<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 28, 1998

                                       OR

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

                For the Transition period from                to
                                               --------------

                         COMMISSION FILE NUMBER: 0-16348

                           PREMIUM RESTAURANT COMPANY
                 (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.     YES  X      NO
                         -----

THE COMPANY'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $12,458,000.

ON SEPTEMBER 18, 1998, THE COMPANY HAD 1,845,939 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 OTC:BB CLOSING BID AND ASK PRICE OF $1.25 PER SHARE ON SEPTEMBER
18, 1998 WAS APPROXIMATELY $1,285,295.

                       DOCUMENTS INCORPORATED BY REFERENCE

THE COMPANY'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING OF SHAREHOLDERS IS
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.


<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Premium Restaurant Company (the "Company") owns and operates two
full-service Italian restaurants in Minnesota under the name "Ciatti's Italian
Restaurant" and seven "Bruegger's Bagel Bakery" restaurants in the Dallas-Fort
Worth, Texas area as of September 21, 1998. All bagel bakeries are operated
under the name "Bruegger's Bagel Bakery" pursuant to the terms of a development
agreement and related franchise documents under which the Company's subsidiary
DFW Bagels, Inc. ("DFW") acts as franchisee.

RESTAURANT DEMOGRAPHICS

         Bagel Bakeries

         As of June 28, 1998, DFW operated seven bagel bakeries in the
Dallas-Fort Worth area and has signed leases for an additional four bakeries.
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. Although, 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, it subsequently closed that restaurant. In the
future, the Company plans to open bagel bakeries ranging in size from 1,800 to
2,200 square feet.

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

<TABLE>
<CAPTION>

                                                                         APPROXIMATE
           DATE OPENED                             LOCATION            SQUARE FOOTAGE
           -----------                             --------            --------------
<S>                                          <C>                       <C>  
     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
     June, 1997                              Fort Worth (Fossil Creek)     2,100
     August, 1997                            University Park               2,300
     October, 1998 (estimated) (1)           Southlake                     2,000
     October, 1998 (estimated) (1)           Dallas (Old Denton)           2,000
     November, 1998 (estimated) (1)          Woodbridge                    2,000
     November, 1998 (estimated) (1)          Lakewood                      2,000

</TABLE>

----------
(1) The Company is paying rent in the aggregate amount of $17,000 per month with
respect to these locations where the Company signed leases, but has not yet
completed construction of restaurants.

Full-Service Restaurants

         The Company currently operates two Italian restaurants in Minnesota.
The Company's Italian restaurants range in size from 6,500 to 8,600 square feet.
Each seats between 70 and 100 customers in the lounge and between 110 and 220
customers in the dining area. One also offers outdoor patio dining on a seasonal
basis.



                                       2
<PAGE>


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

<TABLE>
<CAPTION>

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

<S>                       <C>                            <C>  
     September, 1984       Saint Paul, Minnesota             8,600
     October, 1991         Edina, Minnesota (1)              6,500

</TABLE>

----------
(1) The Company has entered into a letter of intent to sell the Edina restaurant
in October 1998.

         The Saint Paul restaurant is located in an urban area. The Edina
restaurant is located in a suburban area. The actual cost of opening an Italian
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 full-service restaurants in recent years
and has no plans to open any additional full-service restaurants in the future.
The Company sold six of its full-service restaurants during fiscal 1998. The
restaurants are located in Burnsville, Falcon Heights, Maplewood, St. Cloud, and
Woodbury, Minnesota and LaCrosse, Wisconsin. The sale of these restaurants
generated cash proceeds of $1,580,000 and notes receivable of $369,496. The gain
recognized on the sale of these restaurants sold was $1,076,342. The restaurants
sold are initially being operated as Ciatti's Italian Restaurants, however, the
new operators have the right to change the name. During fiscal 1998 and 1997,
the restaurants sold generated approximately $3,198,000 and $9,558,000 of sales,
$(288,000) and $204,000 of net earnings (loss) and $(229,000) and $609,000 of
cash flows (deficits) from operations.

         On July 13, 1998, the Company entered into an agreement whereby it was
released from its obligations under the capital lease at its Madison, Wisconsin,
location and the Company ceased operating this restaurant. As of June 28, 1998,
$341,813 was recorded as a capital lease obligation. In fiscal 1999 the
remaining capital lease obligation will be recorded as an extraordinary gain
from the early extinguishment of debt. The long-lived assets at this location
had been fully written-off in fiscal 1997. During fiscal 1998, this restaurant
generated approximately $939,000 of sales and $3,000 of net earnings and cash
flows from operations.

         During September 1998, the Company sold one of its remaining
full-service restaurants and entered into a letter of intent to sell an
additional restaurant in October 1998. The restaurants are located in Eden
Prairie and Edina, Minnesota. Debt obligations of $159,805 related to pledged
equipment included in the sale were paid during September 1998. The sale of
these restaurants will generate proceeds of approximately $950,000. The net book
value of the leasehold improvements and equipment as of June 28, 1998 at these
locations was $469,251. During fiscal 1998, these restaurants generated
approximately $3,475,000 of sales, $17,000 of net earnings and $192,000 of cash
flows from operations.

RESTAURANT FORMATS

         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 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.


                                       3

<PAGE>


Italian Restaurants

         The Company's full-service 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. These restaurants accept reservations
for a limited portion of their dining area. The St. Paul restaurant has a lounge
area, which has a full-service liquor license, available for customers waiting
to be seated for dining. 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 $3.99 to $9.99 at lunch, and $5.99 to $15.95 at dinner. During
fiscal year 1998, food sales comprised approximately 78% and beverage sales
comprised approximately 22% 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 the restaurants from 10:00
a.m. to 2:00 p.m. The 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.

FULL-SERVICE 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.

         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.


                                       4

<PAGE>


         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 Franchise Corporation ("Bruegger's"). Bruegger's has indicated that
as of February 2, 1998, directly or through franchises, it operates in 52
metropolitan markets in 32 states.

         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. Bruegger's has indicated that, as of
January 1, 1998, there were 423 Bruegger's Bagel Bakery restaurants open for
business, owned and operated by either Bruegger's or by franchisees. Although
Bruegger's is generally considered one of the largest bagel concepts 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.

         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 June 28, 1998, five
bagel bakeries were open in the north-central portion of the Dallas area, and
two were open 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,
including the initial franchise fee. 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. Bruegger's has agreed to waive the $20,000 initial franchise fee for all
Bruegger's Bagel Bakery restaurants opened in calendar 1998 and has agreed to
reduce franchise royalties during calendar 1998.

RELATIONSHIP WITH BRUEGGER'S

         The development by DFW of bagel bakeries is based upon franchise
documents entered into between DFW and Bruegger's. The principal documents are a
Development Agreement dated as of January 1, 1995, as amended through May 28,
1998, and franchise agreements pertaining to each existing bagel bakery.

         The Development Agreement, as amended, gives DFW 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 the exclusive right and obligation to develop thirty bagel bakeries within
the Development Area by July 1, 2002 on the following schedule:

<TABLE>
<CAPTION>

                                   Minimum number
                                 of bagel bakeries
                                 DFW must have in
       Deadline                operation by deadline
       --------                ---------------------
<S>                            <C>
     July 1, 1996                        4
     October 1, 1998                     9
     July 1, 1999                        14
     July 1, 2000                        19
     July 1, 2001                        24
     July 1, 2002                        30

</TABLE>


                                       5

<PAGE>



         As of June 28, 1998, DFW has seven bagel bakeries open. DFW expects to
open its eighth and ninth bagel bakeries during October 1998 and has requested a
waiver from Bruegger's.

