle of
1999 at an estimated cost of $500,000 which is to be capitalized in accordance
with normal policy and which will be funded either through operating cash flow
or equipment lease financing.

                The Company has also contacted outside entities with which it
interacts electronically and has requested information regarding whether or not
their systems are or will be year 2000 compliant. The Company plans to monitor
the progress of outside entities that are in the process of developing year 2000
compliance, but it does not believe there is a material risk to the Company if
these entities do not achieve compliance.

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:



                                       11
<PAGE>   12

                Operating Losses and Declines in Comparable Store Sales. The
Company's profitability began to decline in the second half of 1994. In the
fourth quarter of 1994, the Company reported its first operating loss, and
reported operating losses in both 1995 and 1996 and reported a modest profit in
1997. The Company has reported an operating loss for the first thirty-six weeks
of 1998.

                Beginning late in the third quarter of fiscal 1994, the Company
began reporting comparable store sales declines. Comparable store sales have
continued to decline in each quarter through the end of 1997. The Company
reported comparable store sales declines of 4.6%, 15.3%, 5.9% and 2.7% for
fiscal years 1994, 1995, 1996 and 1997, respectively, and a comparable store
sales decline of 6.3% in the first thirty-six weeks of 1998. There can be no
assurance that comparable store sales will improve or that the Company will
return to long-term profitability.

                Expansion. The Company experienced substantial growth prior to
mid-1995, having opened 14 restaurants in 1993, 15 restaurants in 1994, and
seven in 1995. In 1995, the Company suspended its expansion plans after opening
seven restaurants, reviewed the operating performance of all of its restaurants,
and identified certain restaurants which did not meet its expectations for
operating performance. As a result, in December 1995 the Company announced a
restructuring plan to close as many as ten restaurants. The Company has closed
or sold twelve restaurants to date. The Company closed three restaurants at the
end of 1995 and eight in 1996 in accordance with a restructuring plan announced
at the end of 1995. The Company closed no restaurants in 1997, but identified
one other restaurant for closure in 1998 at the expiration of its lease term.
This restaurant closed in the second quarter of 1998 with no material impact on
the Company's financial position, results of operations or cash flows. The
Company opened one Fresh Choice restaurant in 1996. In 1997, the Company
acquired the Zoopa trade name and three Zoopa restaurants (in Tacoma, Tukwila
and Bellevue, Washington) and opened an additional two new Zoopa restaurants (in
San Antonio and Houston, Texas). In the second quarter of 1998, the Company
opened one new Zoopa restaurant (in Houston, Texas) and after the close of the
third quarter of 1998, the Company opened one new Fresh Choice restaurant (in
Fort Worth, Texas). Subsequent to the end of the third quarter, the Board of
Directors authorized the closing of up to four previously-impaired restaurants
over the next year; in addition, the Company identified two other restaurants
where it does not intend to renew the leases.

                The Company believes its growth depends to a significant degree
on its ability to open new restaurants and to operate such restaurants
profitably. The Company has lease commitments on two additional locations and
currently has no plans for expansion beyond this. The Company intends to
continue its expansion if and when its financial performance improves and
financing is in place; however, there can be no assurance that the Company will
be able to continue expansion. The Company's ability to implement successfully
an expansion strategy will depend on a variety of factors, including the
selection and availability of affordable sites, the selection and availability
of capital to finance restaurant expansion and equipment costs, the ability to
hire and train qualified management and personnel, the ability to control food
and other operating costs, and other factors, many of which are beyond the
Company's control.

                On a long-term basis, the Company intends to continue to expand
its operations in markets outside of California, contingent upon its financial
performance and financing. The Company's expansion plans may include entering
new geographic regions in which the Company has no previous operating
experience. There can be no assurance that the concept will be successful in
regions outside of California, where tastes and restaurant preferences may be
different. As of October 21, 1998, the Company had opened or purchased nine
restaurants in Texas, six restaurants in the state of Washington and three
restaurants in the Washington, DC metropolitan area. Of the twelve restaurants
closed or sold, two were in Texas, one was in the state of Washington, six were
in California, and three were in the Washington, DC metropolitan area (where the
Company no longer operates). Subsequent to the close of the third quarter, the
Company announced planned restaurant closures, including up to four
previously-impaired restaurants and two restaurants where the Company does not
intend to renew the leases, involving restaurants located in Washington and
California.



