<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 8, 1996
                           -----------------

                                       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
6, 1996 was 5,647,273.
<PAGE>   2
                               FRESH CHOICE, INC.

                                      INDEX

PART I - FINANCIAL INFORMATION

  Item 1 - Financial Statements

       Condensed Consolidated Balance Sheets at September 8, 1996
       and December 31, 1995................................................   3

       Condensed Consolidated Statements of Operations for the Twelve and
       Thirty-six Weeks ended September 8, 1996 and September 3, 1995 ......   4

       Condensed Consolidated Statements of Cash Flow for the Thirty-six
       Weeks ended September 8, 1996 and September 3, 1995..................   5

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

  Item 2 - Management's Discussion and Analysis of Financial Condition
       and Results of Operations............................................  10

PART II - OTHER INFORMATION

  Item 1 - Legal Proceedings................................................  21
  Item 2 - Changes in Securities............................................  21
  Item 3 - Defaults Upon Senior Securities..................................  21
  Item 4 - Submission of Matters to a Vote of Security Holders..............  21
  Item 5 - Other Information................................................  21
  Item 6 - Exhibits and Reports on Form 8-K.................................  21

                                       2
<PAGE>   3
                          PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

FRESH CHOICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                September 8,    December 31,
                                                                        1996            1995
                                                                ------------    ------------
                                                                 (Unaudited)
<S>                                                             <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                         $  1,935        $  1,294
  Receivables                                                            255             207
  Inventories                                                            447             465
  Pre-opening costs                                                       41             117
  Refundable income taxes                                                 44           1,602
  Prepaid expenses and other current assets                              788             686
                                                                    --------        --------
  Total current assets                                                 3,510           4,371

PROPERTY AND EQUIPMENT, net                                           30,400          31,983

LEASE ACQUISITION COSTS, net                                             579             630

DEPOSITS AND OTHER ASSETS                                                287             322
                                                                    --------        --------
TOTAL                                                               $ 34,776        $ 37,306
                                                                    ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

  Accounts payable                                                  $  3,006        $  2,909
  Accrued salaries and wages                                           1,631           1,121
  Sales tax payable                                                      705             627
  Other accrued expenses                                               2,355           2,954
  Restructuring reserve                                                3,369           5,266
  Current portion of capital lease obligations                           155             406
                                                                    --------        --------
  Total current liabilities                                           11,221          13,283

CAPITAL LEASE OBLIGATIONS                                                  2              89

OTHER LONG TERM LIABILITIES                                            1,301           1,643
                                                                    --------        --------
Total liabilities                                                     12,524          15,015
                                                                    --------        --------

STOCKHOLDERS' EQUITY

Preferred stock, $.001 par value; 250,000 shares authorized;
   none outstanding
Common stock, $.001 par value; 7.5 million shares authorized;
    shares outstanding:  1996-5,646,319; 1995-5,582,449               42,022          41,619
Accumulated deficit                                                  (19,770)        (19,328)
                                                                    --------        --------
Total stockholders' equity                                            22,252          22,291
                                                                    --------        --------
TOTAL                                                               $ 34,776        $ 37,306
                                                                    ========        ========
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements.

                                       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 8,    September 3,    September 8,    September 3,
                                                     1996            1995            1996            1995
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
NET SALES                                        $ 18,644        $ 21,660        $ 55,498        $ 57,769

COST AND EXPENSES:
  Cost of sales                                     5,040           5,878          15,143          15,746
  Restaurant operating expenses:
    Labor                                           5,784           6,528          17,621          18,708
    Occupancy and other                             5,207           6,442          15,738          18,294
  Depreciation and amortization                       758           1,390           2,347           4,017
  General and administrative expenses               1,459           1,733           4,890           5,758
                                                 --------        --------        --------        --------
  Total costs and expenses                         18,248          21,971          55,739          62,523
                                                 --------        --------        --------        --------
OPERATING INCOME (LOSS)                               396            (311)           (241)         (4,754)
                                                 --------        --------        --------        --------
Interest income                                      --                 1               1              53
Interest expense                                      (67)            (49)           (202)           (140)
                                                 --------        --------        --------        --------
Interest income (expense), net                        (67)            (48)           (201)            (87)
                                                 --------        --------        --------        --------
INCOME (LOSS) BEFORE INCOME TAXES                     329            (359)           (442)         (4,841)

Provision for (benefit from) income taxes            --              (131)           --            (1,767)
                                                 --------        --------        --------        --------
NET INCOME (LOSS)                                $    329        $   (228)       $   (442)       $ (3,074)
                                                 ========        ========        ========        ========
Net income (loss) per common share               $   0.06        $  (0.04)       $  (0.08)       $  (0.56)
                                                 ========        ========        ========        ========
Shares used in computing per share amounts          5,664           5,509           5,619           5,493
                                                 ========        ========        ========        ========
</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 8,   September 3,
                                                                              1996           1995
                                                                      ------------   ------------
<S>                                                                   <C>            <C>
OPERATING ACTIVITIES:

Net loss                                                                   $  (442)      $  (3074)
Adjustments to reconcile net loss to
  net cash provided by operations:
    Depreciation and amortization                                            2,510          4,225
    Issuance of common stock for consulting services                           325           --
    Premium amortization on short-term investments                            --               26
    Loss on sale of short-term investments                                    --               46
    Loss on disposal of property                                                73            210
    Deferred rent                                                             (284)          (304)
    Deferred income taxes                                                     --             (446)
    Changes in operating assets and liabilities:
      Receivables                                                              (48)           (30)
      Inventories                                                                8             36
      Pre-opening costs                                                        (58)          (498)
      Prepaid expenses and other current assets                               (102)        (1,215)
      Income taxes payable (refundable)                                      1,558           (263)
      Accounts payable                                                          97            806
      Accrued salaries and wages                                               510            317
      Other accrued expenses                                                  (521)         1,590
      Restructuring reserve                                                 (1,274)          --
                                                                           -------        -------
Net cash provided by operating activities                                    2,352          1,426
                                                                           -------        -------

