<PAGE>
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C.  20549

                                 FORM 10-KSB
(MARK ONE)
      /x/    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended June 29, 1997

                                      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:  0-16348

                                CIATTI'S, INC.
                ----------------------------------------------
                (Name of small business issuer in its charter)

               MINNESOTA                                   41-1564262
     ------------------------------                        ----------
     (State or other jurisdiction                       (I.R.S. Employer
     of incorporation or organization)                  Identification No.)

                            5555 WEST 78TH STREET
                               EDINA, MN  55439
            -----------------------------------------------------
            (Address of principal executive offices and zip code)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (612) 941-0108

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  COMMON STOCK, $.01
                                                             PAR VALUE PER SHARE

CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE 
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS 
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING 
REQUIREMENTS FOR THE PAST 90 DAYS.      YES  X   NO    
                                            ---     ---

CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 
OF REGULATION S-B IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE 
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS 
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB FOR ANY AMENDMENT 
TO THIS FORM 10-KSB.  /X/

THE COMPANY'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $17,738,000.

ON SEPTEMBER 19, 1997, THE COMPANY HAD 742,819 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING.

THE AGGREGATE MARKET VALUE OF THE SHARES OF VOTING STOCK HELD BY 
NON-AFFILIATES OF THE COMPANY (PERSONS OTHER THAN DIRECTORS AND OFFICERS) 
COMPUTED AT THE AVERAGE OF THE NASDAQ CLOSING BID AND ASK PRICE OF $2.00  PER 
SHARE ON SEPTEMBER 19, 1997 WAS APPROXIMATELY $656,592.

                     DOCUMENTS INCORPORATED BY REFERENCE

THE COMPANY'S PROXY STATEMENT FOR ITS 1997 ANNUAL MEETING OF SHAREHOLDERS TO 
BE HELD ON NOVEMBER 13, 1997 IS INCORPORATED BY REFERENCE INTO PART III OF 
THIS FORM 10-KSB.

<PAGE>
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

    Ciatti's, Inc. (the "Company") owns and operates seven full-service 
restaurants in Minnesota and Wisconsin.  At September 17, 1997,  these 
full-service restaurants included six Italian restaurants operating in 
Minnesota and Wisconsin under the name "Ciatti's Italian Restaurant" and one 
Steakhouse restaurant operating in Wisconsin under the name "Spurs Steakhouse 
& Saloon."  During September 1997, the Company sold three Italian restaurants 
and the Company has entered into an agreement to sell a fourth restaurant in 
October 1997.  DFW Bagels, Inc. ("DFW Bagels"), a wholly-owned subsidiary of 
the Company, has entered into an exclusive area development agreement with 
Bruegger's Franchise Corporation ("Bruegger's") to develop bagel bakeries in 
the Dallas-Fort Worth area.  As of September 17, 1997, DFW Bagels is 
operating eight bagel bakeries in the Dallas-Fort Worth area.

RESTAURANT DEMOGRAPHICS

    FULL-SERVICE RESTAURANTS

    The Company currently operates five Italian restaurants in Minnesota and 
one Italian and one steakhouse restaurant in Wisconsin.  The Company's 
Italian and steakhouse restaurants range in size from 6,500 to 9,800 square 
feet.  Each seats between 70 and 100 customers in the lounge and between 110 
and 220 customers in the dining area.  Some of the Company's restaurants also 
offer outdoor patio dining on a seasonal basis.

    The following table sets forth the opening date and square footage of the 
Company's full-service restaurants:

                                                          APPROXIMATE
    DATE OPENED            LOCATION                      SQUARE FOOTAGE
    -----------            --------                      --------------

    September, 1984        Saint Paul, Minnesota             8,600
    February, 1985         Madison, Wisconsin                9,800
    November, 1988         Eden Prairie, Minnesota           7,800
    February, 1990         Maplewood, Minnesota              7,800
    November, 1990         St. Cloud, Minnesota (1)          6,700
    October, 1991          Edina, Minnesota                  6,500
    November, 1991         LaCrosse, Wisconsin               7,100
    _________________________________
    (1)  The Company has entered into an agreement to dispose of the St. Cloud
         restaurant in October 1997.

                                       2
<PAGE>

    The Saint Paul restaurant is located in an urban area.  The Madison, Eden 
Prairie, Maplewood and Edina restaurants are located in suburban areas.  The 
St. Cloud restaurant is located in a community of approximately 50,000 
residents, 50 miles northwest of the Minneapolis-St. Paul metropolitan area.  
The LaCrosse, Wisconsin restaurant is located in a community of approximately 
50,000 residents, 90 miles southeast of the Minneapolis-Saint Paul 
metropolitan area.  The actual cost of opening an Italian or steakhouse 
restaurant, including leasehold improvements, furniture, fixtures, and 
equipment and other pre-opening costs has varied from $480,000 to $930,000 
per restaurant.

    The Company has not opened any Italian or steakhouse restaurants in 
recent years and has no plans to open any additional full-service restaurants 
in the future.  In September 1997, the Company sold three of its full service 
restaurants and entered into an agreement to sell a fourth restaurant.  The 
restaurants that were sold were located in Burnsville, Falcon Heights, and 
Woodbury, Minnesota, while the restaurant that the Company has entered into 
an agreement to sell is located in St. Cloud, Minnesota.  The aggregate sales 
price of the three restaurants that were sold in September 1997 was 
approximately $925,000, of which $825,000 was paid in cash with the remaining 
$100,000 payable in monthly installments over a five year period. The net 
book value of the leasehold improvements and equipment as of June 29, 1997 at 
these three locations was approximately $479,000.  

    The restaurants being sold will initially be operated as Ciatti's Italian 
Restaurants.  The new owners have the right, however, to change the name at 
any time after the sale.  The Company decided to sell these restaurants to 
focus on achieving and maintaining profitability at its remaining 
full-service restaurants and to generate cash to continue to expand the 
construction of Bruegger's bagel bakeries in the Dallas-Fort Worth area.  
During fiscal 1997, the three full-service restaurants that were sold by the 
Company in September 1997 generated approximately $5,025,000 of sales, net 
earnings of $53,000 and cash flows from operations of $275,000. 

    BAGEL BAKERIES

    As of September 17, 1997, DFW Bagels operated eight bagel bakeries in the 
Dallas-Forth Worth area and has signed leases for an additional four bakeries.
Generally, these bagel bakeries range in size from 2,100 to 3,000 square feet
and seat between 45 and 50 customers.  Most bagel bakeries also offer a limited
area for outdoor patio dining.  As a test, the Company opened a 520 square foot
bagel bakery as part of a service station/convenience store in Irving, Texas
during the last quarter of fiscal 1997.  In the future, the Company plans to
open bagel bakeries ranging in size from 1,800 to 2,200 square feet.

                                       3
<PAGE>

    The following table sets forth the opening date and square footage of the
Company's bagel bakeries:

                                                          APPROXIMATE
    DATE OPENED            LOCATION                      SQUARE FOOTAGE
    -----------            --------                      --------------

    October, 1995          Plano (Lancer's Square)           3,000
    December, 1995         Plano (Shepard Place)             2,250
    February, 1996         Dallas (Preston Center)           2,500
    June, 1996             Fort Worth (Bowie)                2,130
    November, 1996         Dallas (Preston Campbell)         2,200
    April, 1997            Irving (Valley Ranch)               520
    June, 1997             Fort Worth (Fossil Creek)         2,100
    August, 1997           University Park (Southern         2,300
                            Methodist University)

RESTAURANT FORMATS

    ITALIAN RESTAURANTS

    The Company's restaurants have traditionally had an Italian format.  The 
Company's Italian restaurants serve appetizers, pizza, soups, salads, 
sandwiches, pasta, chicken, seafood, bread and desserts, together with 
alcoholic and non-alcoholic beverages.  Menu items are prepared at each 
restaurant pursuant to the Company's uniform recipes and ingredient 
specifications.

    The Company has traditionally designed the dining areas and lounges of 
its Italian restaurants to convey an atmosphere of casual elegance.  The 
dining area of each restaurant features booths and individual tables with 
either chairs or banquettes.  Each restaurant differs in interior design and 
decor, depending upon the location and nature of the space.  The Company has 
recently redesigned one of its restaurants to be a more informal, 
open-kitchen style restaurant.  Most restaurants accept reservations for a 
limited portion of their dining area.  The Company has lounge areas, which 
have full-service liquor licenses, available in most restaurants for 
customers waiting to be seated for dining.  In most of the Company's 
restaurants, appetizers and other menu items are available in the lounge as 
well as in the restaurant.

    Each Italian restaurant employs a standardized menu with entree prices 
ranging from $5.99 to $8.99 at lunch, and $7.99 to $14.99 at dinner.  During 
fiscal year 1997, food sales comprised approximately 77% and beverage sales 
comprised approximately 23% of total full-service sales.

    The Company's Italian restaurants are typically open for lunch and dinner 
daily during the year, except for Thanksgiving, Christmas Eve and Christmas 
Day.  Hours of operation may vary depending on local custom and customer 
traffic.  Menu service is normally available from 11:00 a.m. to 10:00 p.m. 
(9:00 p.m. on Sunday).  A Sunday brunch is served in some of the Minnesota

                                       4
<PAGE>

restaurants from 10:00 a.m. to 2:00 p.m. Each restaurant's lounge is 
typically open from 11:00 a.m. until midnight (10:00 p.m. on Sundays).  In 
addition to in-restaurant dining, all of the menu items are available for 
carry-out.  Carry-out sales constitute a small portion of the Company's total 
sales.

    STEAKHOUSE RESTAURANT

    The Company's Madison, Wisconsin Spurs Steakhouse & Saloon restaurant has 
a more casual atmosphere than the Company's Italian restaurants, with a menu 
that features a Texas theme, featuring a variety of steaks, ribs, chicken, 
seafood, sandwiches, salads, soup and appetizers.  Prices at the steakhouse 
restaurant range from $4.99 to $17.95 and the hours of operation are similar 
to those of the Company's Italian restaurants.

    BAGEL BAKERIES

    The Company's bagel bakeries specialize in 12 varieties of freshly baked 
bagels and branded cream cheeses, as well as freshly ground, premium branded 
coffee which is brewed fresh every 19 minutes.  Bruegger's bagels are unique 
because certified bagel masters make the bagels by kettle-boiling them in 
malt and water and then baking them in a stone hearth oven.  In addition, 
each bagel bakery offers deli-style bagel sandwiches, freshly-made soups, and 
other food and beverage items.  The bagel bakeries are open from 
approximately 6:30 a.m. to 7:00 p.m. each day, depending upon location, and 
offer both carry-out and in-store dining.

    The design and general layout of the Company's bagel bakeries are based 
on plans and guidelines issued by Bruegger's.  Bruegger's updated its plans 
and designs for all bagel bakeries in 1995 and all of the Company's existing 
bagel bakeries have been constructed following this new design.  It is 
anticipated that the new design will be the national standard for a number of 
years.  The Company's ability to make material changes to such design is 
limited and any such change requires the written approval of Bruegger's.  The 
new design and ambiance is bright and clean looking, using materials to 
withstand heavy customer use.

    Bruegger's also issues standard plans for furniture, fixtures and 
equipment ("FF&E"), including standard menu boards and art work.  The 
Company, similarly to other franchisees of Bruegger's, is required to equip 
each bakery with such FF&E.  In a number of cases, Bruegger's offers 
franchisees an option to purchase major equipment from two different 
manufacturers.

RESTAURANT AND BAKERY OPERATIONS

    The Company has established uniform operational standards for all of its 
restaurants, which are maintained by each restaurant's management team in 
accordance with the Company's manuals that emphasize quality of ingredients, 
food preparation and presentation, maintenance of the restaurant premises and 
employee training and conduct.

                                       5
<PAGE>

    The Company's President supervises the operations of all restaurants with 
the assistance of a Director of Operations for the bagel bakeries.  
Additionally, a Vice President for Administration, a Corporate Controller and 
a Corporate Chef administer their respective areas of responsibility at the 
corporate office.