                                       12
<PAGE>   13

                Geographic Concentration. As of October 21, 1998, 42 of the
Company's 54 restaurants are located in California, primarily in the San
Francisco Bay Area. 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, and such pressure may continue to depress annual comparable store
sales. 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 in the region
or negative publicity relating to an individual Company restaurant could have a
more pronounced adverse affect on net sales than if the Company's restaurants
were more broadly dispersed.

                Volatility of Stock Price. The market price of the Company's
Common Stock has fluctuated substantially since the initial public offering of
the Common Stock in December 1992. Changes in general conditions in the economy,
the financial markets or the restaurant industry, natural disasters or other
developments affecting the Company or its competitors could cause the market
price of the Company's Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had significant effect on the market prices of
securities issued by many companies, including the Company, for reasons
sometimes unrelated to the operating performance of these companies. Any
shortfall in the Company's net sales or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's Common Stock in any given period.
Additionally, such shortfalls may not become apparent until late in the fiscal
quarter, which could result in an even more immediate and significant adverse
effect on the trading price of the Company's Common Stock.

                Seasonality and Quarterly Fluctuations. The Company's
restaurants have typically experienced seasonal fluctuations, as a
disproportionate amount of net sales and net income are generally realized in
the second and third fiscal quarters. 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 and restaurant closings. 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 and net income can be expected to
decline in the first quarter of each fiscal year in comparison to the fourth
quarter of the prior fiscal year. Comparable store sales, which have been
negative for four consecutive years, may continue to be negative.

                Dependence on Key Personnel. 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 employees and to attract qualified
personnel, particularly general managers, for its restaurants. The Company faces
significant competition in the recruitment of qualified employees.

                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 employees benefit costs, and the availability of experienced
management and hourly employees 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.



                                       13
<PAGE>   14

                Competition. The Company's restaurants compete with the rapidly
growing mid-price, full-service casual dining segment; with traditional
self-service buffet, soup, and salad restaurants; and, increasingly, with
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.

                Ability to Obtain Additional Financing. Although the Company has
slowed its expansion, it intends to continue restaurant expansion if and when
its financial performance improves and financing is in place. The Company's
ability to implement an expansion strategy will depend upon a variety of
factors, including its ability to restore profitability and obtain funds. The
Company is seeking additional financing to meet its required debt reductions
under its line of credit, to complete its capital requirements for committed
restaurant expansion and to provide greater flexibility toward its planned
restaurant closures and improving its operating performance. There can be no
assurance that the Company will be able to obtain additional financing when
needed on acceptable terms or at all.

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:



<TABLE>
<CAPTION>
                                                      Twelve Weeks Ended                      Thirty-Six Weeks Ended
                                         --------------------------------------      --------------------------------------------
(In thousands)                           September 6, 1998    September 7, 1997      September 6, 1998          September 7, 1997
                                         -----------------    -----------------      -----------------          -----------------
<S>                                      <C>       <C>       <C>           <C>       <C>           <C>         <C>           <C>    
NET SALES                                $18,644   100.0 %   $ 18,334      100.0%    $ 52,202      100.0%      $ 51,819      100.0%

COSTS AND EXPENSES:
    Cost of sales                          4,886    26.2 %      4,861       26.5%      13,723       26.3%        13,966       27.0%
    Restaurant operating expenses:
           Labor                           5,879    31.5 %      5,445       29.7%      16,920       32.4%        15,821       30.5%
           Occupancy and other             5,683    30.5 %      5,076       27.7%      16,175       31.0%        15,328       29.6%
    Depreciation and amortization            889     4.8 %        723        3.9%       2,558        4.9%         2,121        4.1%
    General and administrative expenses    1,219     6.5 %      1,199        6.6%       3,780        7.2%         4,049        7.8%
                                         -----------------    -----------------      -----------------          -----------------

           Total costs and expenses       18,556    99.5 %     17,304       94.4%      53,156      101.8%        51,285       99.0%
                                         -----------------    -----------------      -----------------          -----------------

OPERATING INCOME (LOSS)                       88      0.5%      1,030        5.6%        (954)     (1.8)%           534        1.0%

    Interest income                           --       --%         39        0.2%           8         --%           128        0.2%
    Interest expense                         (59)   (0.3)%         (4)        --%        (139)     (0.3)%           (13)       0.1%
                                         -----------------    -----------------      -----------------          -----------------

    Interest income (expense), net           (59)   (0.3)%         35        0.2%        (131)     (0.3)%           115        0.3%
                                         -----------------    -----------------      -----------------          -----------------

INCOME (LOSS) BEFORE INCOME TAXES             29      0.2%      1,065        5.8%      (1,085)     (2.1)%           649        1.3%