INVESTING ACTIVITIES:
Capital expenditures                                                        (1,323)        (7,491)
Proceeds from sale of short-term investments                                  --            4,652
Deposits and other assets                                                     (127)           690
                                                                           -------        -------
Net cash used in investing activities                                       (1,450)        (2,149)
                                                                           -------        -------

FINANCING ACTIVITIES:
Common stock sales                                                              78            158
Other note payable - borrowings (repayments)                                    (1)           120
Notes payable and line of credit - borrowings                                1,701          4,405
Notes payable and line of credit - repayments                               (1,701)        (4,405)
Capital lease obligations - repayments                                        (338)          (284)
                                                                           -------        -------
Net cash used in financing activities                                         (261)            (6)
                                                                           -------        -------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               641           (729)

CASH AND CASH EQUIVALENTS:
Beginning of period                                                          1,294          1,542
                                                                           -------        -------
End of period                                                              $ 1,935        $   813
                                                                           =======        =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for interest                                   $    46        $   140
Cash paid during the period for income taxes                               $  --          $    38

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
   FINANCING ACTIVITIES:
Income tax benefit from employee stock option transactions                 $  --          $    15
Decrease in unrealized loss on investments, net of tax effect of $32       $  --          $   (53)
</TABLE>

See accompanying notes to unaudited condensed consolidated financial statements

                                       5
<PAGE>   6
FRESH CHOICE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Twelve and Thirty-six Weeks Ended September 8, 1996 and September 3,
1995

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 to 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 31, 1995.

2. EARNINGS PER SHARE

         Net income (loss) per common and equivalent share is based on the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common share equivalents, which are common stock
options and warrants assumed converted using the treasury stock method, have
been excluded from the earnings per share computation for the twelve weeks ended
September 3, 1995 and the thirty-six weeks ended September 8, 1996 and September
3, 1995 as they would be anti-dilutive.

3. RESTRUCTURING RESERVE

         In December 1995, after a thorough analysis of the sales potential and
operating economics of every Fresh Choice restaurant, the Company finalized and
announced a restructuring plan to help restore profitability. The plan included
closing as many as ten of the Company's restaurants (of which seven restaurants
were included in the reserve for closures) and a partial write-down of assets to
estimated fair value for thirteen other restaurants.

         The Company recorded a $23,932,000 restructuring charge in connection
with the plan which consisted of three parts: (1) an $18,671,000 non-cash
impairment charge of which $8,318,000 related to a write-down of assets to fair
market value at seven restaurants identified for closure and $10,353,000 related
to a write-down to fair market value at 13 other restaurants, (2) a $4,655,000
charge for estimated cash costs associated with restaurant closures and
settlement of lease obligations, and (3) a $606,000 charge for other costs, both
cash and non-cash, primarily for consulting and other professional services
rendered in connection with the Company's restructuring.

         The Company has closed eight restaurants to date: three restaurants at
the end of 1995, one in the first quarter of 1996, two in the second quarter of
1996, and two in the third quarter of 1996. The first five of the eight closed
restaurants were included in the 1995 reserve for closures. For four of these
closed restaurants, the Company negotiated cash payments to landlords to settle
the lease obligations and for the fifth restaurant the Company assumed a
contingent liability in connection with a sublease agreement. This contingent
liability decreases over a four-year period provided the sublessee is in
compliance with the terms of the sublease.

         The last three of the eight closed restaurants were not included in the
1995 reserve for closures although two of the restaurants were included in the
1995 asset impairment reserve. One restaurant closed in the second quarter was
included in the 1995 asset impairment reserve, and its remaining net assets were
charged to operations at the time the restaurant closed. This restaurant did not
require a cash settlement with

                                       6
<PAGE>   7
the landlord. Of the two restaurants closed in the third quarter of 1996, one
was included in the 1995 asset impairment reserve, and the Company provided an
asset impairment charge in the third quarter of 1996 for the other restaurant.
The Company is currently negotiating lease settlements with both landlords.

         During the third quarter of 1996, the Company recorded a $1,618,000
restructuring charge which consisted of (1) a $650,000 non-cash asset impairment
charge for one restaurant closed in the third quarter and (2) a $968,000 charge
for estimated cash costs associated with restaurant closures and settlement of
lease obligations for both restaurants closed during the quarter.

         During the third quarter of 1996, the Company also reversed $1,618,000
of the 1995 restructuring reserve of which $1,062,000 of the reversal related
primarily to lower cash payments for restaurant closures and settlement of lease
obligations on the five closed restaurants included in the reserve for closures.
The balance of the reversal, or $556,000, was a reversal of the reserve for the
non-cash write-down of restaurant assets to estimated fair value and other
related costs. The Company attributes the 1995 reserve reversal primarily to
lower than expected cash payments to settle lease obligations resulting from an
improved real estate market which enabled landlords to locate new tenants for
the closed locations.

         The following table sets forth the Company's 1995 and 1996
restructuring reserves and their respective balances at December 31, 1995 and
September 8, 1996:

<TABLE>
<CAPTION>
                                                                                       Provided/
(dollars in thousands)                                     1995  Utilized   Balance,  (Reversed)  Utilized    Reclassified   Balance
                                                    Restructure        in   Dec. 31,     to date   to date         to date  Sept. 8,
                                                        Reserve      1995       1995        1996      1996            1996      1996
                                                    --------------------------------------------------------------------------------
<S>                                                    <C>       <C>        <C>         <C>         <C>           <C>       <C>     
1995 Restructuring Reserve:
Restaurant closures:
   Non-cash write-down of restaurant assets to
       estimated fair value and other related costs    $  8,318  $ (8,010)  $    308    $   (230)   $   --        $   --    $     78
   Estimated cash costs associated with restaurant
       closures and settlement of lease obligations       4,655      (205)     4,450      (1,011)     (1,107)         --       2,332

