TUBBYS INC, 10KSB/A, 1998-04-03

TUBBYS INC
10KSB/A, 1998-04-03
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB/A-1

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the Fiscal Year Ended November 30, 1997
-----------------
Commission File Number 0-12706
--------
TUBBY'S, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

New Jersey 22-2166602
- ------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6029 East Fourteen Mile Road, Sterling Heights, Michigan 48312-5801
- -----------------------------------------------------------------------------

Registrant's telephone number, including area code 810/978-8829
------------

Securities registered pursuant to Section 12(g) of the Act:

Common Stock $.01 Par Value
---------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X|No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not 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 or any amendment to this Form 10-KSB.

The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sale price of the common stock on
February 20, 1998, as reported on the NASDAQ SmallCap Market was
approximately $3,700,717. Shares of common stock held by each officer and
by each person who owns 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.

Issuer's revenues for its most recent fiscal year: $3,599,035

<PAGE>
As of February 20, 1998, there were 2,583,114 shares of the registrant's
common stock outstanding. This reflects a one for ten reverse stock split
declared by the Company on January 21, 1998. Retroactive effect has been
given to all share and per share data contained in this document.

DOCUMENTS INCORPORATED BY REFERENCE
---------------------------------------------
See Items 9,10,11, and 12 of this Form 10-KSB

1
<PAGE>
PART I
------

ITEM 1. BUSINESS
------- --------

Introduction
------------

Tubby's, Inc., the Registrant, and its subsidiaries, are referred to
herein as the "Company" or "Tubby's."

History
-------

Tubby's was founded in 1968 in Metropolitan Detroit, Michigan. The
Company began by selling submarine sandwiches from a small store. The
Company enjoyed success and growth and in 1977 began the sale of
franchises of its submarine sandwich concept. In 1990, the Company,
through a reverse merger, acquired the rights to the Stuff-Yer-Face
Restaurants which operated primarily in New Jersey.

General Development of Business
-------------------------------

The 1998 outlook for Tubby's traces its roots back to the 1994 decision
to concentrated on a "back to basics" approach. At that time, Company
concentrated on restructuring its management team, consolidating
administrative functions, eliminating unprofitable operations, and
development of new Tubby's Sub Shop franchises. The results of this
multi-faceted undertaking began to be realized in 1995. The Company
achieved its initial goals and returned to profitability. In 1996, the
Company continued its "back to basics" approach while beginning its next
phase of strategic development.

With an eye to the future, the Company sold its first Development Agent
Agreement ("DA Agreement") in April, 1996. By the end of 1996, the
Company had sold a total of four DA Agreements. In 1997, six additional
DA Agreements were sold representing a potential of an additional 102
Tubby's Sub Shops over the next eight years. Stores that are expected to
result from the implementation of DA Agreements are the contractual
responsibility of the Development Agents ("DAs"). Tubby's anticipates
that these agreements will be fulfilled on a timely basis as stipulated
in their respective contracts. The following details the Company's
efforts to franchise new stores in fiscal 1997 and anticipated stores in
future years:

This continuing strategy to sell DA Agreements, in addition to single
store Tubby's Sub Shop franchises, has resulted in the following
achievements in 1997, and expected openings in the first and second
quarters of 1998:

Six DA Agreements Representing One Hundred Two Units:
o Seventeen store openings anticipated in year one.
o Eighteen store openings anticipated in year two.
o Twenty store openings anticipated in year three.
o Nineteen store openings anticipated in year four.
o Eighteen store openings anticipated in year five.
o Twelve store openings anticipated in year six and thereafter.

Store Openings in 1997:
o Ten new franchised stores opened in 1997.
o Six stores opened pursuant to DA Agreements in 1997.
o Two company owned stores were sold or leased to franchisees in 1997.

First and Second Quarters of 1998:
o Fourteen new franchised stores are expected to be opened in the
first and second quarters of 1998. Of these stores, nine are
pursuant to DA Agreements.

2
<PAGE>

Closed and Reacquired Stores:
o Two franchisee owned Tubby's Sub Shop were closed in 1997.

In February of 1998 the Company launched a new subsidiary named SUBperior
Distribution Systems, Inc.,("SDS"). SDS was formed by management to
become its distributor of food and restaurant supplies to the franchised
and Company-owned Tubby's Sub Shops. SDS has contracted with an unrelated
Detroit company that is experienced with institutional food distribution
to provide the warehouse and distribution activities that are required.

This General Development of Business section contains forward-looking
statements that involve uncertainties. Actual results could differ
materially from those in the forward-looking statements, due to a number
of uncertainties, including but not limited to, those discussed below and
in "Management's Discussion & Analysis of Financial Condition & Results
of Operation."

Description of Business
-----------------------

The Company develops, operates, franchises and services a system of
restaurants which prepare and serve a comprehensive menu of submarine
sandwiches and related items. Tubby's submarine sandwiches are all
prepared to order and many of its sandwiches are cooked on a grill. These
restaurants are franchised or owned and operated as company stores. The
restaurants are located in Michigan, Ohio, New Jersey, Arizona,
Pennsylvania, Missouri, Indiana, and Alberta, British Columbia and
Ontario, Canada.

The Company also franchises and services a line of restaurants known as
Stuff-Yer-Face. These restaurants are casual, sit-down, full service
restaurants offering a line of "stuffed pizza" products known as
"Stromboli." These restaurants create a casual and distinctive atmosphere
by emphasizing the humorous "Stuff-Yer-Face" name and service by friendly
waiters and waitresses. Consistent with the Stuff-Yer-Face name, portions
are large.

In 1996, the Company began selling DA Agreements. A DA Agreement confers
the right to qualified persons to operate as an independent agent, on a
non-exclusive basis, to develop and service the Company's franchised
stores in a specific geographical area. The DA agrees that during the
term of the agreement he will diligently perform his obligations on
behalf of the Company to identify and assist prospective franchisees and
to perform site acquisition services and supervision of franchisees
operating Tubby's Sub Shops located in the territory. The DA agrees to
comply with the quotas as set forth in the DA Agreement.