    Each restaurant normally employs a general manager and assistant 
managers. General managers have primary responsibility for restaurant 
operations, including customer relations, food service, cost control, 
maintenance, personnel, implementation of Company policies and procedures, 
and restaurant profitability. Assistant managers share day-to-day 
responsibility for restaurant operations.  The Company has a bonus program to 
compensate its managers and assistant managers for achieving sales, service 
and profitability goals.

    Supervisory personnel visit each restaurant an average of one day a week. 
During these visits each aspect of the restaurant's operations is scrutinized 
to ensure that the restaurant is being operated in conformance with Company 
policies and procedures and that the Company's high levels of customer 
service are being maintained.

    For its Italian restaurants, the Company periodically prepares and 
revises menu items, recipes and lists of approved ingredients.  Menu items, 
recipes and the ingredients used in preparing them are chosen based upon 
quality, cost and customer acceptance. Each restaurant's food and beverage 
inventories and supplies are purchased by the general managers directly from 
suppliers approved by the Company.

    All supplier invoices are paid at the Company's home office after 
approval by the appropriate general manager.  The Company believes it has a 
good working relationship with its suppliers.  The Company limits the number 
of its suppliers to take advantage of volume discounts, to achieve better 
quality control and to simplify the purchasing process for the general 
managers.  Although the Company purchases a majority of its food ingredients 
and restaurant supplies from a single distributor, which is not uncommon in 
the restaurant industry, the Company believes that its food and beverage 
supplies can be obtained from more than one supplier if any one supplier is 
unable to meet the Company's demand or quality specifications.

    The Company maintains centralized financial and accounting controls for 
its restaurants.  Restaurant and bakery personnel are required to report 
sales and deposit information to the Company on a daily basis.  On a weekly 
basis, general managers complete and forward to the Company a food and liquor 
inventory, supplier invoices, payroll reports and other various information.

RESTAURANT DEVELOPMENT

    The Company has entered into an exclusive development agreement with 
Bruegger's. Bruegger's was acquired in May 1996 by Quality Dining, Inc.  As 
of May 11, 1997, Bruegger's, directly or through franchises, operated in 52 
metropolitan markets in 32 states.  In September

                                       6
<PAGE>

1997, Quality Dining, Inc. entered into a share exchange agreement under 
which it will sell Bruegger's Corporation back to its former owners. The 
Company believes the transaction will be completed during October 1997.  See 
"Proposed Sale of Bruegger's Corporation by Quality Dining, Inc." 

    All franchisees are required to open a contractually specified number of 
bakeries in their territory within a specified period of time or they will 
lose their territorial franchise rights.  As of June 30, 1997, there were 475 
bagel bakeries open for business, owned and operated by either Bruegger's or 
by franchisees. Although Bruegger's is generally considered the largest bagel 
concept in the country, there are several franchise or company-owned systems 
with aggressive development plans in direct competition in all areas of the 
country.

    The Company intends to devote significant resources to the development of 
its bagel bakeries.  This decision to concentrate on Bruegger's reflects the 
Company's judgment concerning the potential market for bagel-based restaurant 
concepts, the continuing appeal of the Bruegger's format to customers and the 
Company's ability to successfully manage its growth.  Under the terms of the 
agreement, the Company is required to build thirty bagel bakeries in the 
Dallas-Fort Worth area by July 1, 2001.

    The Company is concentrating its development efforts in the socioeconomic 
well-to-do areas of the greater Dallas-Fort Worth area.  Experience gained 
from other Bruegger's franchises has shown that the typical customer tends to 
be well educated and financially well-off.  As of September 17, 1997, six 
bagel bakeries have been opened in the north-central portion of the Dallas 
area, and two were opened in the Fort Worth area.

    The ability of the Company to open additional bagel bakeries will depend 
to a large degree on the availability of suitably sized spaces in desired 
areas at economically justifiable terms.  Other bagel chains, as well as 
coffee houses, are vying for the same locations, thus providing strong 
competition for space.

    The cost of opening a new bagel bakery is approximately $370,000.  The 
cost of leasehold improvements for the existing bakeries has averaged 
$175,000 per bakery, depending on the size of the space, contributions by the 
lessor and the condition of the buildings.  The cost of equipment for the 
existing bakeries has averaged $150,000 for each bakery.  Other pre-opening 
expenses, including design services, smallwares, training, and initial 
inventory is $45,000 for each bakery, including the initial franchise fee.

RELATIONSHIP WITH BRUEGGER'S AND QUALITY DINING

    The development by DFW Bagels of bagel bakeries is based upon franchise 
documents entered into between DFW Bagels and Bruegger's.  The principal 
documents are a development agreement dated as of January 1, 1995 and amended 
on April 23, 1997 and franchise agreements pertaining to each existing bagel 
bakery.  In September 1997, Quality Dining, Inc. entered into a

                                       7
<PAGE>

share exchange agreement under which it will sell Bruegger's Corporation back 
to its former owners.  The Company believes the transaction will be completed 
during October 1997.  See "Proposed Sale of Bruegger's Corporation by Quality 
Dining, Inc."

    The development agreement, as amended, gives DFW Bagels the right to 
construct, own and operate bagel bakeries in the counties of Tarrant and 
Dallas, Texas and certain areas immediately north of the City of Dallas, 
including the City of Plano, Texas (the "Development Area").  The development 
agreement grants DFW Bagels the exclusive right and obligation to develop 
thirty bagel bakeries within the Development Area by July 1, 2001 on the 
following schedule:

                                         Minimum number
                                       of bagel bakeries
                                    DFW Bagels must have in
         Deadline                   Operation by Deadline
         --------                   ---------------------
         July 1, 1996                         4
         January 1, 1998                      9
         October 1, 1998                     14
         July 1, 1999                        19
         July 1, 2000                        24
         July 1, 2001                        30

    DFW Bagels is to choose the sites for the bagel bakeries at its sole 
expense but must seek site approval from Bruegger's in writing prior to 
beginning construction. The development agreement also defines the 
relationship of DFW Bagels to Bruegger's as that of independent contractor 
and states that none of the rights granted therein may be assigned or 
otherwise transferred.  In addition, Ciatti's, Inc. agreed that any sales of 
its interest in DFW Bagels shall be subject to a right of first refusal and 
prior written consent by Bruegger's.  Bruegger's has additional rights to 
acquire equity securities of Ciatti's, Inc. if Ciatti's stock ceases to be 
publicly traded.

    The development agreement may be renewed in one year increments after the 
initial term if DFW Bagels continues opening bagel bakeries at the rate of 
three per year.  After five years of renewals, however, DFW Bagels is 
obligated to open only one bagel bakery per year.

    The development agreement gives DFW Bagels the exclusive right to operate 
bagel bakeries in the Development Area.  The development agreement provides, 
however, that certain Bruegger's specialty products (specifically cheese 
spreads and related products) may be distributed by a third party through 
supermarkets, delicatessens, specialty food stores, convenience stores, and 
other wholesale and retail food stores within the Development Area, but in 
such event DFW Bagels has a right to act as distributor.

                                       8
<PAGE>

    The development agreement provides that if DFW Bagels breaches any term 
of the agreement, Bruegger's has the right to terminate the agreement.

    The development agreement provides that DFW Bagels and Bruegger's will 
enter into a predetermined franchise agreement for each bagel bakery opened 
by DFW Bagels. Each franchise agreement grants DFW Bagels the right to 
establish and operate the particular bagel bakery and to use the Bruegger's 
system and various trademarks.  The franchise agreement designates the 
locations approved pursuant to the development agreement as the exclusive 
sites for the operation of the bagel bakeries.  Under the terms of the 
franchise agreement, Bruegger's agrees to provide DFW Bagels with operation 
assistance, layout as well as manuals, training and annual audits.  The 
franchise agreement also states that Bruegger's may at its discretion 
establish an Advertising Cooperative (the "Coop") for certain geographic 
areas and that if DFW Bagels operates a bagel bakery within such area it must 
immediately become a member of the Coop.  DFW Bagels s duties under the 
franchise agreement include constructing bagel bakeries at its own expense 
from pre-approved plans and sending new managers to Bruegger's training 
program.  DFW Bagels also agrees that its bagel bakeries will strictly 
conform to Bruegger's methods, such as its core products, management of the 
business, fixtures, furnishings, and maintenance, and that it will keep 
confidential the Operations and Bagel Production Manuals provided it.  In 
consideration of the rights granted it, DFW Bagels is obligated to pay 
certain franchise and other fees to Bruegger's.  Each franchise agreement has 
a term of twenty years and may be renewed in ten year increments.  If DFW 
Bagels chooses to renew, the terms of the franchise agreement will change to 
whatever terms are being offered new franchisees at the time of renewal.

    As a result of a dispute between the Company and Bruegger's with respect 
to whether Bruegger's had the right to consent to issuances of securities by 
Ciatti's and a right of first refusal to purchase securities of Ciatti's, the 
Company commenced litigation against Quality Dining and Bruegger's in 
November 1996 in United States District Court for the District of Minnesota.  
Quality Dining and Bruegger's counterclaimed and the parties conducted 
discovery.   In April 1997, in connection with the settlement of the lawsuit, 
Ciatti's and Bruegger's entered into a Settlement Agreement.  Under the terms 
of the Settlement Agreement, Bruegger's agreed to extend the dates on which 
the Company was required to complete the opening of certain bagel bakeries 
under the development agreement, and under certain circumstances the Company 
needs the consent of Bruegger's to issue securities and under certain 
circumstances Bruegger's has a right of first refusal with respect to the 
Company's securities.

PROPOSED SALE OF BRUEGGER'S CORPORATION BY QUALITY DINING, INC.

    In September 1997, Quality Dining, Inc. entered into a share exchange 
agreement under which it agreed to sell Bruegger's Corporation back to its 
former owners. Although the Company is unable to determine the effect of the 
sale upon it, the Company believes completion of this transaction will remove 
some of the uncertainty surrounding the status of Bruegger's in the bagel 
market place and may facilitate the Company's ability to expand and achieve 
profitability in

                                       9
<PAGE>

the Dallas-Fort Worth market.  The Company expects this transaction to close 
at the end of October 1997. 

RELIANCE ON COMMISSARY OF THIRD PARTY

    Currently, the Company obtains its shaped bagel dough, as well as other 
food supplies from a commissary owned by Quality Dining, Inc.  Based upon 
industry information, the Company does not consider it economically 
advantageous to invest in the construction of its own commissary until it has 
opened approximately ten to fifteen of its own bagel bakeries, which the 
Company expects to occur in fiscal 1998, subject to available financing.  
While the current arrangement represents the most cost effective way of 
obtaining bagel dough and other supplies, the closing of the commissary or 
the inability of the Company to receive its supplies from the commissary, 
would have a severe and immediate impact on the continuation of the Company's 
business in the Dallas-Fort Worth area.

FISCAL YEAR

    The Company's fiscal year ends on the Sunday closest to June 30 of each 
year. Therefore, the Company's fiscal years are either 52 or 53 week periods.

SEASONALITY

    The Company's full-service restaurant sales historically have been the 
highest during the period from July through December.  The Company's bagel 
bakeries' highest sales have occurred during the period from September 
through May.

COMPETITION

    The restaurant industry is intensely competitive and is affected by 
changes in taste and eating habits of the public, local and national economic 
conditions affecting spending habits, population and traffic patterns.  Menu, 
price, service, convenience, location, decor and atmosphere are all important 
competitive factors, with the relative importance of such factors varying 
among different segments of the consuming public.  By serving high-quality 
food and beverages at reasonable prices in pleasant, casual surroundings, the 
Company seeks to appeal to a wide range of customers.

    Although the full-service Italian restaurant market segment is highly 
fragmented, a few regional and national chains compete directly against the 
Company in this market segment.  Dardens' concept, The Olive Garden, is 
represented in the Company's Minnesota and Wisconsin markets.  The Company's 
Italian and Steakhouse restaurants compete not only with other chain or 
locally owned restaurants with similar menus, but also with other 
full-service restaurants.

                                      10
<PAGE>

    For its bagel bakeries, the Company's primary competitors are several 
chain bagel operators offering menu items essentially similar to Bruegger's, 
all vying for speedy market penetration.  For example, Einstein Bagels and 
Bagel Boulevard are represented in the Company's Development Area as well as 
are a number of local, owner-operated bagel shops which in several cases have 
developed a loyal local clientele.  In addition, any quick-service or 
home-replacement meal restaurants are competing with the Company for 
breakfast or lunch customers.  