Impaired restaurants:
   Non-cash write-down of  restaurant assets to
       estimated fair value and other related costs      10,353   (10,027)       326        (326)       --            --        --
Other costs, primarily consulting and professional
   services related to the restructuring plan:
   Cash costs                                               106       (80)        26         (51)       (109)          134      --
   Non-cash costs                                           500      (344)       156        --           (22)         (134)     --
                                                       -----------------------------------------------------------------------------
1995 Restructuring Reserve Balance                       23,932   (18,666)     5,266      (1,618)     (1,238)         --       2,410
                                                       -----------------------------------------------------------------------------
1996 Restructuring Reserve:
Restaurant closures:
   Non-cash write-down of restaurant assets to
       estimated fair value and other related costs        --        --         --           650        (622)         --          28
   Estimated cash costs associated with restaurant
       closures and settlement of lease obligations        --        --         --           968         (37)         --         931
                                                       -----------------------------------------------------------------------------
1996 Restructuring Reserve Balance                         --        --         --         1,618        (659)         --         959
                                                       -----------------------------------------------------------------------------
Total Restructuring Reserve Balance                    $ 23,932  $(18,666)  $  5,266    $   --      $ (1,897)     $   --    $  3,369
                                                       =============================================================================
</TABLE>

         Of the eight restaurants closed by the Company to date, two restaurants
were in Dallas, Texas; one restaurant was in Federal Way, Washington; and one
restaurant each was in San Francisco, Menlo Park, Los Angeles, Palm Desert and
Fresno, California.

         The Company reviews the cash flow of each restaurant throughout any
given reporting period, and may perform an impairment review of its investment
in property and equipment at any given restaurant during a reporting period
based on the restaurant's cash flow performance. At least annually, the Company

                                       7
<PAGE>   8
conducts an impairment review of its investment in property and equipment for
all of its restaurants on an individual restaurant basis.

         The Company plans to complete these restaurant closures under its
restructuring plan by the end of 1996 and believes the reserve balance at
September 8, 1996 is adequate to cover the remaining estimated costs to be
incurred under the plan.

4. INCOME TAXES

         The Company recorded no tax benefit from its operating loss during the
thirty-six weeks ended September 8, 1996. The Company reported operating losses
in the six consecutive quarters ending with the first quarter of 1996 and
started reporting operating profits in the second and third quarters of 1996. In
1995, the Company recorded a full valuation allowance against its net deferred
tax assets which consisted primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. 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.

5. PREFERRED STOCK PURCHASE

         On September 13, 1996, in accordance with the terms of the April 26,
1996 preferred stock purchase agreement (the "Agreement") and upon approval of
the stockholders at the Company's annual meeting, the Company sold 1,187,906
shares of its Series B non-voting preferred stock to Crescent Real Estate
Equities Limited Partnership ("Crescent") for $4.63 per share, or approximately
$5,500,000, in a private offering. The Company plans to use the proceeds to
build new restaurants, remodel existing restaurants, upgrade its information
systems and increase working capital. Under the terms of the Agreement, Crescent
also has an option to purchase up to 593,953 shares of Series C non-voting
convertible preferred stock at a price of $6.00 per share during a period of
three years.

         The Series B non-voting preferred stock is convertible, at the holders'
option, into Series A voting convertible preferred stock on a one-for-one basis,
and the Series A voting preferred stock, Series B non-voting preferred stock and
Series C non-voting preferred stock are convertible, at the holders' option,
into Common Stock on a one-for-one basis. The Series A preferred stock entitles
its holders to vote with Common stockholders on all matters submitted to a vote
of stockholders. In addition, 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 targets (before interest, taxes, depreciation, and amortization) of at
least $1,500,000 in 1996, $3,500,000 in 1997 and $5,500,000 in 1998 (subject to
adjustment under certain circumstances by the Company's Board of Directors), the
Series A preferred stockholders could elect a majority of the Company's Board of
Directors. Upon achievement of certain per-share market price tests, the Company
may force a mandatory conversion of the Series A preferred stock to Common
Stock. All shares of Series A, Series B and Series C preferred stock are senior
to the Company's Common Stock with respect to dividends and with respect to
distributions on liquidation.

         In connection with the Agreement, the Company also has granted to
Crescent registration rights with respect to the Common Stock issuable upon
conversion of the Series A, Series B and Series C preferred stock.

                                       8
<PAGE>   9
6. COMMON STOCK

         In April 1996, the Company issued to outside consultants 50,000 shares
of its common stock as payment for accrued consulting services. These shares
were recorded at their fair value of $6.50 per share on the date the Board of
Directors approved the issuance of the shares.

                                       9
<PAGE>   10
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 8, 1996 as compared to the twelve and
thirty-six weeks ended September 3, 1995. 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 31, 1995 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 31, 1995.

         This Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements about the Company's ability to implement and the
effectiveness of its previously-announced restructuring plan; fluctuations in
quarterly results; the ability of Fresh Choice to obtain funds to pursue its
future plans; future profitability; customer receptiveness to new products and
the new prototype restaurant; competitive pressures in the food-service
marketplace; the changing tastes of consumers; the effect of general economic
conditions; and the Company's ability to secure and retain services of
experienced personnel. Actual results could differ materially from those
described in the forward-looking statements as a result of the risk factors set
forth herein.

Liquidity and Capital Resources

         The Company's primary capital requirement has been for the expansion of
its restaurant operations which the Company has traditionally financed with
funds from equity offerings, cash flow from operations, landlord allowances 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.

         Although 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 suspended its expansion plans during 1995, reviewed the
operating performance of all of its restaurants, and identified those
restaurants which did not meet its expectations for operating performance. At
the end of 1995, after a thorough analysis of the sales potential and operating
economics of every restaurant in the chain, the Company announced a major
restructuring plan which called for closing as many as ten of the Company's
restaurants (of which seven restaurants were included in the reserve for
closures) and a partial write-down of assets to estimated fair value in thirteen
other restaurants.