    Provision for (benefit
    from) income taxes                        --       --%         --         --%          --         --%            --         --%
                                         -----------------    -----------------      -----------------          -----------------

NET INCOME (LOSS)                        $    29      0.2%   $  1,065        5.8%    $ (1,085)     (2.1)%      $    649        1.3%
                                         =================    ==================     =================          =================

Number of restaurants:
    Open at beginning of period               53                   51                      53                        48
                                         =======             ========                ========                  ========
    Open at end of period                     53                   51                      53                        51
                                         =======             ========                ========                  ========
</TABLE>



                                       14
<PAGE>   15



                The following table presents the components of average operating
income (loss) on a per restaurant basis, based on the average number of
restaurants open during the period:



<TABLE>
<CAPTION>
                                                     Twelve Weeks Ended                     Thirty-Six Weeks Ended
                                         ----------------------------------------  -----------------------------------------
(In thousands)                            September 6, 1998    September 7, 1997   September 6, 1998       September 7, 1997
                                         -------------------  -------------------  ------------------      -----------------
<S>                                      <C>          <C>     <C>          <C>     <C>         <C>         <C>        <C>   
NET SALES                                $   352      100.0%  $   359      100.0%  $   987     100.0%      $ 1,046    100.0%
COSTS AND EXPENSES:
  Cost of sales                               92       26.2%       95       26.5%      259      26.3%          282     27.0%
  Restaurant operating expenses:
         Labor                               111       31.5%      107       29.7%      320      32.4%          319     30.5%
         Occupancy and other                 107       30.5%      100       27.7%      306      31.0%          309     29.6%
  Depreciation and amortization               17        4.8%       14        3.9%       48       4.9%           43      4.1%
  General and administrative expenses         23        6.5%       24        6.6%       71       7.2%           82      7.8%
                                         -------------------  -------------------  ------------------      -----------------
         Total costs and expenses            350       99.5%      340       94.4%    1,004     101.8%        1,035     99.0%
                                         -------------------  -------------------  ------------------      -----------------
OPERATING INCOME (LOSS)                  $     2        0.5%  $    19        5.6%  $   (17)     (1.8)%      $   11      1.0%
                                         ===================  ===================  ==================      =================
 Average restaurants open                   53.0                 51.0                 52.9                    49.5
                                         =======              ========             =======                 =======
</TABLE>



Results of Operations:  Twelve Weeks Ended September 6, 1998
Compared to Twelve Weeks Ended September 7, 1997

                Net Sales. Net sales for the third quarter ended September 6,
1998 were $18,644,000, an increase of $310,000, or 1.7%, from sales of
$18,334,000 for the third quarter ended September 7, 1997. The primary
components of the net increase in sales were:


<TABLE>
<S>                                                         <C>        
Incremental sales from new or acquired restaurants          $   784,000

Decline in comparable store sales                              (320,000)

Absence of sales from closed restaurant                        (154,000)
                                                            -----------

                                                            $   310,000
                                                            ===========
</TABLE>


                Sales for the quarter reflect an increase in the number of
restaurants (five new restaurants were added in 1997 and one new restaurant in
1998) offset by a comparable-store sales decline versus 1997 of 1.9% for the
quarter.
                Comparable store customer counts, which include only restaurants
open and operated by the Company at least 18 months, declined 1.5% in the third
quarter. The comparable store average check was $6.83 in the third quarter, a
decrease of 0.4% versus $6.86 in the third quarter of 1997 as the Company
increased its discounting levels in the quarter.

                Net sales per restaurant averaged $352,000 in the third quarter
of 1998, a decrease of 1.9% from net sales per restaurant of $359,000 in the
third quarter of 1997.

                Costs and Expenses. Cost of sales (food and beverage costs) was
26.2% of sales in the third quarter of 1998 compared to 26.5% in the third
quarter of 1997, a decrease of 0.3% of sales. The Company's food costs continue
to benefit from a food program, developed and implemented in the second half of
1997, which manages food costs through an efficient product rotation while
maintaining a quality menu offering to guests.

                Restaurant Operating Expenses. Restaurant operating expenses
(labor, occupancy and other) were 62.0% of net sales in the third quarter of
1998 compared to 57.4% of sales in the third quarter of 1997, an increase of
4.6% of sales.