    Through the Bruegger's concept, the Company does, however, differentiate 
itself from these competitors by providing its customers with bagels baked in 
small batches on site throughout the day using fresh, not frozen, dough.  
Additionally, by constructing and operating its own commissary to produce and 
distribute fresh dough daily, the Company will vertically integrate its bagel 
operations.  This integration will allow the Company to provide its bagel 
customers with a consistently high-quality product and to minimize 
transportation and production costs.

ADVERTISING AND PROMOTION

    The Company develops and executes annual advertising and promotional 
programs customized to each of the markets in which the Company currently 
operates.  The Company has budgeted 2.75% of its projected fiscal 1998 
full-service restaurant sales for advertising.  Under the terms of the 
franchise agreements with Bruegger's, the Company is required to spend 
approximately 4% of its sales from the bakeries for advertising and 
promotion, including advertising and promotions due in connection with 
Bruegger's efforts.  Due to the small number of bagel bakeries currently 
existing in the franchise area, the majority of the Company's efforts in this 
respect are directed to local store marketing and direct mail.  As part of 
its efforts to increase sales of its bagel bakeries, the Company intends to 
spend between 4% and 5% of bagel bakery sales for advertising in the near 
future.  Television, radio or other wide coverage advertising could not be 
economically justifiable until a larger number of bakeries exists in the 
Company's territory.

GOVERNMENT REGULATION

    Various federal, state and local laws affect the Company's restaurant 
business, including laws and regulations relating to health, sanitation, 
alcoholic beverage control and safety standards and access for disabled 
persons.  To date, federal and state environmental regulations have not had a 
material effect on the Company's operations.  Varied and sometimes stringent 
requirements of local government bodies with respect to zoning, building 
codes, land use and environmental factors have, in the past, increased, and 
in the future can be expected to increase, the cost and time required for 
developing new restaurants or bakeries.  In some instances the Company may 
have to obtain zoning variances and land use permits for its new restaurants 
or bakeries.  A significant portion of the Company's Italian and steakhouse 
restaurant business is also derived from the sale of alcoholic beverages.  
Any action by an alcoholic beverage control agency to suspend or revoke a 
restaurant's liquor license would have an adverse effect on that restaurant's 

                                      11
<PAGE>

business.  The Company believes that it is operating in compliance with all 
material laws and regulations covering its operations.

    The Company is also subject to the Fair Labor Standards Act, which covers 
such matters as minimum wages, overtime and other working conditions.  A 
significant portion of the Company's food service personnel are paid at rates 
above, but related to, the minimum wage.  Although the Company plans to 
implement a menu-price increase at its full-service restaurants effective 
October 1, 1997 to offset the September 1, 1997 minimum wage increase, 
additional increases in state or federal minimum wage requirements or changes 
in applicable state law with respect to minimum wages for "tipped" employees 
may have an adverse impact on the Company.

TRADEMARKS AND LICENSES

    The Company has obtained a trademark of the stylized words and design for 
"Ciatti's Italian Restaurant," which was renewed in March 1994.  The Company 
also obtained a trademark for the words and design of "Spurs Steakhouse & 
Saloon" in June 1994.  Generally, federal registration of a trademark gives 
the registrant the exclusive use of the trademark in the United States in 
connection with the goods or services associated with the trademark, subject 
to the common law rights of any other person who began using the trademark 
prior to the date of federal registration.  The Company believes that its 
marks are important to its business.

    "BRUEGGER'S" and "BRUEGGER'S BAGEL BAKERY" are trademarks of Bruegger's 
Corporation.  Under the terms of the development agreement, DFW Bagels has 
the right to use all trademarks associated with the Bruegger's bagels 
franchise in connection with the operation of bagel bakeries in the 
Dallas-Fort Worth area.

EMPLOYEES

    As of September 17, 1997, the Company employed approximately 854 persons, 
including 7 corporate employees, 52 restaurant and bakery managers and 
assistant managers, and 795 hourly restaurant and bakery employees.  Hourly 
employees comprise approximately 93% of the Company's total work force and 
most work on a part-time basis.  Other than corporate and restaurant 
management personnel, employees are paid on an hourly basis.  No employees 
are covered by collective bargaining agreements and no work stoppages have 
occurred.  The Company considers its employee relations to be good.

EXECUTIVE OFFICERS OF THE COMPANY

    The following table sets forth the names and ages of the Company's 
Executive Officers, together with all positions and offices held with the 
Company by such Executive Officers.  Officers are appointed to serve until 
the meeting of the Board of Directors following the next Annual Meeting of 
Shareholders and until their successors have been elected and have qualified.

                                      12
<PAGE>

      NAME                     AGE               POSITION
------------------             ---        ----------------------

Phillip R. Danford             48         President and Director

Barney U. Uhlig                57         Vice President for
                                          Administration and Secretary

    Phillip R. Danford, a co-founder of the Company, has served as President 
of the Company since May 1992.  Mr. Danford served as Vice President and 
Chief Operating Officer from November 1988 until May 1992.  Mr. Danford has 
been a director of the Company since 1983.  From 1982 to 1983, Mr. Danford 
was General Manager of the Company's Minneapolis restaurant and developed its 
menu, recipes, kitchen layout, and operating procedures.  Phillip R. Danford 
is the brother of L.E. "Dan" Danford, Jr., Chairman of the Board of Directors 
of the Company.

    Barney U. Uhlig has been a Vice President of the Company since 1983 and 
became its Secretary in November 1992.

ITEM 2.  DESCRIPTION OF PROPERTY

    The Company's existing restaurants are located in leased facilities, all 
of which the Company believes to be adequate.  The Company owns all of the 
furniture, fixtures, and equipment in each of its restaurants.  Leasehold 
improvements paid for by the Company generally will become the property of 
the landlord upon expiration or termination of a lease.

    The Company's corporate offices are located in Edina, Minnesota, a 
Minneapolis suburb.  These premises include a test kitchen and a small 
warehouse area.  The lease currently runs through August 31, 1998, with the 
Company having the option to renew the lease for an additional three year 
term at the then current market rates.  The Company believes this facility 
will be adequate to accommodate its administrative needs for the foreseeable 
future and that it will be able to renew its existing lease upon satisfactory 
terms or obtain comparable space on satisfactory terms.

    The Company leases real estate and improvements for its restaurants.  The 
leases for its Italian restaurants generally provide for an initial term of 
ten or twelve years although one restaurant had an initial term of twenty 
years.  These leases generally have a minimum of two five-year renewal 
options.  Base rent under the Company's leases varies depending, in part, 
upon leasehold allowance funds provided by the lessor.  Base rent at some 
locations also escalates during the term of the lease.  At a few restaurants, 
the Company also is required to pay a percentage rate between 4% and 5.5% of 
sales in excess of specified amounts.  The Company pays all real estate 
taxes, insurance, utilities and maintenance expenses for its leased 
properties.

                                      13
<PAGE>

    The Company's leases for its bagel bakeries generally run for either five 
or ten years, and have an option to renew for one or two additional five year 
terms.  The existing leases provide for a fixed rent for the primary term in 
an amount that varies with the location.

ITEM 3.  LEGAL PROCEEDINGS

    The Company is not subject to any pending legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

    Not applicable.

                                      14
<PAGE>

                                   PART II

ITEM 5.  MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    The Company's Common Stock is currently traded on the Nasdaq SmallCap 
Market under the symbol "CIAT."  The following table sets forth the range of 
high and low prices for the Company's Common Stock on the Nasdaq SmallCap 
Market for fiscal 1996 and 1997.  The prices listed below indicate 
inter-dealer prices without retail mark up, mark down or commissions.  They 
may not necessarily represent actual transactions.

FISCAL YEAR                                 LOW                 HIGH
                                            ---                 ----

1997 First Quarter                          $3.50                $5.00
     Second Quarter                          2.50                4.00
     Third Quarter                           2.50                2.50
     Fourth Quarter                          2.25                2.25

1996 First Quarter                          $3.75                $5.00
     Second Quarter                          4.00                6.125
     Third Quarter                           4.25                6.25
     Fourth Quarter                          2.75                5.25

    As of September 1, 1997, the Company had 79 shareholders of record, plus 
an additional 386,950 shares held by depository institutions for an 
undetermined number of additional shareholders.  The total number of 
outstanding shares was 742,819.

    The Company has not paid cash dividends on its Common Stock in the past 
and does not intend to pay cash dividends in the foreseeable future.

                                      15
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

                        MANAGEMENT DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                           
                                RESULTS OF OPERATIONS

                 COMPARISON OF FIFTY-TWO WEEKS ENDED JUNE 29, 1997 TO
                         FIFTY-TWO WEEKS ENDED JUNE 30, 1996
                                           
SALES

Sales for fiscal 1997 increased $148,617, or .8%, to $17,737,804 from fiscal 
1996 sales of $17,589,187.  The increase in consolidated sales during fiscal 
1997 was due to an increase in sales at the Company's bagel bakeries which 
was offset by a decline in sales at the Company's full-service restaurants as 
described below.

Full-service restaurant sales of $15,811,370 for fiscal 1997 decreased 6.8% 
from sales of $16,962,135 for the same period of fiscal 1996.  This decrease 
in full-service restaurant sales was due, in part, to the Company closing its 
Glendale, Wisconsin restaurant on September 8, 1996.  After adjusting for the 
sale of this restaurant, year-to-date full-service restaurant sales were down 
$399,460, or 2.5%, when compared to the same period last year.  The Company 
believes an extensive advertising campaign entered into during the third 
quarter of this year, which will extend through the first quarter of fiscal 
1998, has had and will continue to have a positive influence on full-service 
restaurant sales. However, the continued competitiveness of the full-service 
restaurant industry may make sales increases difficult to achieve.

Bagel bakery sales of $1,926,434 for fiscal 1997 increased $1,299,382, or 
207.2%, over bagel bakery sales of $627,052 for fiscal 1996.  This increase 
in sales was primarily a function of the Company having seven bagel 
restaurants open as of June 29, 1997, while only having four bagel 
restaurants open as of June 30, 1996.  The Company is required by its 
development agreement to have nine stores open by January 1, 1998 and thirty 
stores open by July 1, 2001.

COST OF FOOD AND BEVERAGE

The cost of food and beverage was 30.3% of sales in fiscal 1997, an increase 
from the 29.5% of sales reported in fiscal 1996.  The increase in the cost of 
food and beverage for fiscal 1997 was primarily due to the Company's bagel 
bakery concept operating at higher cost levels than its full-service 
restaurants.  In addition, increases during the first two quarters of this 
fiscal year in the costs of selected products at the Company's full-service 
restaurants occurred without corresponding menu price increases.  The Company 
believes that its new menu at its full-service restaurants, which was 
implemented during the second and third quarters of fiscal 1997, has allowed 
the Company to stabilize the cost of food and beverage and does not expect 
the cost of food and beverage to increase significantly in the future.

                                      16
<PAGE>

LABOR AND BENEFITS

Labor and benefit costs were 35.5% of sales in fiscal 1997, an increase from 
the 34.9% of sales reported in fiscal 1996.  The increase in labor and 
benefits costs as a percent of sales for fiscal 1997 was mainly due to the 
Company's bagel bakery concept operating at higher cost levels than its 
full-service restaurants.  In addition, increases occurred in labor and 
benefit costs as a percentage of sales at the Company's full-service 
restaurants during the first and second quarters of the fiscal year.  The 
Company believes that the introduction of a new menu at its full-service 
restaurants has helped the Company stabilize its labor and benefit costs and 
does not expect these costs to increase significantly in the future.

The federally mandated minimum wage increases which became effective October 
1, 1996 did not have a significant impact on the Company's financial results. 
On September 1, 1997, another minimum wage increase became effective.  In 
response to this wage increase, the Company plans to implement menu price 
increases at its full-service restaurants effective October 1, 1997.  These 
increases are expected to offset the cost of the wage increases.