         DFW 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 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, Premium
Restaurant Company agreed that any sales of its interest in DFW 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 Premium Restaurant Company
if Premium Restaurant Company's stock ceases to be publicly traded.

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

         The Development Agreement gives DFW 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 has a
right to act as distributor.

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

         The Development Agreement provides that DFW and Bruegger's will enter
into a predetermined franchise agreement for each bagel bakery opened by DFW.
Each franchise agreement grants DFW 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 with operation assistance and 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 operates a bagel bakery within such area it
must immediately become a member of the Coop. DFW'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
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
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 chooses to renew, the terms of the franchise agreement will
change to whatever terms are being offered new franchisees at the time of
renewal.

RELIANCE ON COMMISSARY OF BRUEGGER'S

         Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Bruegger's. 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. The Company expects to build its own commissary in calendar 1998.

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.


                                       6

<PAGE>


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 market. The Company's Italian restaurants
compete not only with other chain or locally owned restaurants with similar
menus, but also with other full-service restaurants.

         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 is 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. 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 portion of the
Company's Italian 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 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 implemented 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.


                                       7

<PAGE>


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. 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
Franchise Corporation. Under the terms of the Development Agreement, DFW 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 18, 1998 the Company employed approximately 450
persons, including 5 corporate employees, 29 restaurant and bakery managers and
assistant managers, and 416 hourly restaurant and bakery employees. Hourly
employees comprise approximately 92% 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.

<TABLE>
<CAPTION>

     Name                    Age                   Position
     ----                    ---                   --------
<S>                        <C>              <C>
Phillip R. Danford            49             President and Director

Barney U. Uhlig               58             Vice President for
                                             Administration and Secretary

</TABLE>

         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 may lease
equipment in the future.

         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 September 30, 1998, and the Company is
currently negotiating a lease with its landlord to move to the premises directly
across from its current location. The Company believes this facility will be
adequate to accommodate its administrative needs for the foreseeable future and
that it will be able to sign this lease with satisfactory terms or obtain
comparable space on satisfactory terms.


                                       8

<PAGE>


         The Company leases real estate and improvements for its restaurants.
The leases for its Italian restaurants provide for an initial term of ten or
twelve years. These leases 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 both restaurants, the Company also is
required to pay a percentage rate between 4% and 5.5% of sales in excess of
specified amounts if it meets certain predetermined sales levels. The Company
pays all real estate taxes, insurance, utilities and maintenance expenses for
its leased properties.

         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.


                                       9

<PAGE>


                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Until October 8, 1997 when it was delisted from the Nasdaq system, the
Company's common stock was traded on the Nasdaq SmallCap Market under the symbol
"CIAT." The common stock is now quoted on the Nasdaq OTC Bulletin Board under
the symbol "PRXC." The following table sets forth the range of high and low
prices for the Company's common stock in fiscal 1997 and 1998 on the Nasdaq
SmallCap Market and the Nasdaq OTC Bulletin Board. The prices listed below
indicate inter-dealer prices without retail mark up, mark down or commissions
and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>

FISCAL YEAR                                   LOW                  HIGH
-----------                                   ---                  ----

<S>                                          <C>                  <C>  
1998 First Quarter                           $0.62                $2.75
     Second Quarter                           1.25                 2.00
     Third Quarter                            1.25                1.625
     Fourth Quarter                          1.125                1.625

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

</TABLE>

         As of September 18, 1998, the Company had 310 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 1,845,939.

         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.


                                       10

<PAGE>


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

SELECTED CONSOLIDATED FINANCIAL DATA

Premium Restaurant Company and Subsidiary

 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                   Fifty-two or fifty-three weeks ended
                                                   ------------------------------------------------------------------
Consolidated Statements of                           June 28,      June 29,      June 30,       July 2,       July 3,
 Operations Data:                                     1998          1997          1996           1995          1994
                                                   ---------     ---------     ---------     ---------     ---------
<S>                                                <C>           <C>           <C>           <C>           <C>
Sales
 Full-service restaurants                          $   9,677     $  15,811     $  16,962     $  18,935     $  22,969
 Bagel bakeries                                        2,781         1,927           627          --            --
                                                   ---------     ---------     ---------     ---------     ---------

  Total sales                                         12,458        17,738        17,589        18,935        22,969

Cost of food and beverage                              3,971         5,371         5,191         5,781        6,848
                                                   ---------     ---------     ---------     ---------     ---------
 Gross profit                                          8,487        12,367        12,398        13,154        16,121

Operating expenses (income)
 Labor and benefits                                    4,553         6,304         6,145         6,266         7,383
 Direct and occupancy                                  5,226         6,625         6,375         5,722         7,039
 General and administrative                            1,191         1,305         1,305         1,054         1,347
 Write-down of impaired assets                            91           640            78          --            --
 Gain on sale of restaurants                          (1,076)         --            --            --            --
 Loss on closure of bagel bakery                          63          --            --            --            --
                                                   ---------     ---------     ---------     ---------     ---------
                                                      10,048        14,874        13,903        13,042        15,769
                                                   ---------     ---------     ---------     ---------     ---------
  Earnings (loss) from 
   operations                                         (1,561)       (2,507)       (1,505)          112           352
Other income (expense), net                             (212)          (69)          (18)           88            92
Income tax (expense) benefit                              (7)            7           160            (6)         (134)
                                                   ---------     ---------     ---------     ---------     ---------
  Net earnings (loss)                              $  (1,780)    $  (2,569)    $  (1,363)    $     194     $     310
                                                   ---------     ---------     ---------     ---------     ---------
                                                   ---------     ---------     ---------     ---------     ---------
Net earnings (loss) per share
  Basic                                            $   (1.81)    $   (3.46)    $   (1.85)    $     .27     $     .41
                                                   ---------     ---------     ---------     ---------     ---------
                                                   ---------     ---------     ---------     ---------     ---------
  Diluted                                          $   (1.81)    $   (3.46)    $   (1.85)    $     .26     $     .40
                                                   ---------     ---------     ---------     ---------     ---------
                                                   ---------     ---------     ---------     ---------     ---------
Weighted average number of shares
outstanding
  Basic                                              985,771       742,819       736,917       727,639       751,785
  Diluted                                            985,771       742,819       736,917       762,089       768,343

</TABLE>

<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:                     June 28,      June 29,      June 30,       July 2,       July 3,
 (at end of period)                                   1998           1997         1996           1995          1994
                                                    --------      --------      --------       -------       -------
<S>                                                 <C>           <C>          <C>           <C>           <C>      
Current assets                                      $  1,599      $  1,420     $   2,184     $   2,713     $   2,763
Current liabilities                                    2,754         3,292         2,569         1,969         2,201
Total assets                                           3,984         4,663         6,652         7,684         7,206
Long-term liabilities                                  1,210           765           908         1,179           665
Shareholders' equity                                $     20      $    606     $   3,175     $   4,536     $   4,340

</TABLE>


                                       11

<PAGE>



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

                             RESULTS OF OPERATIONS

              Comparison of Fifty-two Weeks Ended June 28, 1998 to
                      Fifty-two Weeks Ended June 29, 1997


Sales

         Consolidated sales for fiscal 1998 decreased $5,279,822, or 29.8%, to
$12,457,982 from fiscal 1997 consolidated sales of $17,737,804. The decrease in
consolidated sales during fiscal 1998 was due to a decline in sales at the
Company's full-service restaurants offset by an increase in sales at the
Company's bagel bakeries, as described below.