         The Company recorded a $23,932,000 restructuring charge in connection
with the plan which consisted of three parts: (1) an $18,671,000 non-cash
impairment charge of which $8,318,000 related to a write-down of assets to fair
market value at seven restaurants identified for closure and $10,353,000 related
to a write-down to fair market value at 13 other restaurants, (2) a $4,655,000
charge for estimated cash costs associated with restaurant closures and
settlement of lease obligations, and (3) a $606,000 charge for other costs, both
cash and non-cash, primarily for consulting and other professional services
rendered in connection with the Company's restructuring.

         The Company has closed eight restaurants to date: three restaurants at
the end of 1995, one in the first quarter of 1996, two in the second quarter of
1996, and two in the third quarter of 1996. The first five of the eight closed
restaurants were included in the 1995 reserve for closures. For four of these
closed restaurants, the Company negotiated cash payments to landlords to settle
the lease obligations and for the fifth restaurant the Company assumed a
contingent liability in connection with a sublease agreement. This

                                       10
<PAGE>   11
contingent liability decreases over a four-year period provided the sublessee is
in compliance with the terms of the sublease.

         The last three of the eight closed restaurants were not included in the
1995 reserve for closures although two of the restaurants were included in the
1995 asset impairment reserve. One restaurant closed in the second quarter was
included in the 1995 asset impairment reserve, and its remaining net assets were
charged to operations at the time the restaurant closed. This restaurant did not
require a cash settlement with the landlord. Of the two restaurants closed in
the third quarter of 1996, one was included in the 1995 asset impairment
reserve, and the Company provided an asset impairment charge in the third
quarter of 1996 for the other restaurant. The Company is currently negotiating
lease settlements with both landlords.

         During the third quarter of 1996, the Company recorded a $1,618,000
restructuring charge which consisted of (1) a $650,000 non-cash asset impairment
charge for one restaurant closed in the third quarter and (2) a $968,000 charge
for estimated cash costs associated with restaurant closures and settlement of
lease obligations for both restaurants closed during the quarter.

         During the third quarter of 1996, the Company also reversed $1,618,000
of the 1995 restructuring reserve of which $1,062,000 of the reversal related
primarily to lower cash payments for restaurant closures and settlement of lease
obligations on the five closed restaurants included in the reserve for closures.
The balance of the reversal, or $556,000, was a reversal of the reserve for the
non-cash write-down of restaurant assets to estimated fair value and other
related costs. The Company attributes the 1995 reserve reversal primarily to
lower than expected cash payments to settle lease obligations resulting from an
improved real estate market which enabled landlords to locate new tenants for
the closed locations.

         The Company reviews the cash flow of each restaurant throughout any
given reporting period, and may perform an impairment review of its investment
in property and equipment at any given restaurant during a reporting period
based on the restaurant's cash flow performance. At least annually, the Company
conducts an impairment review of its investment in property and equipment for
all of its restaurants on an individual restaurant basis.

         The Company estimated it would incur cash costs of $4.8 million in
connection with restaurant closures and the related lease settlements of which
$3.8 million related to the 1995 reserve for closures and $1.0 million related
to the 1996 reserve for closures. To date, the Company has incurred cash costs
of approximately $1.5 million, disbursing $0.3 million during fiscal 1995 and
$1.2 million during the thirty-six weeks ended September 8, 1996. The Company
plans to complete these restaurant closures under its restructuring plan by the
end of 1996, and believes the restructuring reserve balance at September 8, 1996
is adequate to cover the remaining estimated costs to be incurred under the
plan.

         Of the eight restaurants closed by the Company to date, two restaurants
were in Dallas, Texas; one restaurant was in Federal Way, Washington; and one
restaurant each was in San Francisco, Menlo Park, Los Angeles, Palm Desert and
Fresno, California.

         The Company intends to resume its restaurant expansion, assuming its
financial performance improves. The Company's ability to implement an expansion
strategy will depend upon a variety of factors, including the success of its
restructuring plan in restoring profitability and its ability to obtain funds.
See "Business Risks - Expansion". The Company believes its operating cash
requirements and near-term capital requirements for closing two additional
restaurants can be met through existing cash balances, cash provided by
operations and its available bank line of credit that expires November 1996.

         On September 13, 1996, in accordance with the terms of the April 26,
1996 preferred stock purchase agreement (the "Agreement") and upon approval of
the stockholders at the Company's annual

                                       11
<PAGE>   12
meeting, the Company sold 1,187,906 shares of its Series B non-voting preferred
stock to Crescent Real Estate Equities Limited Partnership ("Crescent") for
$4.63 per share, or approximately $5,500,000, in a private offering. The Company
plans to use the proceeds to build new restaurants, remodel existing
restaurants, upgrade its information systems and increase working capital. Under
the terms of the Agreement, Crescent also has an option to purchase up to
593,953 shares of Series C non-voting convertible preferred stock at a price of
$6.00 per share during a period of three years.

         The Series B non-voting preferred stock is convertible, at the holders'
option, into Series A voting convertible preferred stock on a one-for-one basis,
and the Series A voting preferred stock, Series B non-voting preferred stock and
Series C non-voting preferred stock are convertible, at the holders' option,
into Common Stock on a one-for-one basis. The Series A preferred stock entitles
its holders to vote with Common stockholders on all matters submitted to a vote
of stockholders. In addition, 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 targets (before interest, taxes, depreciation, and amortization) of at
least $1,500,000 in 1996, $3,500,000 in 1997 and $5,500,000 in 1998 (subject to
adjustment under certain circumstances by the Company's Board of Directors), the
Series A preferred stockholders could elect a majority of the Company's Board of
Directors. Upon achievement of certain per-share market price tests, the Company
may force a mandatory conversion of the Series A preferred stock to Common
Stock. All shares of Series A, Series B and Series C preferred stock are senior
to the Company's Common Stock with respect to dividends and with respect to
distributions on liquidation.

         In connection with the Agreement, the Company also has granted to
Crescent registration rights with respect to the Common Stock issuable upon
conversion of the Series A, Series B and Series C preferred stock.