As of November 30, 1997, a total of eighty-eight restaurants were in
operation consisting of four Stuff-Yer-Face restaurants (of which one was
operated by the Company), three Tubby's Express restaurants, (of which
one was owned by the Company), and eighty-three Tubby's Sub Shops
restaurants, (of which three were owned by the Company). In the first and
second quarters of 1998, fourteen new franchisee owned Tubby's Sub Shop
restaurants are expected to open.

In February of 1998 the Company launched a new subsidiary named SUBperior
Distribution Systems, Inc.,("SDS"). SDS was formed by management to
become its distributor of food and restaurant supplies to the franchised
and Company-owned Tubby's Sub Shops. SDS has contracted with a
unaffiliated Detroit company that is experienced with multiple location
institutional food distribution to provide the warehouse and distribution
activities that are required to serve Tubby's Sub Shops.

This Business section contains forward-looking statements that involve
uncertainties. Actual results could differ materially from those in the
forward-looking statements, due to a number of uncertainties, including
but not limited to, those discussed below and in "Management's Discussion
& Analysis of Financial Condition & Results of Operation."

Products
--------

3
<PAGE>

Tubby's restaurants offer a uniform menu which includes over twenty
different submarine and pita sandwiches cooked to order, French fries,
onion chips and breaded mushrooms, potato chips, soup, and a full line of
Pepsi-Cola soft drinks. Some restaurants also offer a line of premium ice
cream that is sold in cones, desserts and take home packaging.

The Company's submarine sandwiches are all prepared to order and many of
the products, including its line of steak sandwiches, chicken sandwiches
etc., are cooked when ordered. The Company's sandwiches are offered in
different sizes from a length of six inches to a length in excess of five
feet. Sandwiches in excess of twelve inches are generally ordered for
parties, picnics and social events. The "party sub" is offered at all
stores on an advance order basis, only. Tubby's menu is offered for carry
out, on-site consumption and, where available, delivery.

The Stuff-Yer-Face ("SYF") restaurants offer a menu featuring a specialty
sandwich called a "Stromboli." A Stromboli is a closed sandwich with the
bread freshly baked around a favorite filling selected by the customer
together with cheeses, tomato sauce, onions and peppers. The Stromboli
fillings, which customers may select in any combination, include
meatballs, sausage, pepperoni, veal, steak, chicken and shrimp. The
"Vegetaboli (R)" is a meatless "Boli" with fillings selected by the
customer including eggplant, mushroom, broccoli and spinach. The
sandwiches may be prepared in any combination of meat and vegetables.
Management is of the opinion that wrapping the dough around the fillings
improves the taste of the Stromboli over pizza through a steaming process
which occurs inside the Stromboli. The steaming process permits the
vegetables to retain flavor and crispness, meats to remain tender and
juicy, and cheeses and sauce to blend together to create a fine flavor
while also permitting the dough to crisp and brown. "Boli" sandwiches are
served in two sizes: "Large", and a smaller size Boli, the "Baby Boli
(R)."

The Stuff-Yer-Face restaurants also serve hamburgers, steak sandwiches,
and pizzas together with side orders which include, among other things,
French fries, onion rings, and fried mozzarella sticks. The restaurants
also serve "Lite-Stuff"(R), consisting of a variety of fresh salads and
club sandwiches. One location serves alcoholic beverages. Each of the
present Stuff-Yer-Face restaurants are sit-down, full service restaurants
utilizing waitress and waiter service. Beverages and side orders are
served while the customer's order is being prepared. When the order is
ready, each customer is served at his table by the waiter or waitress.
Each restaurant also accommodates phone orders for take out sales.

Franchising
-----------

The Company franchises all of its restaurant concepts, including the
Tubby's Sub Shop and Stuff-Yer-Face concepts.

The Company believes that customer satisfaction is critical to the
long-term success of the Company and emphasizes quality, proven, well
trained entrepreneurs in its Franchisee selection process. All potential
Franchisees are carefully screened by top members of the Management team
who all participate in the Franchisee approval process.

Franchises for Tubby's Sub Shops restaurants have been offered since
1977. The Company offers potential Franchisees a choice of a Single-Unit
Franchise Agreement or a DA Agreement. Tubby's management is continuing
to concentrate its resources on the expansion of Tubby's and
Stuff-Yer-Face restaurants through locating qualified DAs and
implementing DA Agreements.

A Tubby's Franchisee is responsible to supply sufficient capital for
construction, remodeling and equipment costs required to bring a location
to the standard specifications of a Tubby's store. SubLine Co.
("SubLine"), a subsidiary of Tubby's, may, at the option of the
Franchisee, construct the restaurant, provide leasehold improvements and
supply the necessary equipment. Alternately, the Franchisee may purchase
the required construction drawings from the Company and do the work
himself. Regardless of how constructed, all restaurants must meet the
Company's specifications before they are allowed to enter the system.