         Full-service restaurant sales of $9,677,065 for fiscal 1998 decreased
$6,134,305, or 38.8% from sales of $15,811,370 for the same period of fiscal
1997. This decrease in full-service restaurant sales was due, in part, to the
Company selling three of its full-service restaurants in the first quarter of
fiscal 1998, two of its full-service restaurants in the second quarter of fiscal
1998 and one of its full-service restaurants in the fourth quarter of fiscal
1998. In addition, this decrease in sales was due to the increased competition
of national chain restaurants in each of the markets in which the Company's
Italian restaurants operate. The Company expects competition to intensify and,
therefore, the Company's remaining restaurants will continue to face significant
pressure to maintain sales levels.

         Bagel bakery sales of $2,780,917 for fiscal 1998 increased $854,483, or
44.4%, over bagel bakery sales of $1,926,434 for fiscal 1997. This increase in
sales was primarily a function of the Company having seven bagel bakeries open
for all of fiscal 1998, while only having five bagel bakeries open for all of
fiscal 1997. The Company closed one of its bagel bakeries in November 1997. The
Company is required by its development agreement, as amended through May 28,
1998, to have nine stores open by October 1, 1998 and thirty stores open by July
1, 2002.

Cost of Food and Beverage

         The cost of food and beverage was 31.9% of sales in fiscal 1998, an
increase from the 30.3% of sales reported in fiscal 1997. These costs were up
due to the mix of the Company's business including a larger percentage of bagel
bakery sales, which have a slightly higher cost of food and beverage associated
with them. The Company does not expect the cost of food and beverage to increase
significantly in the future. The Company expects to construct a commissary in
calendar 1998 to lower the food and beverage costs associated with its bagel
bakeries and expects no change to the food and beverage costs at its
full-service restaurants.

Labor and Benefits

         Labor and benefit costs were 36.6% of sales in fiscal 1998, an increase
from the 35.5% of sales reported in fiscal 1997. This slight increase was
primarily due to the minimum wage increase that took effect on September 1,
1997. In response to this minimum wage increase, the Company implemented menu
price increases at its full-service restaurants, which took effect in October
1997 and May 1998. These increases have partially 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 42.0% of sales in fiscal 1998, an increase from the
37.3% reported last year. This increase was primarily due to the fact that the
Company is currently paying rent on four bagel bakery leases that are not yet
under construction. Bagel bakeries will not be constructed at these locations
until financing can be acquired. Secondly, the Company expensed the remaining
rental payments, which are due through April 2000, on its Valley Ranch bakery,
which was closed in November 1997. Additionally, the Company increased its
advertising and promotional costs at its full-service restaurants from 4.0% of
sales for fiscal 1997 to 5.1% of sales for fiscal 1998. The Company expects
advertising and promotional expenses at its full-service restaurants to decrease
to 4.0% of sales during fiscal 1999. 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. Lastly, direct and occupancy costs at the Company's
bagel bakeries were affected by fixed costs


                                       12

<PAGE>


such as rent and depreciation being spread across a lower sales base than at its
full-service restaurants. As sales at the Company's bagel bakeries increase in
the future, these fixed costs will decrease as a percent of sales.

General and Administrative

         General and administrative costs decreased $113,964 to $1,190,857 in
fiscal 1998 from $1,304,821 in fiscal 1997. In fiscal 1998 the Company incurred
lower wages due to the sale of six full-service restaurants. Also, the Company
had more professional fees that were expensed during fiscal 1997 than fiscal
1998 pertaining to its attempts to acquire financing for its bagel bakery
concept. This decrease in general and administrative costs was offset by the
Company incurring approximately $452,000 of general and administrative costs in
fiscal 1998 relating to the development of a corporate infrastructure at its
bagel bakery operation, as compared to only $344,000 of costs for the same
period last year. Additionally, general and administrative in fiscal 1997 were
reduced by the Company recording an $85,000 recovery of a bad debt expense.

Write-down of Impaired Assets

         During fiscal 1998, the Company recognized an impairment loss of
$90,732 for the long-lived assets at its Maplewood, Minnesota restaurant. The
Company determined that the geographic area this restaurant is located in could
no longer support two Italian restaurants (Ciatti's Italian Restaurant and a
competitor restaurant) in such close proximity to each other. In addition, the
Company attempted several advertising and promotional campaigns during fiscal
1998 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. Accordingly, the Company fully wrote off the long-lived assets at this
restaurant. During the fourth quarter of fiscal 1998, this restaurant was sold.

         Due to events occurring during fiscal year 1997, the Company recognized
an impairment loss of $640,286 for the long-lived assets at the Company's
Madison, Wisconsin restaurant. 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. As a result of the
projected operating losses and future cash flow deficits, the Company wrote off
the long-lived assets at this restaurant. In July 1998, this restaurant was
closed.

Gain on Sale of Restaurants

         The Company sold six of its full-service restaurants during fiscal
1998. The restaurants are located in Burnsville, Falcon Heights, Maplewood, St.
Cloud, and Woodbury, Minnesota and LaCrosse, Wisconsin. The sale of these
restaurants generated cash proceeds of $1,580,000 and notes receivable of
$369,496. The gain recognized on the sale of these restaurants sold was
$1,076,342. The restaurants sold are initially being operated as Ciatti's
Italian Restaurants, however, the new operators have the right to change the
name. During fiscal 1998 and 1997, the restaurants sold generated approximately
$3,198,000 and $9,558,000 of sales, $(288,000) and $204,000 of net earnings
(loss) and $(229,000) and $609,000 of cash flows (deficits) from operations.

Loss on Closure of Bagel Bakery

         The Company closed one of its bagel bakeries in fiscal 1998. The bakery
is located in Irving, Texas. This bakery was an experimental site, as it was
connected to a gas station and was only one-third the size of a standard bakery.
The Company determined it was unlikely that this bakery would generate the sales
necessary to achieve profitability. The equipment at this bakery was removed and
can be used at other bakeries. The Company recognized a loss of $63,039 on the
net book value of the leasehold improvements at the bakery.

Other Income (Expense), Net

         Other income (expense) increased to a net expense of $211,345 in fiscal
1998 from a net expense of $69,140 in fiscal 1997. The Company's interest
expense increased to $241,759 in fiscal 1998 from $105,460 in fiscal 1997 as a
result of higher debt in 1998 due primarily to the construction of the Company's
bagel bakeries and the sale-leaseback of certain equipment at its bagel
bakeries. In fiscal 1999, the Company expects interest expense will be higher
due the acquisition of debt to finance the construction of additional bagels
bakeries.


                                       13

<PAGE>


Income Taxes

         The income tax expense for fiscal 1998 was $7,349 as compared to an
income tax benefit of $7,633 in fiscal 1997. There were no tax benefits recorded
for the losses generated during fiscal 1998 and fiscal 1997. The Company's
fiscal 1998 tax expense was for state and franchise taxes paid during the year.
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.

         As of June 28, 1998, the Company has approximately $165,000 of
alternative minimum tax credit carryforwards and $4,677,000 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.

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 28, 1998, the Company had cash on hand of $885,087, which
represents an increase of $430,930 from the $454,157 in cash as of June 29,
1997. At June 28, 1998, the Company had a deficit in working capital of
$1,154,734 compared to a deficit in working capital of $1,871,619 at June 29,
1997.

         Net cash used in operating activities was $2,549,536 for fiscal 1998.
During fiscal 1998, the Company incurred a net loss of $1,780,221 which was net
of a gain of $1,076,342 from the sale of six of the Company's full-service
restaurants, a loss of $90,732 from the write-down of impaired assets at one of
the Company's full-service restaurants and a loss of $63,039 from the closure of
one of the Company's bagel bakeries. In addition, the Company reduced its
accounts payable balance by $650,855 during fiscal 1998 as a result of the sale
of the six full-service restaurants. These uses of cash were partially offset by
non-cash depreciation and amortization expense of $800,211.