DIRECT AND OCCUPANCY

Direct and occupancy costs primarily include individual restaurant 
advertising, promotion, supplies, utilities, occupancy and depreciation 
expenses.  These costs were 37.3% of sales in fiscal 1997, an increase from 
the 36.2% reported last year.  This increase was due to the following three 
reasons.  First, the Company increased its advertising and promotion costs 
from 3.6% of sales during fiscal 1996 to 4.5% of sales in fiscal 1997.  
Second, lower sales levels at the full-service restaurants caused fixed costs 
such as occupancy and depreciation to be spread over a smaller sales base, 
thus increasing those respective percentages as compared to sales.  Third, 
the Company incurred significant costs related to the start-up of the bagel 
bakeries.  The Company expects preopening costs relating to the start-up of 
bagel bakeries to remain at an average of $35,000 for each bakery, adjusted 
for inflation.  The Company is obligated by its development agreement with 
Bruegger's to spend a minimum of 4% of sales on advertising and, following 
its current practice, expects to spend between 4% and 5% of bakery sales in 
the near future.  In addition, the Company expects advertising and 
promotional expenses to approximate 2.75% of full-service restaurant sales 
during fiscal 1998.

GENERAL AND ADMINISTRATIVE

General and administrative costs were 7.4% of sales for fiscal 1997 and 
fiscal 1996.  The Company incurred approximately $208,000 of additional 
general and administrative costs related to operating additional bagel 
bakeries in fiscal 1997.  The Company also had increased professional fees 
which were partially offset by the recovery of a note receivable that had 
been fully reserved for.

                                      17
<PAGE>

WRITE-DOWN OF IMPAIRED ASSETS

Due to events occurring during fiscal 1997, the Company recognized an 
impairment loss of $640,286 for the long-lived assets at its Madison, 
Wisconsin restaurant. During fiscal 1997, a major national competitor opened 
a steakhouse restaurant in close proximity to the Company's restaurant.  The 
competitor's restaurant has the Company's restaurant out-positioned in the 
market area, and sales at the Company's restaurant have suffered due to the 
opening of this restaurant.  In addition, the Company attempted several 
advertising and promotional campaigns during the first half of fiscal 1997 
that did not produce the results management expected.  Based on these 
factors, management revised its forecasts for this restaurant and projected 
operating losses and cash flow deficits for the remainder of the restaurant's 
lease, which expires in 2005.  Accordingly, the Company has fully written off 
the long-lived assets at this restaurant.

During fiscal 1996, the Board of Directors resolved to close its full-service 
restaurant located in Glendale, Wisconsin, effective September 8, 1996. 
Accordingly, the Company recorded a $77,691 charge during fiscal 1996 to 
write-off the assets at this location.

OTHER INCOME (EXPENSE), NET

Other income (expense) increased to a net expense of $69,140 in fiscal 1997 
from a net expense of $17,601 in fiscal 1996.  The Company's interest expense 
increased to $105,460 in fiscal 1997 from $92,634 in fiscal 1996 as a result 
of higher debt in 1997 due primarily to the construction of the Company's 
bagel bakeries.  The Company's investment income decreased to $18,097 in 
fiscal 1997 from $59,526 in fiscal 1996 primarily as a result of fewer funds 
available for investment.

INCOME TAX BENEFIT

The income tax benefit for fiscal 1997 was $7,633 as compared to $160,000 in 
fiscal 1996.  The fiscal 1996 tax benefit recorded reflects the amount of 
taxes recoverable from the carryback of losses; there was no tax benefit 
recorded for the losses generated during fiscal 1997.  The Company's fiscal 
1997 tax benefit was due to the receipt of state and federal income taxes in 
excess of the amount recorded as an income tax receivable as of June 30, 
1996.  The fiscal 1997 tax benefit was offset by $7,025 of state and 
franchise taxes paid during the year.

As of June 29, 1997, the Company has approximately $166,000 of alternative 
minimum tax credit carryforwards and $2,733,000 in net operating loss 
carryforwards.  These tax carryforwards may only be utilized against future 
earnings and there is no assurance that the Company will realize these 
benefits. The utilization of these carryforwards may be limited if there are 
significant changes in the ownership of the Company.

SEASONALITY

The Company's full-service restaurant sales historically have been the 
highest during the period from July through December.  The Company's bagel 
bakeries' highest sales have occurred during the period from September 
through May.

                                      18
<PAGE>

EFFECTS OF INFLATION

Inflationary factors such as increases in food and labor costs directly 
affect the Company's operations.  Because most of the Company's employees are 
paid hourly rates related to federal and state minimum wage and tip credit 
laws, changes in these laws may result in an increase in the Company's labor 
costs. The Company cannot always implement immediate price increases to 
offset higher costs, and no assurance can be given that the Company will be 
able to do so in the future.

                           LIQUIDITY AND CAPITAL RESOURCES

At June 29, 1997, the Company had cash and cash equivalents on hand of 
$454,157, which represents a decrease of $1,148,779 from the $1,602,936 in 
cash and cash equivalents reported as of June 30, 1996.  At June 29, 1997, 
the Company had a deficit in working capital of $1,871,619 compared to a 
deficit in working capital of $385,291 at June 30, 1996.

Net cash used in operating activities was $706,255 for fiscal 1997.  During 
fiscal 1997, the Company incurred a net loss of $2,568,778.  This use of cash 
was partially offset by non-cash depreciation and amortization expense of 
$1,002,942 and a write-down of impaired assets of $640,286.  In addition, the 
Company received proceeds from an income tax receivable of $165,576.

Net cash used in investing activities was $414,320 during fiscal 1997 which 
is the net of $499,320, used primarily for purchases of equipment and 
leasehold improvements for the Company's fifth bagel bakery, and $85,000 
recovered on a note receivable.  The equipment and leasehold purchases for 
the Company's sixth and seventh bagel bakeries were financed with loans from 
construction companies.

Net cash used in financing activities was $28,204 for fiscal 1997.  The net 
cash used in financing activities is the net of proceeds of borrowings from 
the Chairman of the Board of Directors of the Company of $100,000 and 
borrowings of $73,000 from a note offering commenced in June 1997, less 
payments of $201,204 due under other debt financing.

DFW Bagels, Inc. (DFW Bagels), a wholly-owned subsidiary of Ciatti's, Inc., 
has entered into an exclusive development agreement with Bruegger's Franchise 
Corporation (Bruegger's).  This agreement, as amended in April 1997, requires 
DFW Bagels to build thirty bagel bakeries by July 1, 2001.  During fiscal 
1996, four bagel restaurants were built, thus meeting the initial terms of 
this agreement.  During fiscal 1997, three additional bagel bakeries were 
opened. DFW Bagels is required to open two additional bagel bakeries by 
January 1, 1998. As of September 15, 1997, DFW Bagels opened one additional 
bagel bakery and has entered into lease agreements for four additional bagel 
bakery sites.  The Company intends to open bagel bakeries at a faster rate 
than that obligated under the development agreement, subject to available 
financing.  The Company believes each new site will require approximately 
$370,000 for capital expenditures, including the initial franchise fee.

                                      19
<PAGE>

The Company believes that the profitability of any individual bagel bakery 
often depends to a high degree on the penetration of a particular market by 
the bagel bakery operator.  The Company believes that individual bagel 
bakeries will generally become profitable only after the Company has opened a 
number of bagel bakeries sufficient to make the franchise name well-known in 
that market.  The Company estimates that in the Dallas-Fort Worth area the 
minimal number of bagel bakeries needed for such penetration is between 
twelve and twenty.  If the Company is unable to achieve this level of 
penetration, its ability to achieve profitability may be affected. In 
addition, if the Company is unable to obtain adequate financing to open the 
bagel bakeries, it could have a material adverse effect on the Company's 
consolidated financial position or results of operations.

In June 1997, the Company commenced a note offering of $2,000,000 in one and 
three year notes.  Through July 31, 1997, the Company had raised 
approximately $200,000 from the offering.

On August 8, 1997, the Company filed a Registration Statement with the 
Securities and Exchange Commission (SEC) for the sale of up to 3,000,000 
units, each unit consisting of one share of common stock and a warrant to 
purchase an additional share of common stock.  The Registration Statement 
indicates that the units will be sold at a price of $2.25 per unit, with the 
warrant exercisable at a price of $5.00 until December 31, 2001.  The 
offering will be made directly by the Company.  The offering is being done on 
a minimum - maximum basis with a minimum of $2,000,000.  The Registration 
Statement has not yet become effective.

In August 1997, the Company borrowed $300,000 from the Chairman of the Board 
of Directors of the Company and may borrow additional amounts.

During September 1997, the Company sold three of its full-service restaurants
and entered into an agreement to sell an additional restaurant in October 1997. 
The restaurants are located in Burnsville, Falcon Heights, St. Cloud, and
Woodbury, Minnesota.  The sale of these restaurants will generate proceeds of
approximately $1,500,000.  The net book value of the leasehold improvements and
equipment as of June 29, 1997 at these locations was approximately $663,000. 
The restaurants being sold will initially be operated as Ciatti's Italian
Restaurants-Registered Trademark-, however, the new operators have the right to
change the name at any time after the sale.  The Company decided to sell these
restaurants to focus on achieving and maintaining profitability at its remaining
full-service restaurants and to generate cash to continue to expand its bagel
bakery concept in the Dallas-Fort Worth market.  During fiscal 1997, the
restaurants being sold generated approximately $6,913,000 of sales, net earnings
of $203,000 and cash flows from operations of $488,000.  The Company has no
current intention of selling any of its other full-service restaurants.

                                      20
<PAGE>

The Company plans to finance its working capital and capital resource needs 
with its current cash, future cash generated from operations, and proceeds 
from its current and future debt and equity financing.  The Company has 
explored several alternatives for lease financing and equipment financing for 
its bagel bakeries and believes that it will be able to obtain such financing 
when the Bruegger's divestiture is completed, as described below.  The 
Company believes that these sources will be sufficient to enable it to 
satisfy its working capital needs for the next twelve months.  If the Company 
decides to pursue a strategy of building bagel bakeries at a rate faster than 
that required by the development agreement, it may need funds in addition to 
those generated from the unit offering.  In such event, the Company will 
attempt to raise additional funds through debt or equity offerings.  If the 
Company is unable to successfully raise funds from the unit offering in a 
timely manner, it may be necessary for it to raise additional capital through 
other means of financing.  Although the Company believes that it will be able 
to secure the necessary capital, there can be no assurance that the Company 
will be successful.

In May 1996, Bruegger's was purchased by Quality Dining, Inc.  On May 12, 
1997 Quality Dining, Inc. announced that its Board of Directors approved a 
plan to divest its Bruegger's bagel-related business.  On September 3, 1997, 
Quality Dining, Inc. entered into a share exchange agreement under which it 
will sell Bruegger's to its former owners in exchange for their securities of 
Quality Dining, Inc. and certain other consideration.  Consummation of the 
transactions is subject to the prior satisfaction of certain conditions.  The 
Company believes the transactions will be consummated in October 1997.

FAILURE TO MEET CURRENT NASDAQ NATIONAL SMALLCAP MARKET REQUIREMENTS

The Company's common stock trades on the Nasdaq SmallCap Market.  Under the 
rules of the Nasdaq SmallCap Market, an issuer must maintain shareholders' 
equity of at least $1,000,000.  As a result of its net loss in fiscal 1997, 
the Company's shareholders' equity as of June 29, 1997 was approximately 
$606,000, which is less than the minimum required for continued inclusion on 
the Nasdaq SmallCap Market.  In August 1997, Nasdaq advised the Company that 
it was not in compliance with the shareholders' equity requirement and 
indicated that it intended to delist the Company's common stock from the 
Nasdaq SmallCap Market. The Company has requested an exemption from the 
$1,000,000 shareholders' equity requirement on the basis that the Company had 
filed a registration statement for a public offering that, among other 
things, would raise sufficient funds to satisfy the $1,000,000 requirement.  
The Nasdaq staff denied the Company's request for the exemption.  The Company 
has appealed the Nasdaq staff determination and requested an oral hearing 
with respect to this issue.  The hearing has been scheduled for October 2, 
1997.  If the Company does not receive an exemption and does not otherwise 
raise additional capital in an amount sufficient to achieve compliance with 
the Nasdaq SmallCap shareholders' equity requirement, the Company's common 
stock could be delisted from the Nasdaq SmallCap Market and would trade on 
the Nasdaq "Bulletin Board" or in the over-the-counter market.  This could 
have an adverse effect on the price and liquidity of the Company's common 
stock.