4
<PAGE>

The License Agreement gives the Franchisee the right to use Tubby's
trademarks, service marks and methods of operation to operate a Tubby's
restaurant at a specific location that is approved by Tubby's. The
initial term of a Tubby's Franchise Agreement is ten (10) years with the
Franchisee generally having the option to renew. The initial license fee,
which is payable upon execution of the Franchise Agreement is $15,000 for
a traditional location. For non-traditional sites, such as convenience
store locations, the Franchise fee is $8,000. Persons who commit to the
construction of more than one franchise could have a reduced up-front
franchise fee. The initial franchise fee compensates Tubby's for various
services provided by Tubby's to Franchisees, such as management and
operations training, review of restaurant site selection, restaurant
design assistance, specifications and equipment lists, assistance in
locating suppliers and operating assistance during the initial opening of
a restaurant. New Tubby's License Agreements require the Franchisee to
pay Tubby's a weekly royalty equal to the greater of $125 per restaurant
or six percent (6%) (as of January, 1996) of the Franchisee's adjusted
gross weekly sales. Previously, Tubby's Licensing Agreements required the
franchisee to pay Tubby's a weekly royalty equal to the greater of $125
per restaurant or four percent (4%) of the Franchisee's adjusted gross
weekly sales. Most of the already existing Franchise Agreements require
the Franchisee to pay Tubby's a weekly advertising fee equal to the
greater of $100 per restaurant or three and one-half percent (3 1/2%) of
the Franchisee's adjusted gross weekly sales. Those advertising fees are
used to pay for shared production and media advertising costs and other
promotional costs. The Franchise Agreement further requires the
Franchisee, among other things, to comply with Tubby's standards and
procedures of operation along with menu and food quality specifications,
to purchase supplies from Tubby's approved sources, and to permit
inspections and audits by Tubby's.

DA Agreements require franchisees to pay a licensing fee, similar to
those described above, to the Company. Upon receipt of a licensing fee,
however, the Company is required to pay a commission to the DA of 50% of
the amount collected. Similarly, the receipt of royalty payments by the
Company from stores licensed under a DA Agreement also require that a
commission be paid to the DA of 28% of the royalty fee if collected at a
rate under 6% of sales and 40% of the royalty fee if collected at a rate
of 6% or higher of sales.

Franchised restaurants are operated in accordance with uniform standards
required of all Franchisees. These standards include such items as
selection, quality, preparation and approval of menu items, signage,
decor, equipment, uniforms, suppliers, hours of operation, cleanliness,
appearance, etc. All standards are developed by the Company and
implemented in conjunction with its Franchisees.

The Company offers ongoing Franchisee support as well as scheduled and
unscheduled site inspections. All services are designed to ensure
customer satisfaction, efficient franchise operation and compliance with
the Company's standards.

In addition to the above standards, the Company also has financial
reporting requirements. These requirements include weekly/monthly sales
reporting and royalty and advertising payments, monthly financial
statement submission and the maintenance of books and records that will
allow the Company to audit those records if it so desires. The Company
has the right to terminate a Franchise Agreement if the Franchisee fails
to meet the requirements imposed by the above standards.

Training
--------

The Company emphasizes Franchisee training as a means of ensuring the
quality and value of the products delivered to its customers, and the
profitability and long-term sales growth to the Company. Training is an
essential part of the Franchisee experience. In order to enter the
Tubby's system, a Franchisee is required to complete an extensive
training program as part of the orientation process.

Tubby's provides a complete course of instructions relating to the
operations, methods, and other related procedures, with emphasis placed
on the preparation and serving of the specialty food items that are
characteristic of its restaurants. Salaries, expenses of travel, food and
lodging for a Franchisee and his/her representative are at the
Franchisee's own expense. The training program consists of a minimum of
150

5
<PAGE>

hours of in-store operations, under direct supervision of qualified
personnel, in addition to classroom sessions at Tubby's corporate
offices.

After successfully completing the training program, Tubby's provides
assistance to new franchisees by providing a member of Tubby's staff to
the Franchisee's location for at least three days out of the first nine
weeks of operation.

Tubby's may charge a fee for the training described above. However, it is
only obligated to provide such training for a Franchisee's first
location. Additional training is available at a fee, as is assistance at
a subsequent location.

Tubby's commitment to training is not limited to the initial training
provided at the time a Franchisee enters the system. The Company offers
training and education to its Franchisees on an ongoing basis. This
training includes restaurant operation, management training, equipment
training and marketing assistance. The Company emphasizes continued
training as part of its Franchisee support program.

Supplies
--------

As of February 2, 1998, the Company initiated operation of its SUBperior
Distribution Systems, Inc. ("SDS") subsidiary that sells food and
proprietary items to its Franchisees. The Company also maintains an
approved supplier list and the Franchisees are able to select the
approved supplier of their choice. The Company's believes that its new
subsidiary, SDS, will be able to provide its franchised and Company owned
Tubby's Sub Shops with uniform and consistently high quality products at
equivalent or lower prices than previously charged.

The Franchisees are also required to purchase fixtures and equipment
meeting Tubby's specifications from suppliers that are approved by
Tubby's. The approval of suppliers is based upon the quality of the items
they supply and their conformity with specifications established by
Tubby's.

SubLine is an approved supplier of certain equipment that has been
specially manufactured for use in Tubby's restaurants. SubLine also acts
as a broker for several approved suppliers of machinery, equipment and
food products that are sold to Tubby's Franchisees and others. Although
Tubby's Franchisees are not required to purchase any equipment from
SubLine or utilize SubLine's brokerage services, Tubby's believes that
many of them do so because the costs of utilizing SubLine's services are
often less than the prices charged by other sources. One reason why
SubLine is able to offer competitive prices is that, when it acts as a
broker, it can often obtain volume discounts for the items that are sold
to Tubby's Franchisees. SubLine will make a profit on equipment it
purchases and resells. It does not make a profit in connection with the
assistance it offers regarding leasehold improvements.

Advertising
-----------

Tubby's Franchisees are generally required to pay advertising fees equal
to the greater of $100 per week or 3 1/2% of total weekly adjusted gross
sales of that Franchisee's restaurant. Those funds are administered by
Tubby's Sub Shop Advertising Co., a subsidiary of the Company, and are
used to pay for shared production and media advertising costs as well as
other promotional costs. Marketing and promotion is voted on by an
advertising council. This council is made up of Franchisees and employees
of the Company and works with the Company in setting advertising programs
and the timing of those programs.

The Company has historically emphasized local print media, direct mail,
television and radio as its form of advertising. Such advertising is
generally cost prohibitive for an individual Franchisee, but can be cost
effective when included with other Franchisees. All funds received for
advertising are spent for advertising purposes only, except for a portion
which is retained by the Company to cover administrative costs.