         The Company may continue to seek additional debt or equity financing to
provide greater flexibility toward improving its operating performance and
resuming expansion.

         For the thirty-six weeks ended September 8, 1996 and September 3, 1995,
the Company invested $1.3 million and $7.5 million, respectively, in property
and equipment. In 1996, approximately half of the investment consisted primarily
of spending on the new prototype restaurant opened in the second quarter of
1996. The Company funded this investment through bank debt and cash flow from
operations. In 1995, the investment included spending on seven new restaurants
opened in 1995, of which two were opened in the first quarter of 1995, four in
the second quarter of 1995, and one in the third quarter of 1995. The Company
funded this investment through the sale of short-term investments, bank debt and
cash flow from operations.

         During the thirty-six weeks ended September 8, 1996 and September 3,
1995, operating activities provided $2.4 million and $1.4 million of cash,
respectively. The Company typically has realized a seasonal increase in
restaurant sales and restaurant operating income beginning in its second quarter
and continuing through its third fiscal quarter, followed by a decline in
restaurant sales and restaurant operating income in its fourth and first fiscal
quarters.

         At September 8, 1996, the Company had no borrowings under its $5
million bank line of credit that expires in November 1996. Borrowings under the
line bear interest at the prime rate (8.25% on September 8, 1996) plus 2%. The
initial $2 million available under the line is collateralized by the Company's
personal property, and subsequent advances, if any, will be collateralized by
executed leasehold interests in certain Company restaurants. The line of credit
agreement requires the Company to achieve minimum sales, cash flow and fixed
charge coverage, limits the Company's capital spending, debt to tangible net
worth ratio and debt to cash flow ratio, and prohibits the payment of dividends.
The Company was in compliance with these covenants as of September 8, 1996. The
Company is in discussions to renew the line of credit with the bank.

                                       12
<PAGE>   13
         Total long-term debt outstanding as of September 8, 1996 was $0.1
million, a decrease of $0.3 million from December 31, 1995. The long-term debt
consists of a $0.1 million note for site construction costs which is included 
in other long-term liabilities on the balance sheet.

Impact of Inflation

         The Company has not experienced a significant overall impact from
inflation.

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 quarterly results. These risks include:

         Recent Operating Losses. 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 additional operating losses in each
subsequent quarter ending with the first quarter of 1996. The Company reported
operating profits in the second and third quarters of 1996.

         Beginning late in the third quarter of fiscal 1994, the Company began
reporting significant comparable real store sales declines. Comparable real
store sales continued to decline in each quarter of 1995 compared to the
respective quarters in the prior year, although the magnitude of these declines
lessened in the third and fourth quarters of 1995. In the second and third
quarters of 1996, the magnitude of the declines in comparable real store sales
increased. The Company reported a 0.3% decline in comparable real store sales in
the first quarter of 1996. Following the introduction of a one-price system and
termination of discount programs, the Company reported an 8.6% and 17.0% decline
in comparable real store sales in the second and third quarters of 1996,
respectively. There can be no assurance that comparable real store sales will
improve or that the Company will return to long-term profitability.

         Expansion. The Company has experienced substantial growth in recent
years, having opened 14 restaurants in 1993, 15 restaurants in 1994, and seven
in 1995. In 1995, the Company suspended its expansion plans, 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 eight restaurants to date,
including three at the end of 1995, one in the first quarter of 1996, two in the
second quarter of 1996 and two in the third quarter of 1996. The Company has
identified two additional restaurants for closure in 1996. The Company has
opened one restaurant to date in 1996, which is a new store model with a reduced
cash investment, more efficient operating layout and a warmer ambiance which the
Company intends to use as a prototype for any future expansion, as well as for
future remodeling of existing stores. The Company believes its growth depends to
a significant degree on its ability to open new restaurants and to operate such
restaurants profitably. While the Company intends to resume its expansion,
assuming its financial performance improves, there can be no assurance as to
when or whether the Company will resume its expansion. The Company's ability to
implement successfully its expansion strategy will depend upon 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.

                                       13
<PAGE>   14
         On a long-term basis, the Company intends to continue to increase its
presence in California and to expand its operations in additional markets
outside of California, assuming its financial performance improves. 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 Fresh Choice concept will be successful in regions outside of California,
where tastes and restaurant preferences may be different. The Company opened
five restaurants in Texas, three restaurants in the state of Washington and
three restaurants in the Washington, D.C. metropolitan area during fiscal years
1993, 1994 and 1995. Of the eight restaurants closed by the Company to date, two
were in Texas, one was in the state of Washington, and five were in California.

         Geographic Concentration. As of September 8, 1996, 43 of the Company's
51 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 real store sales. The
Company expects additional sales pressure may be experienced at the individual
restaurants as it continues to expand within existing market areas. There can be
no assurance that such continued 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 effect 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 or planned restaurant closings. The fourth quarter normally includes 16
weeks of operations as compared with 12 weeks for each of the three prior
quarters. However, in 1995, the fourth quarter included 17 weeks to accommodate
the Company's fiscal year-end date, the last Sunday in December, which fell on
December 31, 1995. 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 real store sales, which have been negative in the nine
quarters beginning in the third quarter of 1994, may continue to be negative.

                                       14
<PAGE>   15
         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. In 1995, several
senior corporate office employees left the Company. The Company is constantly
assessing its management needs and has hired personnel to fill those positions
which it believes are necessary to provide continuity of direction for the
Company and to execute the Company's business plan. There can be no assurance
that these new employees will be able to perform effectively, or that
significant management turnover will not continue in the future.

         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
employee 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.

         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. The Company believes that it competes favorably with respect to
these factors, although 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. The Company intends to resume
restaurant expansion, assuming its financial performance improves. The
Company's ability to implement an expansion strategy will depend upon a variety
of factors, including the success of its restructuring plan in restoring
profitability and its ability to obtain funds. The Company believes its
near-term capital requirements for closing up to two additional restaurants can
be met through its existing cash balances, cash provided by operations and its
available bank line of credit which expires in November 1996 as well as through
the recently completed private offering with Crescent Real Estate Equities
Limited Partnership ("Crescent"), from which it received funds of approximately
$5,500,000. The Company is also in discussions to renew the line of credit with
the bank. However, the Company may seek additional financing to provide greater
flexibility toward 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.