                                       15
<PAGE>   16

                Labor costs were 1.8% of sales higher than last year. This
increase is primarily the result of minimum wage increases and a highly
competitive labor market which have contributed to an increase in the Company's
average wage rate in 1998. In addition, the fixed portion of labor costs became
a higher percentages of sales as comparable store sales declined.

                Occupancy and other costs were 2.8% of sales higher than last
year. This increase was primarily the result of higher restaurant maintenance
and supply costs along with higher occupancy costs as a result of CPI-related
rent increases. Occupancy and other costs also increased as a percentage of
sales due to the impact of a 1.9% comparable store sales decline on these mostly
fixed costs and to higher advertising costs in the current quarter compared to
the same quarter last year. The Company invested 3.0% of sales in advertising
this quarter versus 2.4% of sales in the prior year quarter, an increase of 0.6%
of sales.

                Depreciation and Amortization. Depreciation and amortization
expenses were 4.8% of sales in the third quarter of 1998 compared to 3.9% of
sales in the third quarter of 1997. This increase is primarily a result of lower
average unit sales compared to the third quarter of 1997, additional restaurants
operating this year compared to last year, additional investment in remodeled
restaurants and start-up cost amortization in the current year.

                General and Administrative Expenses. General and administrative
expenses were 6.5% of sales in the third quarter of 1998 compared to 6.6% of
sales in the third quarter of 1997. These expenses increased only $20,000 in the
third quarter of 1998 compared to the third quarter last year as a result of
continued staffing and cost controls.

                Interest Income. The Company had no interest income in the third
quarter of 1998 compared to $39,000 in the third quarter of 1997. Last year, the
Company earned interest income primarily from the investment in money market
funds of the excess proceeds from its September 1996 sale of series B preferred
stock to Crescent Real Estate Equities Limited Partnership. The Company
subsequently used the excess proceeds to construct or purchase new restaurants
and remodel existing restaurants.

                Interest Expense. Interest expense consists primarily of fees
and interest related to the Company's short-term line of credit facility and
capital lease obligations for equipment leases. Interest expense increased to
$59,000 in the third quarter of 1998 compared to $4,000 in the third quarter of
1997 due primarily to short-term borrowings in the current year versus no
borrowing in last year's third quarter and to new equipment leases at three of
the Company's new restaurants.

                Income Taxes. In the third quarters of 1998 and 1997, the
Company offset currently taxable income with available net operating loss
carryforwards and, as a result, recorded no tax provision for its operating
income.

Results of Operations:  Thirty-Six Weeks Ended September 6, 1998
Compared to Thirty-Six Weeks Ended September 7, 1997

                Net Sales. Net sales for the thirty-six weeks ended September 6,
1998 were $52,202,000, an increase of $383,000, or 0.7%, from sales of
$51,819,000 for the thirty-six weeks ended September 7, 1997. The primary
components of the net increase in sales were:


<TABLE>
<S>                                                         <C>        
Incremental sales from new or acquired restaurants          $ 3,795,000

Decline in comparable store sales                            (3,083,000)

Absence of sales from a closed restaurant                      (329,000)
                                                            -----------

                                                            $   383,000
                                                            ===========
</TABLE>



                                       16
<PAGE>   17

                Sales for the first thirty-six weeks of 1998 reflect an increase
in the number of restaurants (five new restaurants were added in 1997 and one
new restaurant in 1998) offset by a comparable-store sales decline versus 1997
of 6.3% year to date. Comparable store customer counts, which include only
restaurants open and operated by the Company at least 18 months, declined 7.1%.
The comparable store average check was $6.87, an increase of 0.9% versus $6.81
last year.
                Net sales per restaurant averaged $987,000 in the first
thirty-six weeks of 1998, a decrease of 5.6% from net sales per restaurant of
$1,046,000 in the first thirty-six weeks of 1997. Sales in 1998 were adversely
impacted in the first quarter of 1998 by the El Nino storms in the Company's
core Northern California markets and by the lingering effect of El Nino weather
patterns into the second quarter. In addition, the Company launched a major
advertising program, including television support, in last year's first quarter.

                Costs and Expenses. Cost of sales (food and beverage costs) was
26.3% of sales in the first thirty-six weeks of 1998 compared to 27.0% in the
first thirty-six weeks of 1997, a decrease of 0.7% of sales. The Company
continued to benefit from its food program, developed and implemented in the
second half of 1997, which manages food costs through an efficient product
rotation while maintaining a quality menu offering to guests.

                Restaurant Operating Expenses. Restaurant operating expenses
(labor, occupancy and other) were 63.4% of net sales in the first thirty-six
weeks of 1998 compared to 60.1% of sales in the first thirty-six weeks of 1997,
an increase of 3.3% of sales.