The Company has two full time employees devoted exclusively to the
process of marketing and advertising for its Franchisees on both an
individual and on a system wide basis. As a result of the efforts of
these

6
<PAGE>

people, and the efforts of the Advertising Council, the Company has
expanded and refined its marketing efforts and in 1998 will continue its
advertising campaign.

Company Stores
--------------

The Company owned and operated five Company restaurants as of November
30, 1997. Three of the Company restaurants operate as Tubby's Sub Shops,
one restaurant operates as a Stuff-Yer-Face, and one restaurant operates
as a Tubby's Express. In 1997, the Company sold one Tubby's Sub Shop and
leased another, with an option to buy the restaurant, to franchisees.
Both restaurants are operated as a Tubby's Sub Shop by the respective
franchisees.

Expansion Progress and Restaurant Development
---------------------------------------------

Expansion is an important part of Tubby's growth plans. The Company
carefully studies possible locations and evaluates those potential sites
based on a variety of criteria including traffic patterns, population,
availability of drive-thru permits and other relevant criteria. The
following table shows a summary of the Company's franchise activity and
Company store activity over the last five years:

Fiscal Year Ended November 30,
Tubby's/Tubby's Express/SYF Restaurants 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Opened 16 7 10 7 5
Closed 2 2 3 1 4
Ending Number (1) 88 74 69 62 56
<FN>
(1) Company owned Tubby's Sub Shops include three in 1997, five in 1996,
two in 1995 and three in 1993. Tubby's Express stores include three, one
of which is operated under a joint venture operating agreement in 1997
and 1996, four, one of which was operated under a joint venture operating
agreement in 1995, six, five of which were operated under a joint venture
operating agreement, in 1994, and four in 1993. SYF restaurants include
four in 1997 and 1996, (one of which is Company owned), four in 1995, and
three in 1994, and 1993.
</TABLE>

Stores that are expected to result from the implementation of DA
Agreements are the contractual responsibility of the respective DAs.
Tubby's anticipates that these agreements will be fulfilled on a timely
basis as stipulated in their respective contracts. The following details
the Company's efforts to franchise new stores in fiscal 1997 and
anticipated stores pursuant to DA Agreements and an Area Development
Agreement in future years:

Store Openings in 1997:
o Ten new franchised stores opened in 1997.
o Six stores opened pursuant to DA Agreements in 1997.
o Two company owned stores were sold to franchisees in 1997.

Six DA Agreements Representing One Hundred Two Units in Years After
1997:
o Seventeen store openings anticipated in year one.
o Eighteen store openings anticipated in year two.
o Twenty store openings anticipated in year three.
o Nineteen store openings anticipated in year four.
o Eighteen store openings anticipated in year five.
o Twelve store openings anticipated in year six and thereafter.

One Area Development Agreement Representing Five Units:
o Two store anticipated to open in 1998.
o One store anticipated to open in 1999.
o Two stores are anticipated to open after 1999.

7
<PAGE>

approved supplier list and the Franchisees are able to select the
approved supplier of their choice. The Company's believes that its new
subsidiary, SDS, will be able to provide its franchised and Company owned
Tubby's Sub Shops with uniform and consistently high quality products at
equivalent or lower prices then previously charged.

This Development section contains forward-looking statements that involve
uncertainties. Actual results could differ materially from those in the
forward-looking statements, due to a number of uncertainties, including
but not limited to, those discussed below and in "Management's Discussion
& Analysis of Financial Condition & Results of Operation."

Competition
-----------

The restaurant business is highly competitive and is often affected by
changes in taste and eating habits of the public, by local and national
economic conditions affecting spending habits and by population and
traffic patterns. Tubby's believes that the quality and price of food
products offered are the principal means of competition in the restaurant
industry. Also of importance are site location, quality and speed of
service, advertising and attractiveness of facilities.

Tubby's competes with restaurant chains and other restaurants serving a
variety of quick service products. Some of Tubby's competitors operate
more restaurants and have greater financial resources, greater name
recognition and more experienced operational organizations than Tubby's.
In an effort to obtain greater name recognition in new markets outside of
the metropolitan Detroit area, the Company has participated in numerous
national industry trade shows. Additionally, the Company now places
advertisements in leading industry publications as well as on the
Internet. Although Tubby's believes it can operate favorably, it may be
at a competitive disadvantage with respect to chains with greater name
recognition and marketing capability. Furthermore, competition for
management, other key operating personnel and restaurant sites could
increase as Tubby's operations expand and as the general economy
improves.

As a result of the standards Tubby's has set for its franchisees, it
competes with other franchisors for high quality, well capitalized
franchisees. Tubby's management considers the amount of the initial
investment required of the franchisee, the perceived potential for
business success, return on investment, assistance provided by the
franchisor and the franchisor's name recognition and reputation to be the
most significant competitive factors in franchising. The Company believes
that the present economy will intensify this competition.

Trademarks and Service Marks
----------------------------

The Company has registered trademark and service marks including
"Tubby's", "Boli's" and the "Stuff-Yer-Face" names and logos. These
trademarks and service marks, as well as others, are registered with the
United States Patent and Trademark Office and are of material importance
to the Company.

Seasonal Operation
------------------

Although weather can be a factor in the sales of the Company's products,
the Company does not consider this business to be seasonal.

Regulation
----------

The Company is subject to Federal Trade Commission regulations and
several state laws which regulate the offer, sale and licensing process
of Franchisors. In addition to the FTC, most states have laws which
regulate and control the Franchisor/Franchisee relationships.

Many states also have laws regulating franchise operations, including
registration and disclosure requirements in the offer and sale of
franchises and the application of statutory standards regulating

8
<PAGE>

franchise relationships. Tubby's believes it is operating in substantial
compliance with applicable laws and regulations governing its operations.