         Net cash provided by investing activities was $1,540,813 during fiscal
1998, which is the net of cash proceeds of $1,580,000 generated from the sale of
six of the Company's full-service restaurants, $37,756 from collections on notes
receivable, and $76,943 for the purchase of leasehold improvements and
equipment.

         Net cash provided by financing activities was $1,439,653 during fiscal
1998. The net cash provided by financing activities consists of net proceeds of
$1,178,285 generated from the Company's unit offering, borrowings from the
Chairman of the Board of Directors of the Company of $300,000, borrowings of
$159,390 from a note offering commenced in June 1997, and borrowings of $469,555
from sale-leasebacks on equipment at the Company's existing bagel bakeries.
These borrowings were partially offset by payments of $237,620 to the Company's
equipment vendor, $125,000 to the Company's construction company, $211,186 for
other debt financing, and $93,771 for deferred financing costs.


                                       14

<PAGE>


         DFW Bagels, Inc. ("DFW Bagels"), a wholly-owned subsidiary of Premium
Restaurant Company, has entered into an exclusive development agreement with
Bruegger's Franchise Corporation ("Bruegger's"). The development agreement
requires DFW Bagels to have nine stores open by October 1, 1998 and 30 stores
open by July 1, 2002. As of June 28, 1998, DFW Bagels has seven bagel bakeries
open. DFW Bagels expects to open its eighth and ninth bagel bakeries in October
1998 and has requested a waiver from Bruegger's. 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
pre-opening expenses and the initial franchise fee.

         The Company is working with the owners of Bruegger's to provide the
Company with additional working capital and to increase sales at the Company's
bagel bakeries. The owners of Bruegger's have agreed to waive the initial
franchise fee and reduce franchise royalties for all Bruegger's Bagel Bakery
restaurants through calendar 1998.

         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.

         During fiscal 1998, the Company re-financed through sale-leaseback
transactions, equipment at five of its existing bagel bakeries. The five
bakeries were originally financed through the Company's cash reserves. The
funded amount of $469,555 was in excess of the book value of the equipment
thereby creating a deferred gain of $132,258, which is being amortized over the
remaining useful life of the equipment. The lease terms are for sixty months
expiring in March 2003 and have monthly obligations of approximately $12,000.
The leases have been recorded as capital leases. The Company has and is
continuing to explore several alternatives for lease financing and equipment
financing for its bagel bakeries including additional sale and lease-back
financing arrangements with respect to its existing bagel bakeries and
full-service restaurant.

         As of June 28, 1998, the Company has borrowed $400,000 from the
Chairman of the Board of Directors of the Company, pursuant to an unsecured
promissory note due December 31, 1998. Although the Company may borrow
additional amounts from Mr. Danford, there are no agreements between Mr. Danford
and the Company with respect to future financing or any guarantee that such
funds will be available.

         The Company sold six of its full-service restaurants during fiscal
1998. The restaurants are located in Burnsville, Falcon Heights, Maplewood, St.
Cloud, and Woodbury, Minnesota and LaCrosse, Wisconsin. The sale of these
restaurants generated cash proceeds of $1,580,000 and notes receivable of
$369,496. The gain recognized on the sale of these restaurants sold was
$1,076,342. The restaurants sold are initially being operated as Ciatti's
Italian Restaurants, however, the new operators have the right to change the
name. During fiscal 1998 and 1997, the restaurants sold generated approximately
$3,198,000 and $9,558,000 of sales, $(288,000) and $204,000 of net earnings
(loss) and $(229,000) and $609,000 of cash flows (deficits) from operations.

         On July 13, 1998, the Company entered into an agreement whereby it was
released from its obligations under the capital lease at its Madison, Wisconsin,
location and the Company ceased operating this restaurant. As of June 28, 1998,
$341,813 was recorded as a capital lease obligation. In fiscal 1999 the
remaining capital lease obligation will be recorded as an extraordinary gain
from the early extinguishment of debt. The long-lived assets at this location
had been written-off in fiscal 1997. During fiscal 1998, this restaurant
generated approximately $939,000 of sales and $3,000 of net earnings and cash
flows from operations.

         During September 1998, the Company sold one of its remaining
full-service restaurants and entered into a letter of intent to sell an
additional restaurant in October 1998. The restaurants are located in Eden
Prairie and Edina, Minnesota. Debt obligations of $159,805 related to pledged
equipment included in the sale were paid during September 1998. The sale of
these restaurants will generate proceeds of approximately $950,000. The net book
value of the leasehold improvements and equipment as of June 28, 1998 at these
locations was $469,251. During fiscal 1998, these restaurants generated
approximately $3,475,000 of sales, $17,000 of net earnings and $192,000 of cash
flows from operations.


                                       15

<PAGE>


          The Company filed a registration statement with the Securities and
Exchange Commission for a unit offering of common stock and warrants with a
minimum requirement of $600,000 (480,000 units) and a maximum of $2,500,000
(2,000,000 units) effective February 23, 1998. Each unit ("Unit") consists of
one share of the Company's common stock and one Redeemable Common Stock Purchase
Warrant ("Warrant"). One Warrant entitles the holder to purchase, at any time
until March 31, 2000, one share of common stock at a price of $1.875. Beginning
January 1, 1999, the Warrants are redeemable, in whole, by the Company at a
redemption price of $.05 per Warrant on not less than 30 days written notice,
provided that the market price of the common stock exceeds $3.50 per share
(subject to adjustment) for any 20 consecutive trading days within 15 days prior
to such notice.

         As of June 28, 1998, the Company has issued 1,090,220 Units, of which
400,000 were purchased by a director of the Company. None of the Warrants have
been exercised as of June 28, 1998. Subsequent to June 28, 1998 and through
September 18, 1998, the Company has issued 12,900 additional Units.

         The Company plans to finance its working capital and capital resource
needs with its current cash, proceeds from the sale of its full-service
restaurants and proceeds from its current and future debt and equity financing.
The Company has and is continuing to explore several alternatives for lease
financing and equipment financing for its bagel bakeries.

         The Company has continued to recognize losses from its bagel bakeries
and has funded those losses from cash flows generated from its full-service
restaurants and proceeds generated from the sale of certain of its full-service
restaurants. The Company needs to acquire additional financing to continue to
fund its operations of the bagel bakeries and enable it to build additional
bagel bakeries. If the Company is unable to successfully raise funds from the
unit offering in a timely manner, it will be necessary for it to raise
additional capital through other means of financing. There can be no 
assurance that the Company can raise additional funds. If the Company is 
unable to complete the Unit Offering in a timely manner or is unable to 
obtain adequate funds from other sources, it will have a material adverse 
effect on the Company.

         The Company does not expect Year 2000 computer issues to significantly
affect its operations. The Company is reviewing internally developed programs
for compliance and is contacting external software vendors and other suppliers
regarding compliance. The Company has not yet made an estimate of the costs
involved, but does not expect such costs to be material.

Forward Looking Statements

         Statements included in this 10-KSB 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.


                                       16

<PAGE>


ITEM 7.  FINANCIAL STATEMENTS

     1.  Financial Statements.  The following financial statements of the
         Company are included herein.

         Report of Independent Certified Public Accountants

         Consolidated Balance Sheet as of June 28, 1998.

         Consolidated Statements of Operations for the fifty-two weeks ended
         June 28, 1998 and June 29, 1997.

         Consolidated Statements of Shareholders' Equity for the fifty-two weeks
         ended June 28, 1998 and June 29, 1997.

         Consolidated Statements of Cash Flows for the fifty-two weeks ended
         June 28, 1998 and June 29, 1997.