                                       15
<PAGE>   16
Results of Operations

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

<TABLE>
<CAPTION>
(Dollars in thousands)                                   Twelve Weeks Ended                   Thirty-six Weeks Ended
                                              -------------------------------------   -------------------------------------
(Unaudited)                                   September 8, 1996   September 3, 1995   September 8, 1996   September 3, 1995
                                              -----------------   -----------------   -----------------   -----------------
<S>                                           <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
NET SALES                                     $18,644   100.0 %   $21,660   100.0 %   $55,498   100.0 %   $57,769   100.0 %
COST AND EXPENSES:
  Cost of sales                                 5,040    27.0 %     5,878    27.1 %    15,143    27.3 %    15,746    27.3 %
  Restaurant operating expenses:
    Labor                                       5,784    31.0 %     6,528    30.1 %    17,621    31.8 %    18,708    32.3 %
    Occupancy and other                         5,207    27.9 %     6,442    29.8 %    15,738    28.4 %    18,294    31.6 %
  Depreciation and amortization                   758     4.1 %     1,390     6.4 %     2,347     4.2 %     4,017     7.0 %
  General and administrative expenses           1,459     7.9 %     1,733     8.0 %     4,890     8.7 %     5,758    10.0 %
                                              ---------------     ---------------     ---------------     ---------------
  Total costs and expenses                     18,248    97.9 %    21,971   101.4 %    55,739   100.4 %    62,523   108.2 %
                                              ---------------     ---------------     ---------------     ---------------
OPERATING INCOME (LOSS)                           396     2.1 %      (311)   (1.4)%      (241)   (0.4)%    (4,754)   (8.2)%
                                              ---------------     ---------------     ---------------     ---------------
Interest income                                    --     --  %         1     0.0 %         1     0.0 %        53     0.1 %
Interest expense                                  (67)   (0.3)%       (49)   (0.3)%      (202)   (0.4)%      (140)   (0.3)%
                                              ---------------     ---------------     ---------------     ---------------
Interest income (expense), net                    (67)   (0.3)%       (48)   (0.3)%      (201)   (0.4)%       (87)   (0.2)%
                                              ---------------     ---------------     ---------------     ---------------
INCOME (LOSS) BEFORE INCOME TAXES                 329     1.8 %      (359)   (1.7)%      (442)   (0.8)%    (4,841)   (8.4)%
Provision for (benefit from) income taxes          --     --  %      (131)   (0.6)%        --     --  %    (1,767)   (3.1)%
                                              ---------------     ---------------     ---------------     ---------------
NET INCOME (LOSS)                             $   329     1.8 %   $  (228)   (1.1)%   $  (442)   (0.8)%   $(3,074)   (5.3)%
                                              ===============     ===============     ===============     ================
Number of restaurants:
Open at beginning of period                        53                  57                  55                  51
Open at end of period                              51                  58                  51                  58
</TABLE>

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

<TABLE>
<CAPTION>
(Dollars in thousands)                                   Twelve Weeks Ended                      Thirty-six Weeks Ended
                                               -------------------------------------   --------------------------------------
(Unaudited)                                    September 8, 1996   September 3, 1995   September 8, 1996   September 3, 1995
                                               -----------------   -----------------   -----------------   ------------------
<S>                                             <C>      <C>        <C>      <C>       <C>        <C>      <C>        <C>
NET SALES                                       $353.4   100.0%     $374.8   100.0 %   $1,034.2   100.0 %  $1,050.5   100.0 %
COST AND EXPENSES:
  Cost of sales                                   95.5    27.0%      101.7    27.1 %      282.2    27.3 %     286.3    27.3 %
  Restaurant operating expenses:
    Labor                                        109.6    31.0%      112.9    30.1 %      328.4    31.8 %     340.2    32.3 %
    Occupancy and other                           98.7    27.9%      111.5    29.8 %      293.3    28.4 %     332.7    31.6 %
  Depreciation and amortization                   14.4     4.1%       24.0     6.4 %       43.7     4.2 %      73.0     7.0 %
  General and administrative expenses             27.7     7.9%       30.0     8.0 %       91.1     8.7 %     104.7    10.0 %
                                                --------------      --------------     ----------------    ----------------
  Total costs and expenses                      $345.9    97.9%     $380.1   101.4 %   $1,038.7   100.4 %  $1,136.9   108.2 %
                                                --------------      --------------     ----------------    ----------------
OPERATING INCOME (LOSS)                         $  7.5     2.1%     $ (5.3)   (1.4)%   $   (4.5)   (0.4)%  $  (86.4)   (8.2)%
                                                ==============      ==============     ================    ================
Average restaurants open during the period       52.75               57.80                53.66               54.99
</TABLE>

                                       16
<PAGE>   17
Results of Operations: Twelve Weeks Ended September 8, 1996
Compared to Twelve Weeks Ended September 3, 1995

         Net Sales. Net sales for the third quarter ended September 8, 1996 were
$18.6 million, a decrease of $3.1 million, or 13.9%, from sales of $21.7 million
for same twelve weeks ended September 3, 1995. The primary components of the net
decrease in sales were:

<TABLE>
<S>                                                               <C>
     The absence of sales from eight closed restaurants.