Each of the restaurants operated by Tubby's Franchisees is subject to
licensing and regulation by the health, sanitation, safety, fire
department and in the case of Stuff-Yer-Face Franchisees serving
alcoholic beverages, the alcoholic beverage control agencies in the state
or municipality where located. Difficulties or failures in obtaining the
required licensing or approval could result in delays or cancellations in
the opening of new restaurants.

Federal and state environmental regulations have not had a material
effect on the operations of Tubby's or its Franchisees, but more
stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay
construction of new restaurants.

Tubby's and its Franchisees are also subject to the Fair Labor Standards
Act, which governs such matters as minimum wage, overtime and other
working conditions. A significant portion of the food service personnel
employed by Tubby's Franchisees are paid at rates related to the federal
minimum wage, and accordingly, increases in the minimum wage increase the
labor cost incurred by Tubby's Franchisees.

In addition to the above rules and regulations, Tubby's Company stores
are subject to state and local laws governing such items as health,
sanitation, licensing, etc. All stores are subject to local inspection
and ongoing permit approval. Local inspections govern items that Tubby's
believes are essential to providing a quality customer experience and
bringing customers back after their initial visit. Tubby's works hard to
comply with these laws and regulations.

Customers
---------

The Company is not dependent on a single customer.

Backlog
-------

Company-owned restaurants have no backlog orders.

Research and Development
------------------------

The Company works hard to ensure that the menu meets the needs of its
customers. Research and development efforts are done in conjunction with
suppliers, franchisees and the general public. New products, if approved,
are introduced via a variety of marketing programs. While the Company
considers research and development to be essential to the successful
long-term operation of the Company, its expenditures in this area at this
time are not material.

Employees
---------

As of November 30, 1997, the Company employed fifteen people in the
management and administration of the corporation. In addition, the
Company owned three Tubby's Sub Shop restaurants, one Stuff-Yer-Face
restaurant, and one Tubby's Express store. These stores employ about
seventy-one people, including related store managers. None of Tubby's
employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.

ITEM 2. PROPERTIES
------- ----------

The Company leases approximately 9,000 square feet in an office building
which it uses as its headquarters and warehouse under a five year lease.
Tubby's believes that these facilities offer sufficient space to allow it
to conduct its business affairs. As of January, 1998, the Company had
notified the lessor of its corporate headquarters building that, pursuant
to its lease, it intended to exercise its option to purchase the building
at a contract price of $425,000.

9
<PAGE>

The Company owns two parcels of real estate. One parcel is leased to a
Franchisee. The other parcel is currently being offered for sale. All of
the Company's real estate has been pledged as collateral on outstanding
mortgage loans and notes.

The Company leases all its Company stores including its Stuff-Yer-Face
and Tubby's Express locations. These leases are for various terms and
various expiration dates.

ITEM 3. LEGAL PROCEEDINGS
------- -----------------

On August 17, 1995, a civil action was commenced against the Company in
the United States District Court for the Eastern District of Michigan.
Patrick J. McCourt, as Trustee of the Patrick J. McCourt trust and as
President of McCourt Corporation, purchased restricted shares of Tubby's
common stock pursuant to private placements in June, July and November of
1993 and formed the McTub Company, a general partnership with Tubby's, in
August of 1993 for the purpose of owning and operating certain
quick-serve restaurants originally under the name "Cafe Express."
Plaintiffs complaint sought rescission of those transactions and, in
connection therewith, alleged violation of federal securities
regulations, fraudulent misrepresentation, violation of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), dissolution of
partnership and accounting, violation of Michigan Securities Act, and
Michigan's Franchise Investment Law. Plaintiffs purchased a total of 1.5
million shares at $0.25 per share for a total purchase price of $375,000
and plaintiffs' total investment in the McTub Company was approximately
$400,000. The Company filed an answer in which it denied liability to
plaintiffs. In addition, the Company filed a cross-claim against the
McTub Company seeking a declaratory judgment that the Company is entitled
to a distribution in the amount of $105,000 prior to any other
distributions that may be made by that Company. After the close of
discovery, the Company filed motions for summary judgment of plaintiffs'
securities fraud claims and to dismiss plaintiffs' RICO claims under
state law, without prejudice. Thereafter, orders were entered granting
judgment in the Company's favor with regard to plaintiffs' securities
fraud claims and dismissing plaintiffs' RICO claims, with prejudice, and
dismissing all of plaintiffs' remaining claims, without prejudice.

Plaintiffs then commenced an action in the Circuit Court for the County
of Oakland (the "Oakland County Action"). In the Oakland County Action,
plaintiffs assert the same allegations of "fraud" that were asserted and
dismissed in the federal action but are only seeking rescission of the
McTub Partnership Agreement and/or money damages in connection with the
formation of that partnership. This case did not involve any "securities"
claims regarding the shares of common stock purchased by McCourt. The
Company filed an answer denying liability, a counter-complaint in which
it asserted a claim for fraud against McCourt, and a cross-claim against
the McTub Company seeking certain declaratory relief in connection with
loans to the partnership that were procured by its partners. Also, the
Company filed an action in the Circuit Court for the County of Macomb in
which it asserted a claim for dissolution of the partnership (the "Macomb
County Action"). That action was transferred to the Circuit Court for the
County of Oakland and consolidated with the Oakland County Action.

In January 1998, the parties reached a settlement agreement regarding all
of their claims. Pursuant to the January 7, 1998 release and settlement
agreement, the McTub partnership paid McCourt $200,000 in 1998 as
repayment of McCourt's 1993 loan in that amount to the partnership,
without interest. In addition, the McTub Partnership paid McCourt $65,000
in 1998 in exchange for McCourt's entire ownership interest in the
partnership. Finally, the parties mutually released each other from any
and all claims, actions or causes of action whatsoever from the beginning
of time to the date of the settlement agreement which either party may
have had.