         Consolidated Notes to Financial Statements for the fifty-two weeks
         ended June 28, 1998 and June 29, 1997.


                                       17

<PAGE>



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
Premium Restaurant Company and Subsidiary

         We have audited the accompanying consolidated balance sheet of Premium
Restaurant Company and Subsidiary as of June 28, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the fifty-two week periods ended June 28, 1998 and June 29, 1997. 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 Premium
Restaurant Company and Subsidiary as of June 28, 1998, and the consolidated
results of their operations and their consolidated cash flows for the fifty-two
week periods ended June 28, 1998 and June 29, 1997, in conformity with generally
accepted accounting principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note B to the
financial statements, the Company is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note B. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
August 24, 1998 (except for note M, as
 to which the date is September 21, 1998)


<PAGE>


                    Premium Restaurant Company and Subsidiary

                           CONSOLIDATED BALANCE SHEET

                                  JUNE 28, 1998

<TABLE>

<S>                                                          <C>
 ASSETS
CURRENT ASSETS
Cash                                                          $     885,087
 Receivables                                                         58,148
 Current portion of notes receivable                                 82,120
 Inventories                                                         82,294
 Prepaid expenses and other current assets                           22,186
 Assets held for sale                                               469,251
                                                              --------------
 Total current assets                                             1,599,086

PROPERTY AND EQUIPMENT

Leasehold improvements                                           2,149,782
 Equipment                                                       1,858,690
 Automobiles                                                        15,060
                                                              --------------
                                                                 4,023,532
 Less accumulated depreciation and amortization                 (1,978,381)
                                                              --------------
                                                                 2,045,151

OTHER ASSETS

 Notes receivable, less current portion                            249,620
 Deferred financing costs                                           89,820
                                                              --------------
                                                              $  3,983,677
                                                              --------------
                                                              --------------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

Current maturities of long-term obligations
 Related party                                                $   400,000
 Other                                                            761,927
 Accounts payable                                                 718,435
 Accrued salaries and wages                                       197,779
 Other accrued liabilities                                        675,679
                                                              --------------
 Total current liabilities                                      2,753,820

LONG-TERM OBLIGATIONS, less current maturities                  1,047,647

OTHER LONG-TERM LIABILITIES                                       161,983

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 1,833,039 shares                  18,330
 Additional paid-in capital                                     5,518,651
 Accumulated deficit                                           (5,516,754)
                                                              --------------
                                                                   20,227
                                                              --------------
                                                              $ 3,983,677
                                                              --------------
</TABLE>

        The accompanying notes are an integral part of these statements.



                                       19
<PAGE>


                    PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997

<TABLE>
<CAPTION>
                                                                1998                1997
                                                           -------------        ------------
<S>                                                        <C>                  <C>
Sales
 Full-service restaurants                                  $  9,677,065          $15,811,370
 Bagel bakeries                                               2,780,917            1,926,434
                                                           -------------        ------------
  Total sales                                                 12,457,982          17,737,804

Cost of food and beverage                                      3,971,327           5,371,297
                                                           -------------        ------------

  Gross profit                                                 8,486,655          12,366,507

Operating expenses (income)
 Labor and benefits                                            4,553,493           6,304,321
 Direct and occupancy                                          5,226,403           6,624,350
 General and administrative                                    1,190,857           1,304,821
 Write-down of impaired assets                                    90,732             640,286
 Gain on sale of restaurants                                  (1,076,342)                -
 Loss on closure of bagel bakery                                  63,039                 -
                                                           -------------        ------------
                                                              10,048,182          14,873,778
                                                           -------------        ------------

 Loss from operations                                         (1,561,527)         (2,507,271)

Other income (expense)
 Interest expense                                               (241,759)           (105,460)
 Investment income                                                23,880              18,097
 Other, net                                                        6,534              18,223
                                                           -------------        ------------
                                                                (211,345)            (69,140)
                                                           -------------        ------------

 Loss before income taxes                                     (1,772,872)         (2,576,411)

Income taxes                                                      (7,349)              7,633
                                                           -------------        ------------

 Net loss                                                   $ (1,780,221)       $ (2,568,778)
                                                           -------------        ------------
                                                           -------------        ------------
Net loss per share - basic and diluted                      $      (1.81)       $      (3.46)
                                                           -------------        ------------
                                                           -------------        ------------

Weighted average number of
 shares outstanding during the year - basic and diluted          985,771             742,819
                                                           -------------        ------------
                                                           -------------        ------------

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       20

<PAGE>


                    PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997

<TABLE>
<CAPTION>

                                                     Common stock                
                                                 ----------------------          Additional                           Total
                                                                  Par             paid-in        Accumulated      shareholders'
                                                 Shares          value            capital          deficit           equity
                                                 ------          -----           ----------      -----------      -------------
<S>                                            <C>             <C>               <C>             <C>              <C>
 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

 Issuance of common stock, net of             1,090,220          10,902           1,183,437                -         1,194,339
  expenses of $168,436

      Net loss                                        -               -                   -       (1,780,221)       (1,780,221)
                                              ----------       ---------         -----------     ------------      ------------
 Balance at June 28, 1998                     1,833,039         $18,330          $5,518,651      $(5,516,754)      $    20,227
                                              ----------       ---------         -----------     ------------      ------------
                                              ----------       ---------         -----------     ------------      ------------

</TABLE>

        The accompanying notes are an integral part of these statements.



                                       21

<PAGE>


                    PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


<TABLE>
<CAPTION>

                                                                1998                1997
                                                            ------------        -----------
<S>                                                         <C>                <C>          
Operating activities:
  Net loss                                                   $(1,780,221)       $ (2,568,778)
  Adjustment to reconcile net loss to net cash
   used in operating activities:
  Depreciation and amortization                                  800,211           1,002,942
  Write-down of impaired assets                                   90,732             640,286
  Gain on sale of restaurants                                 (1,076,342)                -
  Loss on closure of bagel bakery                                 63,039                 -
  Recovery of note receivable                                        -               (85,000)
  Other                                                           29,725                 -
  Changes in operating assets and liabilities
   net of the effects of the sale of restaurants:
   Receivables                                                    14,782             (21,427)
   Income taxes receivable                                            -              165,576
   Inventories                                                     4,808              38,240
   Prepaid expenses and other current assets                      61,388              95,617
   Accounts payable                                             (650,855)             43,012
   Accrued salaries and wages                                   (124,292)             15,223
   Other accrued liabilities                                      17,489             (31,946)
                                                            ------------        -----------
    Net cash used in operating  activities                    (2,549,536)           (706,255)

Investing activities:
 Purchase of leasehold improvements and equipment                (76,943)           (499,320)
 Proceeds from sale of restaurants                             1,580,000                 -
 Collections on notes receivable                                  37,756              85,000
                                                            ------------        -----------
  Net cash provided by (used in)
   investing activities                                        1,540,813            (414,320)

Financing activities:
 Proceeds from long-term obligations                             928,945             173,000
 Payments on long-term obligations                              (573,806)           (201,204)
 Proceeds from issuance of common stock, net                   1,178,285                 -
 Deferred financing costs                                        (93,771)                -
                                                            ------------        -----------
  Net cash provided by (used in)
   financing activities                                        1,439,653             (28,204)
                                                            ------------        -----------
Net increase (decrease) in cash                                  430,930          (1,148,779)

Cash at beginning of fiscal year                                 454,157           1,602,936
                                                            ------------        -----------
Cash at end of fiscal year                                   $   885,087        $    454,157
                                                            ------------        -----------
                                                            ------------        -----------

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       22

<PAGE>


                    PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997

<TABLE>
<CAPTION>

                                                            1998         1997
                                                         ---------    ---------
<S>                                                      <C>          <C>      
Supplemental disclosures of cash flow information
Cash paid during the year for:
 Interest                                                $ 141,218    $ 105,213
 Income taxes                                                7,349        5,000

Supplemental schedule of noncash investing and 
 financing activities:

  Leasehold improvements acquired by issuance
   of long-term obligations                              $ 163,587    $ 566,485
  Issuance of common stock through conversion of
   subordinated notes payable                               16,054            -
  Interest payable converted to long-term obligations       62,628            -

</TABLE>

        The accompanying notes are an integral part of these statements.