     (Three restaurants were closed at the end of fiscal 1995,
     one was closed in the first quarter of 1996, two were closed
     in the second quarter of 1996 and two were closed in the
     third quarter of 1996) ...................................   $(1.5) million

     Incremental sales from two restaurants opened since the
     beginning of the third quarter of 1995.
     (One restaurant was opened in the third quarter of 1995 and
     one was opened in the second quarter of 1996) ............   $  0.3 million

     Decline in sales for the remaining 49 restaurants opened
     prior to the third quarter of 1995........................   $(1.8) million
</TABLE>

         Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 17.0% during the third quarter of 1996 versus
the same period in the prior year. The Company introduced a one-price system at
the end of the first quarter of 1996, replacing its former two-tier pricing
structure, and terminated certain discount programs during the second quarter.
As a result, the customer's average meal check increased to $6.78 during the
third quarter of 1996 compared to $6.21 during the third quarter of 1995. The
Company believes that as a result of the termination of certain discount
programs, it has continued to lose a portion of its price-sensitive customer
segment. Net sales per restaurant averaged $353,000 in 1996 and $375,000 in
1995, a decline of 5.9%.

         Costs and Expenses. Cost of sales (food and beverage costs) was 27.0%
in the third quarter of 1996 and remained almost even as a percentage of net
sales compared to 27.1% in the third quarter of 1995. The Company's new
one-price system introduced at the end of the first quarter of 1996 and
termination of certain discount programs during the second quarter of 1996
produced a higher average customer check that was adequate to cover
the higher food costs from the Company's roll-out of a major food program begun
in the first quarter. The Company's new food program, developed with a food
consulting firm that emphasized market research and consumer trends in
developing new menu items, introduced new recipes and upgraded existing recipe
favorites.

         Restaurant operating expenses decreased as a percentage of net sales to
58.9% in the third quarter of 1996 from 59.9% for the third quarter of 1995.
Tighter management controls and cost reduction programs produced substantial
reductions in variable operating costs with the exception of labor costs. Labor
costs increased almost a full percentage point of sales compared to last year's
third quarter. Year-to-date labor costs of 31.8% of sales continue to be lower
as a percentage of sales than the 32.3% of sales during the same period last
year. To a lesser extent, restaurant operating expenses decreased as a
percentage of sales due to the absence of fixed costs on eight low-volume
restaurants closed to date in connection with the Company's restructuring plan
and the absence of non-recurring costs in the third quarter last year related to
the Company's curtailment of expansion.

         Depreciation and amortization decreased $0.6 million in the third
quarter of 1996 compared to the third quarter of 1995 and also decreased as a
percentage of net sales to 4.1% in the third quarter of 1996 compared to 6.4% in
the third quarter of 1995. The Company's curtailment of restaurant expansion in
1995 resulted in a $0.3 million reduction in restaurant start-up cost
amortization in the third quarter of 1996 compared to the same period in 1995.
The write-down of assets to estimated fair value in connection with

                                       17
<PAGE>   18
the Company's restructuring plan in late 1995 contributed to a $0.3 million
reduction in restaurant depreciation expense in the third quarter of 1996
compared to the third quarter of 1995.

         General and administrative expenses were $1.5 million for third quarter
of 1996, a decrease of $0.2 million compared to expenses of $1.7 million for the
third quarter of 1995. In the third quarter of 1995, the Company recorded a non-
recurring $0.2 million charge for executive severance payments related to the
Company's change in management.

         Interest Income. The Company had no material interest income and no
invested cash balances during the third quarter of 1996 or during the third
quarter of 1995.

         Interest Expense. Interest expense was $67,000 in the third quarter of
1996 compared to $49,000 in the third quarter of 1995. Interest expense consists
primarily of interest on line of credit borrowings and capital lease
obligations.

         Income Taxes. The Company recorded no provision for income taxes on its
operating profit in the third quarter of 1996. The Company incurred operating
losses in six consecutive quarters ending with the first quarter of 1996 and
reported small operating profits in the second and third quarters of 1996. In
late 1995, the Company recorded a full valuation allowance against its net
deferred tax assets consisting primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. 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.

                                       18
<PAGE>   19
Results of Operations:  Thirty-six Weeks Ended September 8, 1996
Compared to Thirty-six Weeks Ended September 3, 1995

         Net Sales. Net sales for thirty-six weeks ended September 8, 1996 were
$55.5 million, a decrease of $2.3 million, or 4.0%, compared to sales of $57.8
million for the thirty-six weeks ended September 3, 1995. The significant
components of the net decrease in sales were:

<TABLE>                                                           
<S>                                                               <C>
     The absence of sales from eight closed restaurants.

     (Three restaurants were closed at the end of fiscal 1995,
     one was closed in the first quarter of 1996, two were
     closed in the second quarter of 1996 and two were closed
     in the third quarter of 1996) ..........................     $(2.7) million

     Incremental sales from eight restaurants opened since the
     beginning  of fiscal 1995 less incremental sales from one
     of these new restaurants which was closed in the third
     quarter of 1996.
     (Two restaurants were opened in the first quarter of 1995,
     four restaurants were opened in the second quarter of 1995
     (of which one was closed in the third quarter of 1996), one
     restaurant was opened in the third quarter of 1995 and one
     in the second quarter of 1996)..........................     $  2.3 million

     Decline in sales for the remaining 44 restaurants opened
     prior to 1995 ..........................................     $(1.9) million
</TABLE>

         Comparable real store sales, which include only sales for restaurants
open at least 18 months, declined 9.5% during the first three quarters of 1996
versus the same period in the prior year. In the first, second and third
quarters of 1996, comparable real store sales declined 0.3%, 8.6% and 17.0%,
respectively. At the end of the first quarter of 1996, the Company introduced a
one-price system, replacing its former two-tier pricing structure, and, during
the second quarter, the Company terminated certain discount programs. As a
result, the customer's average meal check increased to $6.57 during the first
three quarters of 1996 from $6.20 during the first three quarters of 1995. The
Company believes it lost a portion of its price-sensitive customer segment
during the second and third quarters of 1996. Net sales per restaurant averaged
$1,034,000 in 1996 and $1,051,000 in 1995, a decline of 1.6%.