                Labor costs were 1.9% of sales higher than last year, primarily
due to the fixed portion of labor cost which became a higher percentages of
sales as comparable store sales declined and a higher average wage resulting
primarily from the increase in the California minimum wage and highly
competitive labor markets.

                Occupancy and other costs were 1.4% of sales higher than the
prior year, primarily due to the impact of the comparable store sales decline on
these mostly fixed costs and to CPI-related rent increases offset by lower
advertising costs compared to the same year to date period last year. The
Company invested 3.1% of sales in advertising this year versus 3.8% of sales in
the prior year, a decrease of 0.7% of sales.

                Depreciation and Amortization. Depreciation and amortization
expenses were 4.9% of sales in the first thirty-six weeks of 1998 compared to
4.1% of sales in the first thirty-six weeks of 1997. This increase is primarily
a result of lower average unit sales, the Company's investment in new and
remodeled restaurants and increased start-up cost amortization in the current
year.

                General and Administrative Expenses. General and administrative
expenses were 7.2% of sales in the first thirty-six weeks of 1998 compared to
7.8% of sales in the first thirty-six weeks of 1997. These expenses decreased
$269,000 year to date compared to the same period last year as a result of
continued staffing and cost controls.

                Interest Income. Interest income declined to $8,000 in the first
thirty-six week of 1998 compared to $128,000 in the first thirty-six weeks of
1997. Last year, the Company earned interest income primarily from the
investment in money market funds of the excess proceeds from its September 1996
sale of series B preferred stock to Crescent Real Estate Equities Limited
Partnership. The proceeds were subsequently used to construct or purchase new
restaurants and remodel existing restaurants.

                Interest Expense. Interest expense consists primarily of fees
and interest related to the Company's short-term line of credit facility and
capital lease obligations for equipment leases. Interest expense increased to
$139,000 in the first thirty-six weeks of 1998 compared to $13,000 in the first
thirty-six weeks of 1997 due primarily to short-term borrowings in the current
year versus no borrowing in last year's year-to-date period and to new equipment
leases at three of the Company's new restaurants.



                                       17
<PAGE>   18

                Income Taxes. The Company recorded no tax benefit from its
operating loss for the first thirty-six weeks of 1998 as the Company continued
to provide valuation allowances against its net deferred tax assets. For the
first thirty-six weeks of 1997, the Company offset currently taxable income with
available net operating loss carryforwards and, as a result, recorded no tax
provision for its operating income.


ITEM 3  -  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.



                                       18
<PAGE>   19



                           PART II. OTHER INFORMATION


<TABLE>
<S>                                                                            <C>
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
</TABLE>

(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. No reports on Form 8-K were filed during the quarter
ended September 6, 1998.



                                       19
<PAGE>   20

                                   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/ Everett F. Jefferson
                                    ----------------------------------------
                                    Everett F. Jefferson
                                    President and Chief Executive Officer
                                    (Principal Executive Officer)



                                    /s/ David E. Pertl
                                    ----------------------------------------
                                    David E. Pertl
                                    Vice President and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)


Dated:  October 21, 1998



                                       20
<PAGE>   21

                           INDEX TO FORM 10-Q EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NO.                                        DESCRIPTION
---                                        -----------
<S>     <C>      <C>
3.1     (1)      Restated Certificate of Incorporation of Fresh Choice, Inc.

3.2     (8)      Amended By-Laws of Fresh Choice, Inc. dated April 11, 1996

3.3     (10)     Certificate of Amendment of Restated Certificate of Incorporation of Fresh Choice, Inc.

3.4     (10)     Certificate of Designation of Series A Voting Participating Convertible Preferred Stock
                 of Fresh Choice, Inc.

3.5     (10)     Certificate of Designation of Series B Non-Voting Participating Convertible Preferred Stock
                 of Fresh Choice, Inc.

3.6     (10)     Certificate of Designation of Series C Non-Voting Participating Convertible Preferred Stock
                 of Fresh Choice, Inc.