                                       23

<PAGE>


                    PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997

NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation

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

    Nature of Business

    The Company owns and operates four full-service restaurants in Minnesota and
    Wisconsin. Included in these full-service restaurants are three Italian
    restaurants operating in Minnesota 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 28, 1998, one Italian full-service restaurant was sold,
    the Company entered into a letter of intent to sell an additional restaurant
    and the steakhouse was closed (note M).

    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 K). 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

    The Company has approximately $791,000 deposited at one financial
    institution at June 28, 1998.

    Inventories

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

                                       24

<PAGE>


                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

    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 H).

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

<TABLE>
<CAPTION>

                                          Years
                                          -----
<S>                                      <C>
    Leasehold improvements               5 - 10
    Equipment                            3 - 10
    Automobiles                            3

</TABLE>

    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.

    Deferred Financing Costs

    Deferred financing costs consist of expenditures incurred in connection with
    obtaining financing and are being amortized over five years, the terms of
    the related loans. Accumulated amortization as of June 28, 1998 was $3,951.


                                       25

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


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 $629,507 and $790,407 for fiscal 1998
    and 1997.

    Employee Stock Options

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

    Net Earnings (Loss) Per Share - Basic and Diluted

    On December 28, 1997, the Company adopted Statement of Financial Accounting
    Standards (SFAS) 128, "Earnings per Share." The statement requires
    restatement of all current and prior year per share data.

    The Company's basic net earnings (loss) per share amounts are computed by
    dividing net earnings (loss) by the weighted average number of outstanding
    common shares. The Company's diluted net earnings per share amounts are
    computed by dividing net earnings by the weighted average number of
    outstanding common shares and common share equivalents relating to stock
    options and warrants, when dilutive. Options to purchase 42,324 and 64,053
    shares of common stock with a weighted average exercise price of $2.70 and
    $2.53 were outstanding during fiscal 1998 and 1997, but were excluded from
    the computation of common share equivalents because they were anti-dilutive.
    Warrants to purchase 1,090,220 shares of common stock with a weighted
    average exercise price of $1.875 were outstanding as of June 28, 1998, but
    were excluded from the computation of common share equivalents because they
    were anti-dilutive.

    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.


                                       26

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE A  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  -  Continued

    Recently Issued Accounting Standards

    The Financial Accounting Standard Board has 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.

NOTE B  -  GOING CONCERN

    The accompanying financial statements have been prepared on a going concern
    basis, which contemplates the realization of assets and the satisfaction of
    liabilities in the normal course of business. As shown in the financial
    statements during fiscal years 1998 and 1997, the Company incurred losses of
    $1,780,221 and $2,568,778 and as of June 28, 1998, the Company has a working
    capital deficit of $1,154,734. In addition to funding the working capital
    deficit, the Company is obligated to develop bagel bakeries pursuant to its
    development agreement with Bruegger's (note K). These factors raise a
    substantial doubt about the Company's ability to continue as a going
    concern. The consolidated financial statements do not include any
    adjustments that might result from the outcome of this uncertainty.


                                       27

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE B  -  GOING CONCERN  -  Continued

    The retail bagel segment is an emerging concept, the long-term appeal and
    potential of which have not yet been fully determined. Management believes
    that future growth in sales and profits will depend to a substantial extent
    on the Company's ability to increase the number of its bagel bakeries.
    Management also believes that the Company's ability to successfully expand
    its bagel bakery operations will depend upon a number of factors, including
    the availability and cost of suitable locations, the hiring, training and
    retention of skilled restaurant management and personnel, the ability of the
    Company to generate funds from operations, obtain adequate financing on
    favorable terms or to obtain cash concessions from landlords, the
    competitive environment, and the ability to obtain the necessary
    governmental permits and approvals. There can be no assurance that the
    Company will be able to open new bagel bakeries and, if opened, that those
    restaurants can be operated profitably or that the opening of any new
    locations will not result in reduced sales at existing bagel bakeries.

    Under the development agreement, the Company is required to have nine bagel
    bakeries open prior to October 1, 1998 and to have open a total of thirty
    bagel bakeries prior to July 1, 2002. The Company is in the process of
    attempting to raise funds to open the additional bagel bakeries and to fund
    its working capital needs. The Company has a registration statement filed
    with the Securities and Exchange Commission (SEC) for the sale of equity
    pursuant to a unit offering (note F). Additionally, subsequent to year-end,
    the Company was released from a capital lease obligation of $341,813, sold
    one full-service restaurant and entered into a letter of intent to sell a
    second full-service restaurant generating proceeds of approximately $950,000
    (note M). The Company has also obtained a commitment from a lender for the
    financing of ten bagel bakeries and the construction of a commissary.
    Finally, the Company is exploring the possible sale of its remaining
    full-service restaurant.

NOTE C  -  SALE-LEASEBACK OF BAGEL BAKERY EQUIPMENT

    During fiscal 1998, the Company re-financed equipment at five of its
    existing bagel bakeries through sale-leaseback transactions. The funded
    amount of $469,555 was in excess of the book value of the equipment thereby
    creating a deferred gain of $132,258 which is being amortized over the
    remaining useful life of the equipment. The lease terms are for sixty months
    expiring through March 2003, and have an aggregate monthly obligation of
    approximately $12,000. The leases have been recorded as capital leases.


                                       28

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE D  -  LONG-TERM OBLIGATIONS

<TABLE>
<S>                                                                                  <C>
    Long-term obligations at June 28, 1998 consist of the following:

    Unsecured notes payable to a director and shareholder; interest at 10.5%
    (interest expense of $37,190 and $2,260 was incurred during fiscal 1998 and
    1997); payable in quarterly installments through December 31, 1998               $   400,000

    Unsecured note payable to a construction company; interest at prime plus 3%
    (effective rate of 11.5%); payable in monthly installments through 
    June 2000                                                                            430,080

    Note payable to a financial institution, collateralized by inventory,
    receivables and property; interest at 11.5%; note paid in full in September
    1998 (note M)                                                                        159,805

    Notes payable to a financial institution, collateralized by certain property
    and equipment; interest at 10.5%; payable in monthly installments through
    May 2001                                                                             245,930

    Subordinated notes payable, interest at 9% and 9.25% payable semi-annually
    on January 1 and July 1, due through October 2000                                    177,336

    Obligations under capital leases (notes E and M)                                     796,423
                                                                                       ----------
                                                                                       2,209,574
    Less current maturities                                                           (1,161,927)
                                                                                       ----------
                                                                                     $ 1,047,647
                                                                                       ----------
                                                                                       ----------

</TABLE>


                                       29

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE D  -  LONG-TERM OBLIGATIONS  -  Continued

    Aggregate maturities of long-term obligations are as follows:

<TABLE>
<CAPTION>

            Fiscal year ending
            ------------------
<S>                                     <C>
               1999                        $1,161,927
               2000                           411,536
               2001                           223,898
               2002                           170,707
               2003                           138,901
               Thereafter                     102,605
                                           -----------
                                           $2,209,574
                                           -----------
                                           -----------

</TABLE>


    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 28, 1998.