         Costs and Expenses. Cost of sales (food and beverage costs) was 27.3%
of net sales for both the thirty-six weeks ended September 8, 1996 and the
thirty-six weeks ended September 3, 1995. In the first quarter of 1996, the
Company launched the roll-out of a major, higher-cost food program that
introduced new recipes and upgraded existing recipe favorites and that resulted
in an increase in food and beverage costs per customer. Just before the end of
the first quarter, the Company followed the roll-out of its new food program
with a new one-price system and, during the second quarter, the Company
terminated certain discount programs. These actions resulted in a higher average
customer check in the second and third quarters that was adequate to cover the
higher food costs.

         Restaurant operating expenses decreased as a percentage of net sales to
60.2% in the thirty-six weeks ended September 8, 1996 compared to 63.9% in the
thirty-six weeks ended September 3, 1995. Tighter management controls and cost
reduction programs produced substantial reductions in variable operating costs
including labor costs which were half a percentage point of sales lower than the
same period last year. The relationship of restaurant operating costs to net
sales also improved as a result of the absence of non-recurring charges in the
first thirty-six weeks of 1995 related to the Company's curtailment of
restaurant expansion and, to a lesser extent, the absence of fixed costs on
eight low-volume restaurants closed to date in connection with the Company's
restructuring plan.

         Depreciation and amortization decreased $1.7 million in the thirty-six
weeks ended September 8, 1996 compared to the first thirty-six weeks of 1995 and
also decreased as a percentage of net sales to 4.2% in the current period
compared to 7.0% in the same period of 1995. The Company's curtailment of
restaurant expansion in 1995 resulted in a $0.9 million reduction in restaurant
start-up cost amortization in the thirty-six

                                       19
<PAGE>   20
weeks ended September 8, 1996 compared to the same period in 1995. The
write-down of assets to estimated fair value in connection with the Company's
restructuring plan in 1995 contributed to a $0.8 million reduction in restaurant
depreciation expense in the thirty-six weeks ended September 8, 1996 compared to
the thirty-six weeks ended September 3, 1995.

         General and administrative expenses were $4.9 million for the
thirty-six weeks ended September 8, 1996, a decrease of $0.9 million compared to
expenses of $5.8 million for the first thirty-six weeks of 1995. In 1995, the
Company had non-recurring charges of $0.7 million for executive and corporate
employee severance payments related to the Company's change in management and
curtailment of its restaurant expansion. Effective cost controls in the current
year accounted for the balance of the decrease in expense.

         Interest Income. The Company had no material interest income and no
invested cash balances during the thirty-six weeks ended September 8, 1996.
During the thirty-six weeks ended September 3, 1995, the Company sold its final
invested balances from its December 1992 initial public offering and its July
1993 secondary offering to finance the construction of the seven restaurants
opened in 1995 and recorded interest income of $53,000 on its investments.

         Interest Expense. Interest expense was $202,000 in the thirty-six weeks
ended September 8, 1996 compared to $140,000 in the thirty-six weeks ended
September 3, 1995. Interest expense consists primarily of interest on line of
credit borrowings and capital lease obligations.

         Income Taxes. The Company recorded no tax benefit on its operating loss
in the thirty-six weeks ended September 8, 1996. The Company has incurred
operating losses in six consecutive quarters ending with the first quarter of
1996 followed by small operating profits in the second and third quarters of
1996. In 1995, the Company recorded a full valuation allowance against its net
deferred tax assets consisting primarily of the tax benefit related to operating
loss carryforwards and non-deductible restructuring asset write-downs and
restructuring expense accruals. 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.

                                       20
<PAGE>   21
                           PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

         On January 9, 1995, a class action lawsuit was filed in the United
States District Court for the Northern District of California, San Jose
division, naming the Company, certain of its directors, and current and former
officers as defendants. The lawsuit alleged that the defendants misrepresented
or failed to disclose material facts about the Company's operations and
financial results, which the plaintiffs contend resulted in an artificial
inflation of the price of the Company's stock. The suit was purportedly brought
on behalf of a class of purchasers of the Company's stock during the period from
July 15, 1993 to December 15, 1994. On March 20, 1995 the plaintiffs filed an
amended complaint, which added as defendants the co-lead underwriters of the
Company's initial and secondary public offerings and three securities analysts
employed by the underwriters. The amended complaint also expanded the alleged
class period to include purchasers of the Company's stock during the period from
December 8, 1992 to February 9, 1995. On December 7, 1995, the Court dismissed
the amended complaint, with leave for further amendment. Plaintiffs filed a
Second Amended Complaint on February 27, 1996. This complaint alleges that Fresh
Choice and certain of its current and former officers and directors
misrepresented or failed to disclose material facts about the Company's
operations and financial results during the period from February 15, 1994
through February 9, 1995, in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Company filed a motion to dismiss this
lawsuit on March 29, 1996. No hearing on the Company's motion has yet been set.
The Company has reviewed the allegations in the lawsuit, believes them to be
without merit, and is defending itself vigorously. The Company does not believe
that the lawsuit will result in a material impact on its financial position or
operations.

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. No reports on Form 8-K were filed during the
         quarter ended September 8, 1996

                                       21
<PAGE>   22
                                   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/ Charles A. Lynch
                                    --------------------------------------------
                                    Charles A. Lynch
                                    Chairman of the Board and Director
                                    (Principal Executive Officer)

                                    /S/ David A. Anderson
                                    --------------------------------------------
                                    David A. Anderson
                                    Vice President and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

Dated: October 23, 1996

                                       22
<PAGE>   23
                           INDEX TO FORM 10-Q EXHIBITS

EXHIBIT
NO.                                     DESCRIPTION
--------------------------------------------------------------------------------
3.1                 Restated Certificate of Incorporation of Fresh Choice, Inc.

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

3.3                 Certificate of Amendment of Restated Certificate of
                    Incorporation of Fresh Choice, Inc.

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

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

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

4.1                 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

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

                                       23
<PAGE>   24
INDEX TO FORM 10-Q EXHIBITS continued

EXHIBIT
NO.                                     DESCRIPTION
--------------------------------------------------------------------------------

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

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

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

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

11.1                Computation of Net Loss per Share

27        (7)       Financial Data Schedule

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

(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.

(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.

                                       24