Thereafter, the parties stipulated to the entry of an order dismissing
both consolidated cases with prejudice and without costs which the Court
entered on January 28, 1998.

10
<PAGE>

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

There is no information required to be reported hereunder.

Part II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
------- -----------------------------------------------------------
MATTERS
-------

The following table sets forth the high and low stock prices for the
Company's $.01 par value common stock as reported by NASDAQ for the
fiscal years indicated.

The following quotations do not include retail mark-ups, markdowns or
commissions and represent prices between dealers and not necessarily
actual transactions. The past performance of the Tubby's, $.01 par value
common stock is not necessarily indicative of future performance.
<TABLE>
<CAPTION>

1996 1997
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Quarter 1 $7 13/16 $1 1/4 Quarter 1 $4 1/16 $2 1/2
Quarter 2 4 11/16 2 1/2 Quarter 2 4 3/8 2 13/16
Quarter 3 3 3/4 2 3/16 Quarter 3 4 3/8 2 3/16
Quarter 4 3 7/16 1 9/16 Quarter 4 5 2 1/2
</TABLE>

As of February 20, 1998, the approximate number of shareholders of record
of the Company was 7,000. The Company has never paid cash dividends on
its common stock. Payment of dividends is within the discretion of the
Company's Board of Directors and depends, among other factors, on
earnings, capital requirements and the operating and financial condition.
At the present time, the Company's anticipated financial capital
requirements will be such that it intends to follow a policy of retaining
earnings in order to finance the development of its business.

The Company announced that effective January 21, 1998, that it had
declared a reverse stock split. As a result of this split, the amount of
its outstanding shares has been reduced from approximately 26 million to
less than 2.6 million. In connection with the reverse split, Tubby's
amended its Articles of Incorporation to reduce the amount of its
authorized shares from 60 million to 6 million shares so that the
percentage of authorized shares that remains unissued does not exceed the
percentage of authorized shares that was unissued before the share
combination.

ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION &
------- -----------------------------------------------------------
RESULTS OF OPERATIONS
---------------------

The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto. This section
contains forward-looking statements that involve uncertainties. Actual
results could alter materially from those in the forward-looking
statements, due to a number of uncertainties, including but not limited
to, those discussed below and in the "Business" section.

Financial Overview
------------------

Tubby's and its consolidated subsidiaries experienced an increase in 1997
Total Revenues of $475,819, or 15.2%. The Company earned income before
taxes of $202,799, in 1997 versus $117,357, in 1996. The increase in
revenues is attributable to increases in Food sales of $134,010, or
16.8%, Monthly Franchise fees of $126,885, or 19.3%, Advertising fees of
$80,927, or 14.2%, and Commissions and other fees of $155,341, or 42.2%.
Equipment and restaurant sales decreased by $35,637 or 5.8%. Ten new
franchised stores opened in 1997 as well as six additional stores opened
pursuant to DA agreements. Additionally, two company owned restaurants
were sold or leased to franchisees in 1997.

11
<PAGE>

Operating Income in 1997 of $102,928 increased by 57.2% or $37,464 as
compared to 1996. This increase in Operating Income was primarily a
result of the $155,341 increase in Commissions and other fees as well as
less dramatic increases in the other categories of revenue as referred to
above. Operating expenses increase from 62.2% of Total Revenues in 1996
to 65.5% or an increase of $415,448 in 1997. Cost of food sales decreased
from 73.8% of Food sales in 1996 to 71.7% in 1997. Cost of equipment and
restaurants sales also decreased disproportionately from 86.5% of revenue
in 1996 to 81.7% in 1997. Other Income also increased by 92.5% to $99,871
in 1997 reflecting increased interest income and decreased interest
expense.

One Company owned and operated restaurant was sold to a franchisee in
September, 1997. An additional Company owned and operated restaurant that
had been reacquired from a delinquent franchisee in 1996 was leased to a
franchisee in June, 1997, with an option to purchase it after two years.
Both restaurants continue to operate as Tubby's Sub Shops. The Food sales
attributed to these restaurants were $150,714 in 1997.

In November, 1995, the Company hired a new director of franchise
development. This individual brought to Tubby's five years of restaurant
industry experience in franchise sales. The Company attended, as an
exhibitor, several national industry trade shows in its effort to gain
national recognition and expand into new regions of the country. Among
the impressive results of 1997, DA Agreements representing one
hundred-two new Tubby's Sub Shops, over the next eight years, were
initiated for potions of Texas, Missouri, Indiana, Illinois, Michigan and
the provinces of Alberta, British Columbia and Ontario, Canada. Stores
that are expected to result from the implementation of DA Agreements are
the contractual responsibility of the DAs. Tubby's anticipates that these
agreements will be fulfilled on a timely basis as stipulated in their
respective contracts. Six Tubby's Sub Shops opened pursuant to DA
Agreements in 1997. Ten other Tubby's Sub Shops opened in 1997.

Tubby's currently conducts most of its business in the Metropolitan
Detroit, Michigan region. The Detroit area economy is largely tied to the
results of the domestic automotive industry. Employment and spending
patterns of the people living in this area tend to mirror the operating
results of these companies and their suppliers. During the last several
years the domestic automobile industry improved significantly. As the
domestic automobile industry hired additional workers the local economy
also improved and so did the operating results of many of Tubby's
franchised restaurants. The strength of Detroit's local economy is
expected to continue in 1998. As additional stores are opened in other
cities, royalty fee income derived from these stores will at least be
partially dependent upon the economy in those areas. Although weather can
be a factor in the sales of the Company's products, the Company does not
consider this business to be seasonal.

Results of Operations
---------------------

Comparison of the years ended November 30, 1997 and 1996
--------------------------------------------------------
Tubby's and its consolidated subsidiaries experienced an increase in 1997
Total Revenues of $475,819 or 15.2%. The Company earned income before
taxes of $202,799 in 1997 versus $117,357 in 1996 which is a 72.8%
increase. Net Income after taxes was $107,499 in 1997 versus $117,357 in
1996 when no taxes on income were reflected (see Footnote #8 of the Notes
to Consolidated Financial Statements).