                                      21
<PAGE>

In addition, on August 25, 1997, the SEC approved new Nasdaq rules that 
require issuers of SmallCap securities to either (i) maintain net tangible 
assets (assets, excluding goodwill, less liabilities) of at least $2.0 
million, (ii) achieve net income of at least $500,000 in the most recent 
fiscal year or in two of the three most recently completed fiscal years or 
(iii) have a market capitalization of $35 million.  This new requirement 
becomes applicable to Nasdaq SmallCap issuers, including the Company, on 
February 25, 1998.  Although the Company believes that it will be able to 
achieve the $2.0 million net tangible assets requirements by February 25, 
1998 by raising additional equity in the unit offering, there can be no 
assurance that the Company will be able to attain the required net tangible 
assets or meet either of the other requirements for continued inclusion in 
the Nasdaq SmallCap Market.  If the Company is unable to achieve the minimum 
requirements for continued inclusion on the Nasdaq SmallCap Market, then its 
securities would trade on the Nasdaq "Bulletin Board" or in the 
over-the-counter market.  This could have an adverse effect on the price and 
liquidity of the Company's common stock.

FORWARD LOOKING STATEMENTS

Statements included in this Annual Report that are not historical or current 
facts are "forward-looking statements" made pursuant to the safe harbor 
provisions of the Private Securities Litigation Reform Act of 1995 and are 
subject to certain risks and uncertainties that could cause actual results to 
differ materially.  The Company's ability to succeed in the future is 
dependent upon the Company's ability to achieve and maintain profitability in 
its existing restaurants and, together with its subsidiary, DFW Bagels, Inc., 
to open additional Bruegger's Bagel Bakery restaurants and to operate those 
restaurants in a profitable manner.  The Company's ability to achieve these 
goals will be affected by factors such as (i) the ability of the Company to 
generate funds from operations, obtain adequate restaurant financing on 
favorable terms and raise a significant amount of additional working capital, 
(ii) the strength of the Bruegger's name, including in the areas in which the 
Company is the franchisee, (iii) the ability of the Company to locate and 
negotiate favorable leases for additional locations, (iv) the ability of the 
Company to hire, train and retain skilled restaurant management and 
personnel, and (v) the competitive environment within the restaurant industry.

                                      22
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

    1.   FINANCIAL STATEMENTS.  The following financial statements of the
         Company are included herein.  

         Report of Independent Certified Public
         Accountants - Grant Thornton LLP

         Consolidated Balance Sheet as of June 29, 1997.
 
         Consolidated Statements of Operations for the fifty-two weeks ended
         June 29, 1997 and June 30, 1996.

         Consolidated Statements of Shareholders' Equity for the fifty-two weeks
         ended June 29, 1997 and June 30, 1996.

         Consolidated Statements of Cash Flows for the fifty-two weeks ended
         June 29, 1997 and June 30, 1996.

         Notes to the Consolidated Financial Statements for the fifty-two weeks
         ended June 29, 1997 and June 30, 1996.

    2.   PRO FORMA FINANCIAL STATEMENTS.  The pro forma unaudited condensed
         consolidated financial statements of Ciatti's, Inc. reflecting the sale
         of three restaurants in September 1997 are included as Exhibit 99.1.  

                                      23
<PAGE>

                  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
Ciatti's, Inc.

         We have audited the accompanying consolidated balance sheet of 
Ciatti's, Inc. and Subsidiary as of June 29, 1997, and the related 
consolidated statements of operations, shareholders' equity, and cash flows 
for the fifty-two week periods ended June 29, 1997 and June 30, 1996.  These 
financial statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

         We conducted our audits in accordance with generally accepted 
auditing standards.  Those standards require that we plan and perform the 
audit to obtain reasonable assurance about whether the financial statements 
are free of material misstatement.  An audit includes examining, on a test 
basis, evidence supporting the amounts and disclosures in the financial 
statements.  An audit also includes assessing the accounting principles used 
and significant estimates made by management, as well as evaluating the 
overall financial statement presentation. We believe that our audits provide 
a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of 
Ciatti's, Inc. and Subsidiary as of June 29, 1997, and the results of their 
consolidated operations and their cash flows for the fifty-two week periods 
ended June 29, 1997 and June 30, 1996, in conformity with generally accepted 
accounting principles.

         As discussed in note G to the consolidated financial statements, the 
Company changed its method of accounting for impairment of long-lived assets 
and for long-lived assets to be disposed of, effective July 1, 1996.


                                                    /s/ Grant Thorton LLP
Minneapolis, Minnesota
August 18, 1997 (except for note H, as to which the
 date is September 3, 1997 and note I, as to
 which the date is September 17, 1997)

<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY

                              CONSOLIDATED BALANCE SHEET

                                    JUNE 29, 1997
                                           
        ASSETS

CURRENT ASSETS
 Cash and cash equivalents                                          $   454,157
 Receivables                                                             72,930
 Inventories                                                            146,598
 Prepaid expenses and other current assets                               83,574
 Assets held for sale                                                   663,108
                                                                     ----------
           Total current assets                                       1,420,367

PROPERTY AND EQUIPMENT
 Leasehold improvements                                               2,638,024
 Equipment                                                            3,870,418
 Automobiles                                                             15,058
                                                                     ----------
                                                                      6,523,500
 Less accumulated depreciation and amortization                      (3,281,305)
                                                                     ----------
                                                                      3,242,195
                                                                     ----------

                                                                    $ 4,662,562
                                                                     ----------
                                                                     ----------

                     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
 Current maturities of long-term obligations
    Related party                                                  $   100,000
    Other                                                              779,807
 Accounts payable                                                     1,369,290
 Accrued salaries and wages                                             322,071
 Other accrued liabilities                                              720,818
                                                                     ----------
           Total current liabilities                                  3,291,986

LONG-TERM OBLIGATIONS, less current maturities                          764,467

COMMITMENTS AND CONTINGENCIES                                              --

SHAREHOLDERS' EQUITY
 Preferred stock, $.01 par value; authorized 10,000,000 shares;
  no shares issued or outstanding                                          --
 Common stock, $.01 par value; authorized 10,000,000 shares;
  issued and outstanding 742,819 shares                                   7,428
 Additional paid-in capital                                           4,335,214
 Accumulated deficit                                                 (3,736,533)
                                                                     ----------
                                                                        606,109
                                                                     ----------
                                                                    $ 4,662,562
                                                                     ----------
                                                                     ----------
       The accompanying notes are an integral part of these statements.

                                      24
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF OPERATIONS

            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996


                                                     1997              1996
                                                  -----------       -----------

Sales
 Full-service restaurants                         $15,811,370       $16,962,135
 Bagel bakeries                                     1,926,434           627,052
                                                   ----------        ----------

           Total sales                             17,737,804        17,589,187

Cost of food and beverage                           5,371,297         5,191,186
                                                   ----------        ----------

           Gross profit                            12,366,507        12,398,001

Operating expenses
 Labor and benefits                                 6,304,321         6,144,829
 Direct and occupancy                               6,624,350         6,375,300
 General and administrative                         1,304,821         1,305,619
 Write-down of impaired assets                        640,286            77,691
                                                   ----------        ----------
                                                   14,873,778        13,903,439
                                                   ----------        ----------

           Loss from operations                    (2,507,271)       (1,505,438)

Other income (expense)
 Interest expense                                    (105,460)          (92,634)
 Investment income                                     18,097            59,526
 Other, net                                            18,223            15,507
                                                   ----------        ----------
                                                      (69,140)          (17,601)
                                                   ----------        ----------

           Loss before income taxes                (2,576,411)       (1,523,039)

Income tax benefit                                      7,633           160,000
                                                   ----------        ----------

           Net loss                               $(2,568,778)      $(1,363,039)
                                                   ----------        ----------
                                                   ----------        ----------

Net loss per common share                         $     (3.46)      $     (1.85)
                                                   ----------        ----------
                                                   ----------        ----------

Weighted average number of common
 shares outstanding during the year                   742,819           736,917
                                                   ----------        ----------
                                                   ----------        ----------


       The accompanying notes are an integral part of these statements.

                                      25
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



<TABLE>
<CAPTION>
                                          Common stock                        Retained                  
                                       ------------------    Additional       earnings                                 
                                                    Par        paid-in      (accumulated
                                        Shares     value       capital         deficit)          Total
                                       --------   -------    ----------     ------------     -----------
<S>                                     <C>        <C>       <C>            <C>              <C>
Balance at July 2, 1995                 732,486    $7,325    $4,332,921     $   195,284      $ 4,535,530

 Common stock issued pursuant 
  to exercise of stock options, 
  net of 4,207 shares redeemed           10,333       103         2,293            --              2,396

 Net loss                                  --        --            --        (1,363,039)      (1,363,039)
                                        -------     -----     ---------      ----------       ----------

Balance at June 30, 1996                742,819     7,428     4,335,214      (1,167,755)       3,174,887

 Net loss                                  --        --            --        (2,568,778)      (2,568,778)
                                        -------     -----     ---------      ----------       ----------

Balance at June 29, 1997                742,819    $7,428    $4,335,214     $(3,736,533)     $   606,109
                                        -------     -----     ---------      ----------       ----------
                                        -------     -----     ---------      ----------       ----------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      26
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



<TABLE>
<CAPTION>
                                                                    1997             1996
                                                                 ----------       ----------
<S>                                                             <C>              <C>
Operating activities:
 Net loss                                                       $(2,568,778)     $(1,363,039)
 Adjustment to reconcile net loss to cash
  provided by (used in) operating activities:
   Provision for (recovery of) losses on note receivable            (85,000)         147,368
   Depreciation and amortization                                  1,002,942          920,358
   Write-down of impaired assets                                    640,286           77,691
   Changes in operating assets and liabilities:
    Receivables                                                     (21,427)        (14,753)
    Income taxes receivable                                         165,576         (44,419)
    Inventories                                                      38,240           3,830
    Prepaid expenses and other current assets                        95,617         (41,240)
    Accounts payable                                                 43,012         415,612
    Accrued salaries and wages                                       15,223           7,080
    Other accrued liabilities                                       (31,946)         60,827
                                                                 ----------       ---------

          Net cash provided by (used in)
           operating  activities                                   (706,255)        169,315

Investing activities:
 Purchases of leasehold improvements and equipment                 (499,320)     (1,459,233)
 Receipts on note receivable                                         85,000          11,079
 Payment for preferred stock subscription                              --          (150,000)
 Refund of preferred stock subscription payments                       --           600,000
 Redemption of held-to-maturity securities                             --            97,232
                                                                 ----------       ---------

          Net cash used in investing activities                    (414,320)       (900,922)

Financing activities:
 Proceeds from the exercise of stock options                           --             2,396
 Proceeds from long-term obligations                                173,000         396,058
 Payments of long-term obligations                                 (201,204)       (160,432)
                                                                 ----------       ---------

          Net cash provided by (used in)
           financing activities                                     (28,204)        238,022
                                                                 ----------       ---------

Net decrease in cash and cash equivalents                        (1,148,779)       (493,585)

Cash and cash equivalents at beginning of fiscal year             1,602,936       2,096,521
                                                                 ----------       ---------

Cash and cash equivalents at end of fiscal year                 $   454,157     $ 1,602,936
                                                                 ----------       ---------
                                                                 ----------       ---------
</TABLE>

                                      27
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
                 CONSOLIDATED STATEMENTS OF CASH FLOWS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



<TABLE>
<CAPTION>
                                                                     1997           1996
                                                                   ---------      ---------
<S>                                                                <C>            <C>
Supplemental disclosures of cash flow information
Cash paid during the year for:
 Interest                                                          $ 105,213      $  89,040
 Income taxes                                                          5,000          3,750

Supplemental schedule of noncash investing and financing activities:

 Leasehold improvements that were included in
  accounts payable at end of fiscal year                           $  15,262      $ 209,273
 Leasehold improvements that were acquired by
  issuance of long-term obligations                                  566,485           --
</TABLE>

During fiscal year 1997 and 1996, the Company recorded write-downs of 
impaired assets in connection with two of its restaurants (note G).  The 
effect of these write-downs was to reduce the Company's assets as follows:

<TABLE>
             <S>                                                   <C>            <C>
             Building                                              $ 610,829      $    --
             Equipment                                               620,710        409,878
             Leasehold improvements                                  231,229        322,044
             Accumulated depreciation and amortization              (822,482)      (654,231)
                                                                    --------       --------

Write-down of impaired assets                                      $ 640,286      $  77,691
                                                                    --------       --------
                                                                    --------       --------
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      28
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
                      CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996
                                           



NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of Ciatti's,
    Inc. (Ciatti's) and its wholly-owned subsidiary, DFW Bagels, Inc. (DFW
    Bagels), formally Big D Bagels, Inc., collectively referred to as the
    "Company."  Significant intercompany accounts and transactions have been
    eliminated.