NOTE E  -  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 fiscal 1997, the building under capital
    lease was fully written off (note H) and during July 1998 the Company was
    released from its obligations under the capital lease (note M).


                                       30

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE E  -  LEASES  -  Continued

    Future minimum lease payments under noncancelable operating leases and the
    present value of future minimum capital lease payments as of June 28, 1998
    are:

<TABLE>
<CAPTION>

 Fiscal year ending                                        Capital
-----------------------                     Operating      leases
                                             leases       (note M)
                                          ------------  ------------
<S>                                       <C>           <C>
      1999                                $   881,055   $  214,616
      2000                                    826,127      214,616
      2001                                    779,336      214,616
      2002                                    749,900      214,616
      2003                                    497,815      156,954
      Thereafter                              985,227      110,931
                                          ------------  ------------
 Total minimum lease payments              $4,719,460    1,126,349
                                          ------------
                                          ------------

 Less amount representing interest
 imputed at rates of 15% - 21.83%                          329,926
                                                        ------------
                                                        ------------
 Present value of net minimum capital
 lease payments                                         $  796,423
                                                        ------------
                                                        ------------

</TABLE>

    Rent expense under noncancelable operating leases was $1,203,803 and
    $1,398,718 during fiscal years 1998 and 1997.

    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 1998 or 1997. Real estate taxes, insurance and maintenance
    expense are generally obligations of the Company and, accordingly, are not
    included as part of the rental payment.


                                       31

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE F  -  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 1998 and
    1997.

    A summary of the Company's stock option transactions during fiscal 1998 and
    1997 is as follows:

<TABLE>
<CAPTION>

                                                   1998                    1997
                                           --------------------    --------------------
                                                       Weighted                Weighted
                                                       Average                 Average
                                                       Exercise                Exercise
                                            Shares      Price       Shares      Price
                                           --------   ---------    --------    --------
<S>                                         <C>         <C>         <C>         <C>  
    Outstanding at beginning of year        58,391      $2.58       66,171      $2.50
      Granted                                1,500       1.25        1,500       3.00
      Forfeited                            (14,938)      2.26       (9,092)      2.19
      Expirations                          (10,000)      1.95         (188)      2.20
                                           --------                 -------

      Outstanding at end of year            34,953      $2.84       58,391      $2.58
                                           --------                 -------
                                           --------                 -------
      Options exercisable at end of year    27,876      $2.87       40,493      $2.57
                                           --------                 -------
                                           --------                 -------
      Weighted average fair value of
       options granted during the year                 $ .76                    $1.80

</TABLE>


                                       32

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE F  -  SHAREHOLDERS' EQUITY  -  Continued

    The following applies to options that are outstanding at June 28, 1998:

<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>    
    $1.25 - $1.75      18,503       3 years     $  1.63      16,351       $  1.67
        $2.00           4,750       5 years        2.00       3,750          2.00
    $3.00 - $3.32       7,000       6 years        3.11       3,975          3.14
    $5.00 - $5.50       2,750       4 years        5.27       1,850          5.16
       $8.00            1,200       3 years        8.00       1,200          8.00
       $18.00             750        1 year       18.00         750         18.00
                       ------                                ------
                       34,953                                27,876
                       ------                                ------
                       ------                                ------

</TABLE>

    The Company uses the intrinsic value based method of accounting for its
    employee stock options. Had the fair value method been used for valuing
    options granted in fiscal 1998 and 1997, the effect on the Company's fiscal
    1998 and 1997 pro forma net loss would not have been material. 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 1998 and 1997: zero dividend yield; expected
    volatility of 54.05 percent and 49.76 percent; risk-free interest rates of
    5.34 percent and 6.63 percent; and expected lives of seven years.


                                       33

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE F  -  SHAREHOLDERS' EQUITY  -  Continued

    Public Offering

    The Company filed a registration statement with the SEC for a unit offering
    of common stock and warrants with a minimum requirement of $600,000 (480,000
    units) and a maximum of $2,500,000 (2,000,000 units) effective February 23,
    1998. Each unit ("Unit") consists of one share of the Company's common stock
    and one Redeemable Common Stock Purchase Warrant ("Warrant"). One Warrant
    entitles the holder to purchase, at any time until March 31, 2000, one share
    of common stock at a price of $1.875. Beginning January 1, 1999, the
    Warrants are redeemable, in whole, by the Company at a redemption price of
    $.05 per Warrant on not less than 30 days written notice, provided that the
    market price of the common stock exceeds $3.50 per share (subject to
    adjustment) for any 20 consecutive trading days within 15 days prior to such
    notice.

    As of June 28, 1998, the Company has issued 1,090,220 Units, of which
    400,000 were purchased by a director of the Company. None of the Warrants
    have been exercised as of June 28, 1998. Subsequent to June 28, 1998 and
    through August 24, 1998, the Company has issued 10,200 additional Units.

NOTE G - 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, 1998 and 1997, 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.


                                       34

<PAGE>

                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE H  -  IMPAIRMENT OF ASSETS

    During fiscal 1998, the Company recorded an impairment loss of $90,732 for
    the long-lived assets at its Maplewood, Minnesota restaurant. The Company
    determined that the geographic area this restaurant is located in could no
    longer support two Italian restaurants (Ciatti's Italian Restaurant and a
    competitor restaurant) in such close proximity to each other. The Company
    attempted several advertising and promotional campaigns during fiscal 1998
    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. Accordingly, the Company wrote off the long-lived assets
    at this restaurant. During the fourth quarter of fiscal 1998, this
    restaurant was sold (note I).

    Due to events occurring during fiscal year 1997, the Company recognized an
    impairment loss of $640,286 for the long-lived assets at the Company's
    Madison, Wisconsin restaurant. 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. As a result of
    the projected operating losses and future cash flow deficits, the Company
    wrote off the long-lived assets at this restaurant. In July 1998, this
    restaurant was closed (note M).

NOTE I  -  GAIN ON SALE OF RESTAURANTS

    The Company sold six of its full-service restaurants during fiscal 1998. The
    restaurants are located in Burnsville, Falcon Heights, Maplewood, St. Cloud,
    and Woodbury, Minnesota and LaCrosse, Wisconsin. The sale of these
    restaurants generated cash proceeds of $1,580,000 and notes receivable of
    $369,496. The gain recognized on the sale of these restaurants sold was
    $1,076,342. The restaurants sold are initially being operated as Ciatti's
    Italian Restaurants, however, the new operators have the right to change the
    name. During fiscal 1998 and 1997, the restaurants sold generated
    approximately $3,198,000 and $9,558,000 of sales, $(288,000) and $204,000 of
    net earnings (loss) and $(229,000) and $609,000 of cash flows (deficits)
    from operations.

    The Company remains contingently liable for future lease payments for five
    of the restaurants sold. The leases have termination dates through 2007. The
    aggregate amount of contingent lease payments was approximately $2,200,000
    as of June 28, 1998.


                                       35

<PAGE>


                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE I  -  GAIN ON SALE OF RESTAURANTS  -  Continued

    The interest rates on the notes receivable range from 7.5% to 10.5% and
    require monthly payments through November 2002.