The increase in revenues is attributable to increased Food sales of
$134,010, or 16.8%, Monthly Franchise fees of $126,885, or 19.3%,
Advertising fees of $80,927, or 14.2%, and Commissions and other fees of
$155,341, or 42.2%. Equipment and restaurant sales decreased by $35,637
or 5.8%. Ten new franchised stores opened in 1997 as well as six
additional stores opened pursuant to DA agreements. Additionally, two
Company owned restaurants were sold or leased to franchisees in 1997.

The increase in Food sales revenues is primarily attributable to one
Company owned restaurant that was opened and one existing restaurant that
was reacquired from a delinquent franchisee both in the fourth quarter of
1996. The Company owned restaurant was sold to a franchisee in September,
1997. The reacquired restaurant was leased with an option to buy to a new
franchisee in June, 1997. Both restaurants continue to operate as Tubby's
Sub Shops. The Food sales attributable to these restaurants were $150,714
in

12
<PAGE>

1997. Operating Income in 1997 derived from Food sales increased by
$54,413 or 26.1% from 1996. The increase in operating Income from Food
sales was largely attributable to the two restaurants previously
mentioned.

The increased Monthly Franchise fees of $126,885 and Advertising fees of
$80,927 in 1997 reflect increases in system wide sales resulting from the
opening of new Tubby's Sub Shops and the accelerated efforts of the
Company's marketing department. The Company believes that the strong
economy will continue into 1998. With at least fourteen new Tubby's Sub
Shops planned for the first six months of 1998 and more planned for the
remainder of the year, and with the additional efforts of the Company's
new marketing manager, system wide food sales should dramatically
increase resulting in increased fees collected.

The increase in Initial Franchise fees of $14,293 in 1997 consists of the
amounts received from two new Tubby's Sub Shops and fees received from
sixteen franchisees who either transferred ownership of existing
franchisee owned restaurants or opened additional restaurants at reduced
licensing fees in 1997. Initial fees in 1996 consisted of amounts
received from two new franchisees and fees received from thirteen
franchisees who either transferred ownership of existing Tubby's Sub
Shops or open additional restaurants at reduced licensing fees. Reduced
Initial licensing fees are collected from Tubby's Sub Shops opened
pursuant to a DA Agreement, opened in non-traditional sites, or opened by
existing franchisees.

The Company experienced a decrease in Equipment and restaurant sales of
$35,637 as result of the trend towards franchisees opening
non-traditional Tubby's Sub Shops or opening restaurants pursuant to DA
Agreements. In both of these situations, the Company frequently sells the
franchisee the appropriate restaurant equipment but frequently does not
participate in the construction of the leasehold improvements either due
the restaurant being located in an established business site such as a
service station or being located outside of the Detroit region. The
Company did increase the Operating Income derived from Equipment and
restaurant sales by $21,053 or 25% as a result of increased profit
margins.

Commissions and other fees are comprised of vendor rebates, marketing
rights, and rental income of existing Company owned franchisee operated
Tubby's Sub Shops. Vendor rebates increased in 1997 by $49,005 or 15.5%
as compared to 1996. This increase resulted primarily from the increased
systems wide food sales mention above. Rental income increased by $17,968
or 34.4% as compared to 1996. The increase in rental income resulted from
the rental, in July of 1996, of a newly acquired existing Tubby's Sub
Shop to a franchisee for the entire year of 1997. Marketing rights were
first received in 1997 by the Company. In 1997, the Company received
$45,019 for Marketing rights sold pursuant to DA Agreements.

Operating expenses increased in 1997 by $415,448 or 21.4%. Additionally,
Operating expenses increased disproportionately from 62.2% to 65.5% of
Total Revenue. Operating expenses have increased as the Company continues
to expand. The previously unfilled staff positions of purchasing and
marketing were staffed at an expense of approximately $100,000 in 1997.
Building rent of Company owned stores increased by about $38,000.
Building rent is expected to decrease in the coming year as two Company
owned restaurants were either sold or leased to franchisees. Advertising,
promotional, and various marketing and franchise development expenses
increased by $393,000 in 1997 as the Company expanded its marketing
efforts in regions where Tubby's are located and further emphasis was
placed on franchise development in other regions of North America.
Certain operating expenses decreased, also. The most noteworthy decrease
occurred in Legal fees which declined by $95,272 or 86.4% resulting from
an overall decline in legal activity that required outside counsel and
most other legal matters being handled by in-house counsel.

13
<PAGE>

February, 1998, the Company initiated operation of its SUBperior
Distribution Systems, Inc. (SDS) subsidiary that sells food and
proprietary items to its Franchisees. Due to characteristics of its
business cycle, SDS is expected to maintain a sizable inventory and
accounts receivable. To maximize profits SDS will also take advantage of
purchase discounts that are normally available. The Company will utilize
its excess funds to provide short term funding as required.

Interest Expense decreased in 1997 by $18,663 or 66.1% when compared to
1996. Management expects this trend to not continue in 1998. As noted in
the preceding paragraph, SDS is expected to utilize some portion or all
of the Company's excess funds. To the extent that additional funds are
required, the Company may utilize its revolving lines of credit. SDS
maintains a $250,000 revolving line of credit with a financial
institution in addition to a similar line of credit maintained by Tubby's
Sub Shops, Inc. Interest for both lines of credit accrue on the unpaid
balance at 1/2% over the prime rate charged by the financial institution.
As of November 30, 1997, there were no borrowings under either line of
credit.

Liquidity and Capital Resources
-------------------------------

Cash and Equivalents combined with Investments increased by $76,548 when
compared to 1996. The acquisition of property and equipment utilized
$69,020 if cash in 1997 as compared to $462,155 in cash in 1996. An
increase in Accounts Receivable of $198,543 and a decrease in Accounts
Payable of $83,522 utilized Cash and Equivalents of $282,065.