    NATURE OF BUSINESS

    The Company owns and operates ten full-service restaurants in Minnesota and
    Wisconsin.  Included in these full-service restaurants are nine Italian
    restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
    Italian Restaurant-Registered Trademark-" and one steakhouse restaurant
    operating in Wisconsin under the name "Spurs Steakhouse & Saloon-Registered
    Trademark-."  Subsequent to June 29, 1997, four of the full-service
    restaurants were sold (note I).  DFW Bagels has entered into an exclusive
    development agreement with Bruegger's Franchise Corporation (Bruegger's) to
    develop bagel bakeries in the Dallas-Fort Worth area.  DFW Bagels owns and
    operates seven bagel bakeries in the Dallas-Fort Worth, Texas area (note
    H).  Subsequent to June 29, 1997, the eighth bagel bakery was opened.  All
    bagel bakeries operate under the name "Bruegger's Bagel Bakery" pursuant to
    the terms of the Bruegger's development agreement and related franchise
    documents.

    CASH AND CASH EQUIVALENTS

    The Company considers marketable securities purchased with an original
    maturity of three months or less to be cash equivalents.

    The Company has approximately $165,000 of cash at one bank at June 29,
    1997.

    Cash equivalents consist of money market funds.  The cost of these funds
    approximate fair value, and there are no unrealized gains or losses.  Cash
    and cash equivalents consist of the following at June 29, 1997:

             Cash                                         $444,899
             Money market funds                              9,258
                                                          --------
                                                          $454,157
                                                          --------
                                                          --------

                                      29
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

    INVENTORIES

    Inventories are stated at the lower of cost or market.  Cost is determined
    using the first-in, first-out method.

    PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost.  If facts or changes in
    circumstances indicate that an impairment of property and equipment may
    have occurred, management reviews all evidence available to determine
    whether the carrying value of property and equipment should be reduced (see
    note G).

    Depreciation and amortization of property and equipment are provided on the
    straight-line method over the following useful lives:

                                                               YEARS
                                                               -----

             Leasehold improvements                            5 - 10
             Equipment                                         3 - 10
             Automobiles                                         3

    Accelerated depreciation methods are used for tax purposes.

    EMPLOYEE BENEFITS

    The Company acts as a self-insurer for employee medical plans.  Specific
    stop loss insurance coverage is maintained for catastrophic claims.  Losses
    and claims are recorded based upon actual and estimated losses and claims
    outstanding.

    PRE-OPENING COSTS

    Expenses related to the opening of new restaurants and the hiring and
    training of personnel are expensed as incurred.

                                      30
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

    ADVERTISING AND PROMOTION COSTS

    The Company expenses advertising and promotion costs when incurred. 
    Advertising and promotion costs were $790,407 and $640,233 for fiscal 1997
    and 1996.

    EMPLOYEE STOCK OPTIONS

    The Company's employee stock option plans are accounted for under the
    intrinsic value method.

    NET LOSS PER COMMON SHARE

    Net loss per common share has been computed by dividing net loss by the
    weighted average number of common shares outstanding during the year.

    FISCAL YEAR

    The Company's fiscal year is a fifty-two, fifty-three week year which ends
    on the Sunday closest to the last day in June.  Interim quarters end on the
    Sunday closest to the last day of September, December and March.

    FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    The Financial Accounting Standards Board (FASB) has issued Statement of
    Financial Accounting Standards (SFAS) 128, "Earnings per Share," which is
    effective for fiscal year 1998.  Early adoption of the new standard is not
    permitted.  The new standard eliminates primary and fully diluted earnings
    per share and requires presentation of basic and diluted earnings per share
    together with disclosure of how the per share amounts were computed.

                                      31
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

    The FASB also issued SFAS 130, "Reporting Comprehensive Income," which
    requires the Company to display an amount representing total comprehensive
    income, as defined by the statement, as part of the Company's basic
    financial statements.  Additionally, SFAS 131, "Disclosures about Segments
    of an Enterprise and Related Information," requires the Company to disclose
    financial and other information about its business segments, their products
    and services, geographic areas, sales, profits, assets and other
    information.  These statements will be effective in fiscal year 1999.

    The adoption of these statements is not expected to have a material effect
    on the consolidated financial statements of the Company.

    USE OF ESTIMATES

    In preparing financial statements in conformity with generally accepted
    accounting principles, management is required to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    the disclosure of contingent assets and liabilities at the date of the
    financial statements and the reported amounts of revenue and expenses
    during the reporting period.  Actual results could differ from those
    estimates.

    RECLASSIFICATIONS

    Certain 1996 amounts have been reclassified to conform with the 1997
    presentation.


NOTE B  -  LONG-TERM OBLIGATIONS

    Long-term obligations at June 29, 1997 consist of the following:

      Unsecured notes payable to an officer and shareholder;
       interest at 10.5%; payable in quarterly installments
       through June 1, 1998                                           $  100,000

      Unsecured notes payable to two construction companies;
       interest at prime plus 3% (effective rate of 11.5%);
       payable in monthly installments through June 23, 1998             566,485

                                      32
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE B  -  LONG-TERM OBLIGATIONS  -  Continued

      Note payable to a financial institution, collateralized
       by inventory, receivables and property of the Company;
       interest at 11.5%; payable in monthly installments
       through December 2000                                          $  211,975

      Notes payable to a financial institution, collateralized
       by certain equipment and fixtures of DFW Bagels; interest
       at 10.5%; payable in monthly installments through May 2001        315,317

      Subordinated notes payable (a)                                      73,000

      Obligation under capital lease (note D)                            377,497
                                                                       ---------
                                                                       1,644,274
      Less current maturities                                            879,807
                                                                       ---------
                                                                      $  764,467
                                                                       ---------
                                                                       ---------

    (a) During the fiscal year ended June 29, 1997, the Company authorized the
        issuance of up to $2,000,000 in subordinated fixed-rate notes with
        maturities of either one year (9% notes) or three years (9.25% notes).
        Interest is payable semi-annually on January 1 and July 1.  As of
        June 29, 1997, the Company has issued $53,000 in one-year notes due
        through June 25, 1998 and $20,000 in three-year notes due through
        June 25, 2000.  Subsequent to June 29, 1997, approximately $118,000 of
        one-year notes and $8,000 of three-year notes were issued.

    Aggregate maturities of long-term obligations, are as follows:

          FISCAL YEAR ENDING
          ------------------

                 1998                                     $  879,807
                 1999                                        178,180
                 2000                                         218,038
                 2001                                         156,210
                 2002                                          52,127
                 2003 and thereafter                          159,912
                                                            ---------

                                                           $1,644,274
                                                            ---------
                                                            ---------

                                      33
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE B  -  LONG-TERM OBLIGATIONS  -  Continued

    Based on the borrowing rates currently available to the Company for
    long-term obligations with similar terms and average maturities,
    management believes the fair value of these obligations approximates the
    carrying value at June 29, 1997.

NOTE C  -  INCOME TAXES

    Income tax expense (benefit) consists of the following:

                                                       1997            1996
                                                      --------        ---------
     Current
      Federal                                         $(14,658)       $(167,000)
      State                                              7,025            7,000
     Deferred                                             --               --
                                                       -------         --------

                                                      $ (7,633)       $(160,000)
                                                       -------         --------
                                                       -------         --------

    The actual income tax benefit differs from the "expected" tax benefit
    computed by applying the U.S. corporate income tax rate of 34% to loss
    before income taxes as follows:

                                                       1997             1996
                                                     ---------         --------
     Computed "expected" tax benefit                $ (875,980)       $(517,833)
     State income taxes, net of Federal tax effect    (114,697)         (42,048)
     Change in valuation allowance                   1,035,000          355,000
     Other                                             (51,956)          44,881
                                                     ---------         --------
              Actual income tax benefit             $   (7,633)       $(160,000)
                                                     ---------         --------
                                                     ---------         --------

    At June 29, 1997, the Company has approximately $166,000 of alternative
    minimum tax credit carryforwards available to reduce income taxes payable in
    future years.  These credits are available for carryforward until fully
    utilized.  In addition, the Company has other tax credit carryforwards of
    $57,000 which expire in 1998.  The Company has approximately $2,733,000 of
    net operating loss carryforwards which expire through the year 2012.

                                      34
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE C  -  INCOME TAXES  -  Continued

    The components of deferred tax assets (liabilities) were comprised of the
    following:

                                                           1997         1996 
                                                       -----------    ---------
     Deferred tax assets:
      Tax credit carryforwards                         $   223,000    $ 201,000
      Net operating loss carryforwards                   1,076,000      228,000
      Gift certificates                                    154,000      168,000
      Reserve for note receivable                             --         59,000
      Capital lease obligation                             151,000      164,000
      Other                                                 86,000       83,000
                                                        ----------     --------

            Total deferred tax assets                    1,690,000      903,000

     Deferred tax liabilities:
      Fixed asset bases recovery differences               (10,000)    (258,000)
                                                        ----------     --------

      Net deferred tax asset before valuation allowance  1,680,000      645,000
     Valuation allowance                                (1,680,000)    (645,000)
                                                        ----------     --------

      Net deferred tax asset                           $      --      $    --  
                                                        ----------     --------
                                                        ----------     --------

NOTE D  -  LEASES

    The Company conducts its operations from leased facilities.  The lease
    agreements are noncancelable, include various renewal options and expire on
    various dates through 2008.  During 1997, the building under capital lease
    was fully written off (note G).

                                      35
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996


NOTE D  -  LEASES  -  Continued

    Future minimum lease payments under noncancelable operating leases (as
    adjusted for sale of four restaurants subsequent to year end (note I)) and
    the present value of future minimum capital lease payments as of June 29,
    1997 are:

                                           Facility       Capital       Total
     Fiscal year ending                    rentals         lease       rentals
     ------------------                   ----------      -------     ----------

       1998                               $1,333,531     $ 70,062     $1,403,593
       1999                                1,172,091       70,062      1,242,153
       2000                                  966,407       70,062      1,036,469
       2001                                  915,308       70,062        985,370
       2002                                  894,133       70,062        964,195
       2003 and thereafter                 2,110,714      180,924      2,291,638
                                           ---------      -------      ---------

       Total minimum lease payments       $7,392,184      531,234     $7,923,418
                                           ---------      -------      ---------
                                           ---------      -------      ---------

       Less amount representing interest
        imputed at a rate of approximately 15%            153,737
                                                          -------

       Present value of net minimum capital
        lease payments                                   $377,497
                                                          -------
                                                          -------

    Rent expense under noncancelable operating leases was $1,398,718 and
    $1,291,264 during fiscal years 1997 and 1996.

    Certain of the Company's leases have contingent rentals based upon sales
    volumes above specified levels.  There has been no contingent rent expense
    in fiscal years 1997 or 1996.  Real estate taxes, insurance and maintenance
    expense are generally obligations of the Company and, accordingly, are not
    included as part of the rental payment.

                                      36
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE E  -  SHAREHOLDERS' EQUITY

    STOCK OPTIONS

    The Company's 1984 and 1993 Stock Option Plans provide that stock options to
    purchase an aggregate of 212,500 shares of common stock may be granted to
    officers and key employees.  The plans provide for the granting of incentive
    and nonqualified options.