4.1     (10)     Registration Rights Agreement dated September 13, 1996 between Fresh Choice, Inc. and
                 Crescent Real Estate Equities Limited Partnership

10.1    (1)      Form of Indemnity Agreement for directors and officers

10.2    (2)(3)   Second Amended and Restated 1988 Stock Option Plan

10.3    (2)(3)   1992 Employee Stock Purchase Plan

10.4    (1)      Series A Preferred Stock Purchase Agreement dated August 10, 1988

10.5    (1)      Series B Preferred Stock Purchase Agreement dated July 21, 1989

10.6    (1)      Series C Preferred Stock Purchase Agreement dated January 15, 1990

10.7    (1)      Master Lease and Warrant Agreement with Equitec Leasing Company and Warrant dated
                 January 18, 1990

10.8    (8)      Preferred Stock Purchase Agreement with Crescent Real Estate Equities Limited Partnership
                 dated April 26, 1996

10.9    (1)      Series D Preferred Stock Purchase Agreement dated April 17, 1991

10.10   (5)      Amendment No. 1 dated September 3, 1993 to the Business Loan Agreement dated
                 September 3, 1993.

10.11   (5)      Amendment No. 2 dated November 15, 1993 to the Business Loan Agreement dated
                 September 3, 1993.

10.12   (1)      Amendment dated December 1, 1992 to Preferred Stock Purchase Agreements

10.13   (4)      Business Loan Agreement dated September 3, 1993 with Bank of America National Trust
                 and Savings Association

10.14   (5)      Amendment No. 4 dated March 31, 1995 to the Business Loan Agreement dated
                 September 3, 1993
</TABLE>



<PAGE>   22

INDEX TO FORM 10-Q EXHIBITS continued



<TABLE>
<CAPTION>
EXHIBIT
NO.                                               DESCRIPTION
---                                               -----------
<S>     <C>      <C>
10.15   (5)      Amendment No. 3 dated April 27, 1994 to the Business Loan  Agreement dated September 3,
                 1993

10.16   (6)      Loan and Security Agreement dated December 20, 1995 with Silicon Valley Bank

10.17   (6)      Third Party Security agreement dated December 20, 1995 between Silicon Valley Bank and
                 Moffett Design Corporation

10.18   (6)      Warrant to Purchase up to 75,000 Shares of the Company's Common Stock issued to Silicon
                 Valley Bank on December 20, 1995

10.19   (6)      Common Stock Purchase Warrant to Purchase 100,000 Shares of the
                 Company's Common Stock issued to Bain & Company, dated December 15, 1995

10.20   (6) (3)  Employment Offer Letter to Robert Ferngren dated November 9, 1995

10.21   (9) (3)  Amendment dated July 29, 1996 to Employment Offer Letter to Robert Ferngren

10.22   (10)(3)  Severance Agreement with Charles A. Lynch dated July 18, 1996

10.23   (10)(3)  Severance Agreement with David Anderson dated July 18, 1996

10.24   (10)(3)  Severance Agreement with Tim G. O'Shea dated July 18, 1996

10.25   (10)(3)  Severance Agreement with Joan M. Miller dated July 18, 1996

10.26   (11)(3)  Employment Offer Letter to David E. Pertl dated January 24, 1997

10.27   (11)(3)  Employment Offer Letter to Everett F. Jefferson dated January 30, 1997

10.28   (11)(3)  Amendment to Employment Offer Letter to Everett F. Jefferson dated   February 10, 1997

10.29   (11)     Loan Modification Agreement dated November 27, 1996 with Silicon Valley Bank

10.30   (11)(3)  Severance Agreement with Tina Freedman dated March 13, 1997

10.31   (12)     Agreement of Sale and Purchase dated April 2, 1997 with RUI One Corp.

10.32   (12)     Amendment to Loan and Security Agreement dated July 9, 1997 with   Silicon Valley Bank

10.33   (13)     Amendment to Loan and Security Agreement dated May 27, 1998 with   Silicon Valley Bank

10.34   (13)(3)  Consulting Agreement with Charles A. Lynch dated April 17, 1998

27      (7)      Financial Data Schedule
</TABLE>


-------------------------

(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.

(4)     Incorporated by reference from the Company's Annual Report on Form 10-K
        for the period ended December 26, 1993.




<PAGE>   23

(5)     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 19, 1995.

(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.

(7)     Included in EDGAR filing only.

(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.

(9)     Incorporated by reference from the Exhibits with corresponding numbers
        filed with the Company's Quarterly Report on Form 10-Q for the quarter
        ended June 16, 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.

(12)    Incorporated by reference from the Exhibits with corresponding numbers
        filed with the Company's Quarterly Report on Form 10-Q for the quarter
        ended June 15, 1997.

(13)    Incorporated by reference from the Exhibits with corresponding numbers
        filed with the Company's Quarterly Report on Form 10-Q for the quarter
        ended June 14, 1998.