NOTE J  -  INCOME TAXES

    Income tax expense (benefit) consists of the following for the years ending
    June 28, 1998 and June 29, 1997:

<TABLE>
<CAPTION>

                                1998                 1997
                              --------             --------
<S>                           <C>                  <C>
    Current
     Federal                  $   -                $(14,658) 
     State                     7,349                  7,025 
    Deferred                      -                      -
                              --------             --------
                              $7,349               $ (7,633)
                              --------             --------
                              --------             --------

</TABLE>

    The actual income tax expense (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 for the years ending June 28, 1998 and
    June 29, 1997:

<TABLE>
<CAPTION>

                                                               1998                1997
                                                            -----------        ------------
<S>                                                         <C>                <C>         
    Computed "expected" tax benefit                         $(602,776)         $ (875,980) 
    State income taxes, net of federal tax effect             (52,911)           (114,697) 
    Expiration of general business credit carryforward         57,028                -     
    Change in valuation allowance                             601,000           1,035,000  
    Other                                                       5,008             (51,956) 
                                                            -----------        ------------
     Actual income tax expense (benefit)                    $   7,349          $   (7,633) 
                                                            -----------        ------------
                                                            -----------        ------------

</TABLE>

    At June 28, 1998, the Company has approximately $165,000 of alternative
    minimum tax credit carryforwards available to reduce income taxes payable in
    future years. These credits are available for carryforward until fully
    utilized. The Company has approximately $4,677,000 of net operating loss
    carryforwards which expire through the year 2013. The utilization of the
    carryforwards may be limited if there are significant changes in the
    ownership of the Company.


                                       36

<PAGE>


                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE J  -  INCOME TAXES  -  Continued

    The components of deferred tax assets (liabilities) were comprised of the
    following as of June 28, 1998 and June 29, 1997:

<TABLE>
<CAPTION>

                                                      1998             1997
                                                 -------------    -------------
<S>                                              <C>              <C>
    Deferred tax assets:
     Tax credit carryforwards                    $    165,000     $   222,000
     Net operating loss carryforwards               1,797,000       1,076,000
     Gift certificates                                 95,000         154,000
     Capital lease obligation                         137,000         151,000
     Other                                            101,000          87,000
                                                 -------------    -------------
    Total deferred tax assets                       2,295,000       1,690,000

    Deferred tax liabilities:
     Fixed asset differences                          (14,000)        (10,000)
                                                 -------------    -------------
      Net deferred tax asset before
       valuation allowance                          2,281,000       1,680,000
    Valuation allowance                            (2,281,000)     (1,680,000)
                                                 -------------    -------------
     Net deferred tax asset                      $       -        $       -
                                                 -------------    -------------
                                                 -------------    -------------

</TABLE>

NOTE K  -  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 last amended on May 28, 1998, requires DFW Bagels to have
    open nine bagel bakeries by October 1, 1998 and thirty bagel bakeries open
    by July 1, 2002. As of June 28, 1998, DFW Bagels has seven bagel bakeries
    open. The Company expects to open its eighth and ninth bagel bakeries during
    October 1998 and has requested a waiver from Bruegger's.


                                       37

<PAGE>


                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


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

    Under the initial agreement, each bakery has a separate franchise agreement
    which required 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 was 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 amended
    development agreement, the $20,000 fee has been waived for any stores opened
    between January 1, 1998 and December 31, 1998, and for all stores the 5%
    royalty fee was reduced to 2% from January through March, 3% from April
    through June, 4% from July through September, and 5% for September through
    December of 1998. Additionally, for all stores, the 2% advertising fund was
    reduced to 0.5% from January 1, 1998 to December 31, 1998 with DFW Bagels
    expending 3.5% of bagel bakery 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.

    The Company obtains its bagel dough and other food supplies for its bagel
    bakeries from a commissary owned by Bruegger's 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.


                                       38

<PAGE>


                   PREMIUM RESTAURANT COMPANY AND SUBSIDIARY

             CONSOLIDATED NOTES TO FINANCIAL STATEMENTS - CONTINUED

          FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1998 AND JUNE 29, 1997


NOTE L  -  CONSULTING AGREEMENT

    In January 1998, the Company entered into a consulting agreement with Select
    Investor Relations Corporation ("Select") under which Select agreed to
    provide a variety of consulting services to the Company, including assisting
    the Company in developing a business plan, providing public relations
    activities for the Company, increasing the Company's visibility in the
    marketplace and assisting the Company in locating sources of debt and equity
    financing. Under the terms of the agreement, the Company agreed to pay
    Select an initial fee of $29,500, plus monthly fees of $26,042 for a period
    of one year. The Company has also agreed that upon its achieving the minimum
    and maximum proceeds from the Unit offering (note F), it will prepay certain
    of the amounts due under the agreement.

NOTE M  -  SUBSEQUENT EVENTS

    On July 13, 1998, the Company entered into an agreement whereby it was
    released from its obligations under the capital lease at its Madison,
    Wisconsin, location and the Company ceased operating this restaurant. As of
    June 28, 1998, $341,813 was recorded as a capital lease obligation. In
    fiscal 1999 the remaining capital lease obligation will be recorded as an
    extraordinary gain from the early extinguishment of debt. The long-lived
    assets at this location had been fully written-off in fiscal 1997 (note H).
    During fiscal 1998, this restaurant generated approximately $939,000 of
    sales and $3,000 of net earnings and cash flows from operations.

    During September 1998, the Company sold one of its remaining full-service
    restaurants and entered into a letter of intent to sell an additional
    restaurant in October 1998. The restaurants are located in Eden Prairie and
    Edina, Minnesota. Debt obligations of $159,805 related to pledged equipment
    included in the sale were paid during September 1998. The sale of these
    restaurants will generate proceeds of approximately $950,000. The net book
    value of the leasehold improvements and equipment as of June 28, 1998 at
    these locations was $469,251. During fiscal 1998, these restaurants
    generated approximately $3,475,000 of sales, $17,000 of net earnings and
    $192,000 of cash flows from operations.

    The Company remains contingently liable for future lease payments for one
    restaurant. The lease has a termination date through January 2003. The
    aggregate amount of the contingent lease payments was approximately $564,000
    as of June 28, 1998.


                                       39

<PAGE>


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

    Not applicable.


                                       40

<PAGE>




                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMTERS 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 1998 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 28, 1998.

    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 1998 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 1998 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 1998 Proxy Statement and is 
    incorporated herein by reference.


                                       41

<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(*).

<TABLE>
<CAPTION>

Exhibit No.    Title
-----------    -----
<S>            <C>
     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 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.

     10.3      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) and
               incorporated herein by reference.

     10.4      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.

     10.5      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

     10.6      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.

     10.7      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.

     10.7.1    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.

     10.8      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.

     10.8.1    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.

     10.9      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.

     10.10     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.

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

</TABLE>

                                       42

<PAGE>

<TABLE>

<S>            <C>
     10.11.1   Settlement Agreement dated April 23, 1997 between Premium
               Restaurant Company, DFW Bagels, Inc., Quality Dining, Inc. and
               Bruegger's Franchise Corporation; Incorporated by reference to
               Exhibit 10.11.1 to Amendment No. 2 to Form S-2 File No. 333-23233.

     10.11.2   Letter Agreement dated May 28, 1998 between DFW Bagels, Inc. and
               Bruegger's Franchise Corporation.

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

     10.13*    1993 Stock Option Plan; Filed as an exhibit to the Form S-8
               Registration Statement, File Number 33-76974 (March 28, 1994) and

               incorporated herein by reference.

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

     10.15     Promissory Note dated May 31, 1996, from the Company to Norwest
               Equipment Finance, Inc. with respect to DFW 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.(formerly Big D
               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

</TABLE>

                                       43

<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, 1998              Premium Restaurant Company


                                       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, 1998
---------------------------
Phillip R. Danford

/s/ Scott McGuire              Controller                   September 25, 1998
---------------------------
Scott McGuire

/s/ L. E. "Dan" Danford, Jr.   Chairman of the Board and    September 25, 1998
----------------------------   Director
L. E. "Dan" Danford, Jr.       

/s/ Thomas A. Kelm             Director                     September 25, 1998
---------------------------
Thomas A. Kelm


                                       44