    Under both plans, incentive stock options may not be granted at a purchase
    price less than the fair market value of the common shares on the date of
    the grant (or for an option granted to a person holding more than 10 percent
    of the Company's voting stock at less than 110 percent of the fair market
    value). Under both plans, the option term is fixed at the date of grant and
    may not exceed ten years from the date the option is granted (except that an
    incentive stock option granted to a person holding more than 10 percent of
    the Company's voting stock may be exercisable only for five years).  Options
    become exercisable in installments generally over five years.  No
    compensation expense has been recorded by the Company during fiscal years
    1997 and 1996.

    A summary of the Company's stock option transactions during fiscal years
    1997 and 1996 is as follows:

                                              1997                 1996
                                       -------------------  -------------------
                                                  Weighted             Weighted
                                                  Average              Average
                                                  Exercise             Exercise
                                        Shares     Price     Shares     Price
                                       --------   --------  --------   --------
     Outstanding at beginning of year   66,171     $2.50     77,236     $2.27
      Exercised                           --         --     (14,540)     1.71
      Granted                            1,500      3.00      4,000      4.14
      Forfeited                         (9,092)     2.19       (525)     1.90
      Expirations                         (188)     2.20       --         -- 
                                        ------               ------

     Outstanding at end of year         58,391     $2.58     66,171     $2.50
                                        ------               ------
                                        ------               ------

     Options exercisable at end of
      year                              40,493     $2.57     29,950     $2.73
                                        ------               ------
                                        ------               ------

     Weighted average fair value of
      options granted during the year              $1.80                $2.35

                                      37
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE E  -  SHAREHOLDERS' EQUITY  -  Continued

    The following applies to grants that are outstanding at June 29, 1997:

<TABLE>
<CAPTION>
                                 Options Outstanding                   Options Exercisable
                      -----------------------------------------     -------------------------
                                      Weighted
                                       Average         Weighted                      Weighted
        Range of                      Remaining         Average                       Average
        Exercise        Number        Contractual      Exercise       Number         Exercise
         Prices       Outstanding        Life            Price      Exercisable        Price
     --------------   -----------     -----------      --------     -----------      --------
     <S>                  <C>           <C>             <C>            <C>            <C>
     $1.50 to $2.00       42,191        3 years         $ 1.82         33,243         $ 1.85
     $3.00 to $3.32       11,500        7 years           3.13          3,750           3.14
     $5.00 to $5.50        2,750        5 years           5.27          1,550           5.10
         $8.00             1,200        4 years           8.00          1,200           8.00
        $18.00               750        2 years          18.00            750          18.00
                          ------                                       ------

                          58,391                                       40,493
                          ------                                       ------
                          ------                                       ------
</TABLE>

    The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," which
    introduced an alternative method for recognizing compensation costs based
    upon the fair value of the awards on the date they are granted.  SFAS 123
    allows entities to continue to account for stock options using the
    intrinsic value method, provided pro forma net earnings (loss) and net
    earnings (loss) per share, as if the fair value based method had been used,
    are disclosed.  The effects on the Company's pro forma net loss and net
    loss per share, had the fair value based method been used, was not material
    for fiscal years 1997 and 1996.  These effects may not be representative of
    the future effects of applying this statement.

    The fair value of each option grant was estimated on the date of grant
    using the Black-Scholes options-pricing model with the following weighted
    average assumptions used in fiscal years 1997 and 1996:  zero dividend
    yield; expected volatility of 49.76 percent and 52.41 percent; risk-free
    interest rates of 6.63 percent and 6.23 percent; and expected lives of
    seven years and six years.

                                      38
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE E  -  SHAREHOLDERS' EQUITY  -  Continued

    PUBLIC OFFERING

    On August 8, 1997, the Company filed a Registration Statement with the
    Securities and Exchange Commission (SEC) for the sale of up to 3,000,000
    units, each unit consisting of one share of common stock and a warrant to
    purchase an additional share of common stock.  The Registration Statement
    indicates that the units will be sold at a price of $2.25 per unit, with
    the warrant exercisable at a price of $5.00 until December 31, 2001.  The
    offering will be made directly by the Company.  The offering is being done
    on a minimum - maximum basis with a minimum of $2,000,000.  The
    Registration Statement has not yet become effective.

    FAILURE TO MEET CURRENT NASDAQ NATIONAL SMALLCAP MARKET REQUIREMENTS

    The Company's common stock trades on the Nasdaq SmallCap Market.  Under the
    rules of the Nasdaq SmallCap Market, an issuer must maintain shareholders'
    equity of at least $1,000,000.  As a result of its net loss in fiscal 1997,
    the Company's shareholders' equity as of June 29, 1997 was approximately
    $606,000, which is less than the minimum required for continued inclusion
    on the Nasdaq SmallCap Market.  In August 1997, Nasdaq advised the Company
    that it was not in compliance with the shareholders' equity requirement and
    indicated that it intended to delist the Company's common stock from the
    Nasdaq SmallCap Market.  The Company has requested an exemption from the
    $1,000,000 shareholders' equity requirement on the basis that the Company
    had filed a registration statement for a public offering that, among other
    things, would raise sufficient funds to satisfy the $1,000,000 requirement. 
    The Nasdaq staff denied the Company's request for the exemption.  The
    Company has appealed the Nasdaq staff determination and requested an oral
    hearing with respect to this issue.  The Company expects the hearing to
    occur during October 1997.  If the Company does not receive an exemption
    and does not otherwise raise additional capital in an amount sufficient to
    achieve compliance with the Nasdaq SmallCap shareholders' equity
    requirement, the Company's common stock could be delisted from the Nasdaq
    SmallCap Market, which could have an adverse effect on the price and
    liquidity of the Company's common stock.

                                      39
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE E  -  SHAREHOLDERS' EQUITY  -  Continued

    In addition, on August 25, 1997, the SEC approved new Nasdaq rules that
    require issuers of SmallCap securities to either (i) maintain net tangible
    assets (assets, excluding goodwill, less liabilities) of at least $2.0
    million, (ii) achieve net income of at least $500,000 in the most recent
    fiscal year or in two of the three most recently completed fiscal years or
    (iii) have a market capitalization of $35 million.  This new requirement
    becomes applicable to Nasdaq SmallCap issuers, including the Company, on
    February 25, 1998.  Although the Company believes that it will be able to
    achieve the $2.0 million net tangible assets requirements by February 25,
    1998 by raising additional equity in the unit offering, there can be no
    assurance that the Company will be able to attain the required net tangible
    assets or meet either of the other requirements for continued inclusion on
    the Nasdaq SmallCap Market.  If the Company is unable to achieve the
    minimum requirements for continued inclusion on the Nasdaq SmallCap Market,
    then its securities would trade on the Nasdaq "Bulletin Board" or in the
    over-the-counter market.  This could have an adverse effect on the price
    and liquidity of the Company's common stock. 

NOTE F  -  EMPLOYEE BENEFIT PLAN

    The Company has a 401(k) salary savings plan.  Under this plan, employees
    who meet eligibility requirements, as defined in the plan, may elect to
    defer a portion of their salary into the plan, up to certain limits set by
    law.  At the discretion of the Company, matching contributions equal to a
    percentage of the salary deferred by the employee may be made.  The
    matching contribution is determined by the Company on a calendar year
    basis.  For the plan years ending December 31, 1997 and 1996, the Company
    approved a match of 100% of the employee's elected salary deferral up to a
    maximum of 3% of the employee's gross wages.  Company matching
    contributions were $42,814 and $48,642 for fiscal years 1997 and 1996.

NOTE G  -  IMPAIRMENT OF ASSETS

    The Company implemented SFAS 121, "Accounting for the Impairment of Long-
    Lived Assets and for Long-Lived Assets to be Disposed Of," effective July 1,
    1996.  SFAS 121 establishes guidance for when to recognize and how to
    measure impairment losses of long-lived assets and certain identifiable
    intangibles, and how to value long-lived assets to be disposed of.  The
    effect of implementation of SFAS 121 on July 1, 1996 did not have a
    material effect on the Company's financial position.  Due to events
    occurring during fiscal year 1997, the Company recognized an impairment of
    the long-lived assets at the Company's Madison, Wisconsin restaurant.

                                      40
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE G  -  IMPAIRMENT OF ASSETS  -  Continued

    Based on several factors, management revised its forecasts for this
    restaurant and projected operating losses and cash flow deficits for the
    remainder of the restaurant's lease, which expires in 2005.  As a result of
    the projected operating losses and future cash flow deficits, the Company
    has fully written off, during fiscal year 1997, the long-lived assets at
    this restaurant as follows:

         Building                                        $ 610,829
         Equipment                                         620,710
         Leasehold improvements                            231,229
         Accumulated depreciation and amortization        (822,482)
                                                          --------

            Write-down of impaired assets                $ 640,286
                                                          --------
                                                          --------

    The effect of the above write-down was to increase the Company's net loss
    for fiscal year 1997 by $640,286 or $.86 per share.

    During fiscal year 1996, the Board of Directors resolved to close the
    Glendale, Wisconsin, restaurant during September 1996.  During August 1996,
    an agreement was entered into with the landlord which released the Company
    from the remainder of its lease obligations in exchange for the remaining
    leasehold improvements and equipment at this location.  Accordingly, during
    fiscal 1996, the Company wrote off the assets as follows:

         Equipment                                       $ 409,878
         Leasehold improvements                            322,044
         Accumulated depreciation and amortization        (654,231)
                                                          --------

            Write-down of impaired assets               $   77,691
                                                          --------
                                                          --------

    Also during fiscal year 1996, the Company recorded a reserve of $147,368
    for the entire balance of an outstanding note receivable related to the
    closure of its Milwaukee, Wisconsin, restaurant.

                                      41
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE G  -  IMPAIRMENT OF ASSETS  -  Continued

    The net effect of the above was to increase the net loss for fiscal year
    1996 by $225,059 or $.31 per share.

    During fiscal year 1997, the Company recovered $85,000 of the note
    receivable and recorded the recovery of bad debt expense.


NOTE H  -  BRUEGGER'S BAGEL BAKERY DEVELOPMENT AGREEMENT

    DFW Bagels has entered into an exclusive development agreement with
    Bruegger's to develop bagel bakeries in the Dallas-Fort Worth, Texas area. 
    The agreement, as amended on April 23, 1997, requires DFW Bagels to build
    30 bagel bakeries by July 2001.  DFW Bagels opened four bagel bakeries
    during fiscal year 1996, three during fiscal year 1997, and one additional
    bagel bakery was opened subsequent to June 29, 1997.  Pursuant to the
    amended agreement, DFW Bagels is required to have nine bagel bakeries
    opened by January 1, 1998 and 14 opened by October 1, 1998.

    The Company is in the process of attempting to raise funds to open the
    additional bagel bakeries.  The inability of the Company to obtain adequate
    financing to open the required bagel bakeries could have a severe and
    immediate effect on the continuation of the Company's bagel bakery business
    in Dallas-Fort Worth and could have a material adverse effect on the
    Company's consolidated financial position or results of operations.

    Under the amended development agreement, each bakery has a separate
    franchise agreement which requires DFW Bagels to pay a $20,000 franchise
    fee upon the opening of each bagel bakery, and 5% of bagel bakery gross
    sales as a royalty fee.  In addition, DFW Bagels is required to contribute
    2% of bagel bakery gross sales to an advertising fund established by
    Bruegger's and to expend 2% of bagel bakery gross sales for its own
    advertising.

    Under the terms of the amended development agreement, under certain
    circumstances the Company needs the consent of Bruegger's to issue
    securities and under certain circumstances Bruegger's has a right of first
    refusal with respect to the Company's securities.

    During fiscal 1997, the Company was in default of one of the terms of the
    development agreement and obtained a waiver from Bruegger's.

                                      42
<PAGE>

                            CIATTI'S, INC. AND SUBSIDIARY
                                           
               CONSOLIDATED NOTES TO FINANCIAL STATEMENTS  -  CONTINUED
                                           
            FOR THE FIFTY-TWO WEEKS ENDED JUNE 29, 1997 AND JUNE 30, 1996



NOTE H  -  BRUEGGER'S BAGEL BAKERY DEVELOPMENT AGREEMENT  -
            Continued

    In May 1996, Bruegger's was purchased by Quality Dining, Inc.  On May 12,
    1997, Quality Dining, Inc. announced that its Board of Directors approved a
    plan to divest its Bruegger's bagel-related businesses.  On September 3,
    1997, Quality Dining, Inc. entered into a share exchange agreement under
    which it will sell Bruegger's to its former owners in exchange for their
    securities of Quality Dining, Inc. and certain other consideration. 
    Consummation of the transactions is subject to the prior satisfaction of
    certain conditions.  The Company believes the transaction will be
    consummated in October 1997.

    The Company obtains its bagel dough and other food supplies for its bagel
    bakeries from a commissary owned by Quality Dining, Inc. located in Austin,
    Texas.  The closing of the Austin commissary or the inability of the
    Company to receive its supplies from the commissary would have a severe and
    immediate effect on the continuation of the Company's bagel bakery business
    in Dallas-Fort Worth.


NOTE I  -  SUBSEQUENT EVENTS

    On August 26, 1997, the Company borrowed an additional $300,000 from an
    officer and shareholder (note B).

    During September 1997, the Company sold three of its full-service
    restaurants and entered into an agreement to sell an additional restaurant
    in October 1997.  The restaurants are located in Burnsville, Falcon
    Heights, St. Cloud, and Woodbury, Minnesota.  The sale of these restaurants
    will generate proceeds of approximately $1,500,000.  The net book value of
    the leasehold improvements and equipment as of June 29, 1997 at these
    locations was $663,108.  During fiscal 1997, these restaurants generated
    approximately $6,913,000 of sales, net earnings of $203,000 and cash flows
    from operations of $488,000.  The Company has no current intention of
    selling any of its other full-service restaurants.

    The Company will remain contingently liable for future lease payments for
    three of the restaurants.  The leases have termination dates through 2002. 
    The aggregate amount of the contingent lease payments was approximately
    $1,290,000 as of June 29, 1997.  

                                      43
<PAGE>

                                  STOCK INFORMATION
                                           


    The Company's common stock is currently traded on the Nasdaq SmallCap Market
    system under the symbol "CIAT."  The following table sets forth the range of
    high and low prices for the Company's common stock on the Nasdaq SmallCap 
    Market for fiscal years 1996 and 1997.  The prices listed below indicate
    inter-dealer prices without retail mark up, mark down or commissions and may
    not necessarily represent actual transactions.

                                                      Common Stock
                                                     --------------
     Fiscal Year 1997                                Low       High
     ----------------                                ---       ----

       First quarter                                $3.50     $5.00
       Second quarter                               2.50       4.00
       Third quarter                                2.50       2.50
       Fourth quarter                               2.25       2.25

     Fiscal Year 1996                                Low       High
     ----------------                                ---       ----

       First quarter                                $3.75     $5.00
       Second quarter                               4.00      6.125
       Third quarter                                4.25      6.25
       Fourth quarter                               2.75      5.25

    As of September 1, 1997, the Company has 79 shareholders of record, plus an
    additional 386,950 shares held by depository institutions for an
    undetermined number of additional shareholders.  The total number of
    outstanding shares was 742,819.

    The Company has not paid cash dividends on its common stock in the past and
    does not intend to pay cash dividends in the foreseeable future.

                                      44
<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    Not applicable.

                                      45
<PAGE>

                                       PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

    Information required under this item with respect to Directors is set 
forth in the Section entitled "Election of Directors" in the Company's 1997 
Proxy Statement and is incorporated herein by reference.  A definitive copy 
of the Proxy Statement will be filed with the Commission within 120 days of 
the close of the fiscal year ended June 29, 1997.

    Information required under this item with respect to Executive Officers 
is set forth in the subsection entitled "Executive Officers of the Company" 
in Part I of this Form 10-KSB.

ITEM 10. EXECUTIVE COMPENSATION

    Information required under this item is contained in the section entitled 
"Executive Compensation" in the Company's 1997 Proxy Statement and is 
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information required under this item is contained in the section entitled 
"Security Ownership of Principal Shareholders and Management" in the 
Company's 1997 Proxy Statement and is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information required under this item is contained in the section entitled 
"Certain Transactions" in the Company's 1997 Proxy Statement and is 
incorporated herein by reference.

                                      46
<PAGE>

                                   PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

    Exhibits that cover management contracts or compensatory plans or
    arrangements are marked with an asterisk(*).

EXHIBIT NO.      TITLE
-----------      -----

       3.1       Articles of Incorporation; Filed as an exhibit to the June 28,
                 1992 Form 10-KSB and incorporated hereby by reference.

       3.2       Bylaws; Filed as an exhibit to the June 28, 1992 Form 10-KSB
                 and incorporated hereby by reference.

       10.1      Lease dated August 31, 1993, as amended September 1, 1993
                 between the Company and 850 Limited Partnership, a Minnesota
                 limited Partnership (St. Paul restaurant); Filed as an exhibit
                 to the July 3, 1994 Form 10-KSB and incorporated hereby by
                 reference.

       10.2      Lease dated September 26, 1984, as amended July 1, 1986 between
                 the Company and R&D Joint Venture (Madison restaurant); Filed
                 as an Exhibit to the Registration Statement on Form S-1, as
                 amended (Commission File No. 33-8965), effective on December
                 23, 1986, and incorporated herein by reference.

       10.2.1    Agreement dated July 1, 1986 between Ciatti's of Wisconsin,
                 Inc. and C.J. Raymond (Madison Restaurant); Filed as an exhibit
                 to the July 3, 1988 Form 10-KSB and incorporated hereby by
                 reference.

       10.2.2    Amendment to Lease (dated September 26, 1984 as amended July 1,
                 1986) dated August 25, 1988 between Ciatti's of Wisconsin, Inc.
                 and C.J. Raymond (Madison restaurant); Filed as an exhibit to
                 the July 3, 1988 Form 10-KSB and incorporated hereby by
                 reference.

       10.3      Lease dated July 24, 1987, between the Company and Eden
                 Entertainment Associates (Eden Prairie restaurant); Filed as an
                 exhibit to the July 3, 1988 Form 10-KSB and incorporated hereby
                 by reference.

       10.4      Lease dated July 29, 1987, between the Company and Restaurant
                 Associates (Falcon Heights restaurant); Filed as an Exhibit to
                 Post-Effective Amendment No. 1 to Form S-1 Registration
                 Statement dated March 20, 1989 (No. 33-8965).

                                      47
<PAGE>

       10.5      Lease dated December 20, 1988, between the Company and Ryan
                 Construction Company of Minnesota, Inc. (Burnsville
                 restaurant); Filed as an Exhibit to Post-Effective Amendment
                 No. 1 to Form S-1 Registration Statement dated March 20, 1989
                (No. 33-8965).

       10.7      Promissory Note dated May 10, 1995, from the Company to Norwest
                 Equipment Finance, Inc. with respect to Eden Prairie
                 restaurant; Filed as an exhibit to the July 2, 1995 Form 10-KSB
                 and incorporated hereby by reference.

       10.8      Lease dated July 11, 1989 between the Company and Larson-Doran
                 partnership (Maplewood restaurant); Filed as an exhibit to the
                 July 2, 1989 Form 10-KSB and incorporated hereby by reference

       10.9      Lease dated July 26, 1990, between the Company and G.R.
                 Herberger's, Inc. (St. Cloud restaurant); Filed as an exhibit
                 to the July 1, 1990 Form 10-KSB and incorporated hereby by
                 reference.

       10.10     Lease dated June 1990 between the Company and Phoenix Mutual
                 Life Insurance (Corporate office); Filed as an exhibit to the
                 July 1, 1990 Form 10-KSB and incorporated hereby by reference.

       10.10.1   Amendment No. 1 dated March 14, 1995 to June 1990 lease between
                 the Company and Phoenix Mutual Life Insurance (Corporate
                 office); Filed as an exhibit to the July 1, 1990 Form 10-KSB
                 and incorporated hereby by reference.

       10.11     Lease dated April 18, 1991, between the Company and J.L.P.
                 Associates II of Eden Prairie (LaCrosse restaurant); Filed as
                 an exhibit to the June 30, 1991 Form 10-KSB and incorporated
                 hereby by reference.

       10.11.1   First Amendment dated June 18, 1991, to lease with respect to
                 LaCrosse restaurant; Filed as an exhibit to the June 28, 1992
                 Form 10-KSB and incorporated hereby by reference.

       10.12     Lease dated May 17, 1991, between the Company and Gabbert and
                 Beck Company (Edina restaurant); Filed as an exhibit to the
                 June 30, 1991 Form 10-KSB and incorporated hereby by reference.

       10.13     Lease dated July 3, 1991, between the Company and Wooddale
                 Shopping Center (Woodbury restaurant); Filed as an exhibit to
                 the June 30, 1991 Form 10-KSB and incorporated hereby by
                 reference.

                                      48
<PAGE>

       10.14     Shareholder Development Agreement effective as of January 1,
                 1995, between Big D Bagels, Inc. and Bruegger's Franchise
                 Corporation; Filed as an exhibit to the January 1, 1995 Form
                 10-QSB and incorporated hereby by reference. 

       10.14.1   Settlement Agreement dated April 23, 1997 between Ciatti's,
                 Inc., Big D. Bagels, Inc., Quality Dining, Inc. and Bruegger's
                 Franchise Corporation; Incorporated by reference to Exhibit
                 10.14.1 to Amendment No. 2 to Form S-2 File No. 333-23233.

       10.15*    Restated Stock Option Plan, as amended; Filed as an exhibit to
                 the Form S-8 Registration Statement, File Number 33-28306
                 (April 24, 1989).

       10.16*    1993 Stock Option Plan; Filed as an exhibit to the Form S-8
                 Registration Statement, File Number 33-76974 (March 28, 1994).

       10.17     Promissory Note dated January 15, 1996, from the Company to
                 Norwest Equipment Finance, Inc. with respect to Big D Bagels,
                 Inc.; Filed as an exhibit to the June 30, 1996 Form 10-K and
                 incorporated herein by reference.

       10.18     Promissory Note dated May 31, 1996, from the Company to Norwest
                 Equipment Finance, Inc. with respect to Big D Bagels, Inc.;
                 Filed as an exhibit to the June 30, 1996 Form 10-K and
                 incorporated herein by reference.

       21.1      The Company has one subsidiary, DFW Bagels, Inc., a Minnesota
                 corporation, dba Bruegger's Bagel Bakery.

       23.1      Consent of Grant Thornton LLP Independent Certified Public
                 Accountants

       24.1      Power of Attorney (included on signature page hereof)

       27.1      Financial Data Schedule

       99.1      Pro Forma Unaudited Condensed Consolidated Financial Statements
                 of Ciatti's, Inc.

                                      50
<PAGE>

                                      SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report be signed on its behalf by the undersigned, thereunto duly
authorized.


Dated:  September 25, 1997             CIATTI'S, INC.



                                       By /s/ Phillip R. Danford
                                          --------------------------------------
                                          Phillip R. Danford,
                                          President and Director


    In accordance with the Exchange Act, this report has been signed below by 
the following persons on behalf of the registrant and in the capacities 
indicated on the dates indicated.

                                 (Power of Attorney)

    Each person whose signature appears below constitutes and appoints 
Phillip R. Danford as his true and lawful attorney-in-fact and agent, with 
full power of substitution and resubstitution, for him and in his name, place 
and stead, in any and all capacities, to sign any or all amendments to this 
Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, 
and other documents in connection therewith, with the Securities and Exchange 
Commission, granting unto said attorney-in-fact and agent, full power and 
authority to do and perform each and every act and thing requisite and 
necessary to be done in and about the premises, as fully to all intents and 
purposes as he might or could do in person, hereby ratifying and confirming 
all said attorney in-fact and agent, or his substitute, may lawfully do or 
cause to be done by virtue thereof.

    Signature                          Title                  Date
    ---------                          -----                  ----


/s/ Phillip R. Danford          President and Director        September 25, 1997
--------------------------
Phillip R. Danford


/s/ Scott McGuire               Controller                    September 25, 1997
--------------------------
Scott McGuire

                                      51
<PAGE>


/s/ L. E. "Dan" Danford, Jr.    Chairman of the Board and     September 25, 1997
----------------------------    Director
L. E. "Dan" Danford, Jr.  


/s/ Thomas A. Kelm              Director                      September 25, 1997
----------------------------
Thomas A. Kelm

                                      52