Cash Flows From Operating Activities Was $169,799 in 1997
---------------------------------------------------------

Operating Activities Creating Significant Cash Inflows:
-------------------------------------------------------
o Net Income of $107,499.
o Non-cash adjustments to the Net Income included Depreciation and
Amortization for 1997 of $135,468 and Taxes on Income of $95,300,
(see Footnote #8 of the Notes to Consolidated Financial Statements).
o Decreases in Prepaid expenses of $59,195 resulting from the payment
of certain non-reoccurring marketing expenses.
o Increases in Deferred revenue of $49,356 representing primarily the
prepayment of initial licensing fees for Tubby's Sub Shops that are
expected to open during the first two quarters of 1998.

Operating Activities Creating Significant Cash Out Flows:
---------------------------------------------------------
o Accounts receivable increased by $198,543 primarily as a result of
equipment sales occurring near the end of the fourth quarter.
o Decreases in Accounts payable of $83,522 resulting from acceleration
of processing of accounts payable.

Cash Flows Used By Investing Activities Was $16,921 in 1997
-----------------------------------------------------------

Cash Flows From Investing Activities:
-------------------------------------
o Net Proceeds From Sale Of Property and Equipment of $5,000.
o Payments on Notes receivable of $52,912.

Cash Used In Investing Activities:
----------------------------------
o Purchase of Certificate of Deposit and Investments of $5,813.
o Purchases of Property and Equipment of $69,020.

Cash Flows From Financing Activities decreased by $82,143
---------------------------------------------------------

Items Creating Cash In Flows:
-----------------------------
o Proceeds From long-term debt of $150,000 results from the refinancing
through a new financial institution of Company owned but franchisee
operated Tubby's Sub Shop.

14
<PAGE>

Cash Used In Financing Activities:
----------------------------------
o Payments of Long-Term Debt of $232,143 relates to principal
reduction on notes owed by the Company relating to the refinancing
mentioned above and other payments of Company debt.

Other Liquidity Related Items
-----------------------------

To generate sufficient cash flow to meet the needs of the Company, the
Company must continue to operate profitably. In order for this to occur,
Company owned restaurants must operate profitably and new stores must be
added to the system.

During fiscal year 1994, Tubby's concentrated on a "back to basics"
approach to its business. The Company concentrated on eliminating
unprofitable operations, consolidating administrative functions and
development of new sub shop franchises. With a leaner and more focused
management team, the Company was able in 1995 to concentrate on its core
business of franchising Tubby's Sub Shops and becoming profitable. In
1996, the Company continued its focus on its core business of franchising
Tubby's Sub Shops while remaining profitable. During 1996 and 1997 the
Company began the implementation of its strategy to become a national
chain of franchised restaurants rather then a regional chain as it had
been in previous years. The Company initiated four DA Agreements in 1996
and an additional six DA Agreements in 1997.

Expense control remains a critical element leading to the continued
profitability of the Company. Management is continuing its ongoing review
of expenses and is initiating cost reductions where appropriate. In the
fourth quarter of the 1994 fiscal year management initiated significant
salary and expense reductions--the full benefit of which is still being
realized.

During 1998, the Company has identified several items which will impact
cash flow and the liquidity of the Company. Those items are:

Items Creating Cash Inflows
---------------------------

o In the first quarter of 1998, the Company expects to complete those
locations that were under construction at the end of 1997 and
realize $181,000 in cash from the respective sales at that time.

o In February, 1998, the Company lunched its new subsidiary, SUBperior
Distribution Systems, Inc., (`SDS"). SDS was created by management
to become its distributor of food and restaurant supplies to the
franchisee and Company owned Tubby's Sub Shops. SDS has contracted
with an unrelated Detroit based company that is experienced with
multiple location institutional food distribution to provide
warehouse and distribution services that are necessary to serve
Tubby's Sub Shops. The Company believes SDS will be able to provide
its franchisee and Company owned restaurants with uniform and
consistently high quality products at equivalent or lower prices
then previously charged.

o The Company anticipates the construction and opening of as many as
fourteen new restaurants in the first two quarters of 1998. If these
restaurants open as planned, the Company will realize operating
income from the sale of equipment of about $10,000 from each store.
The Company will also receive initial licensing fees, and ongoing
monthly royalty and advertising fees. Reduced fees are derived from
stores that are opened pursuant to DA Agreements.

The Company also has sufficient equipment inventory (see Footnote #3 of
the Consolidated Financial Statements) to meet some of the needs of the
new Franchisees entering the system. Based on the existing commitments
for new Franchisees, the Company anticipates that it will convert most of
its existing inventory to cash in the 1998 year.

15
<PAGE>

Items Creating Cash Outflows
----------------------------

o At November 30 ,1997, the Company had four restaurants at various
stages of construction. These new locations will require significant
additional expenditures before completion. These restaurants are
franchise owned and operated. Upon their completion, the Company
will recoup its investments in these locations. The Company believes
that it has sufficient liquidity to complete these restaurants.

o The Company's SDS subsidiary will require a significant investment
in inventory to meet the needs of its restaurants and those owned by
franchisees. As the inventory is sold it will be replenished and
accounts receivable generated. The Company believes that with a
combination of internal funding and existing lines of credit
sufficient funds are available to maintain its inventory and
accounts receivable.

o In January, 1998, pursuant to its corporate headquarters lease, the
Company notified its landlord of their intention to purchase the
building at the contract price of $425,000. The Company has a
confirmed commitment for funding the entire purchase. The terms of
the commitment are 100% financing at a fixed rate of 8.25% for five
years with a fifteen year amortization. After five years, a new
commitment will be required.

o In January, 1998, the Company paid $265,000 pursuant to a settlement
agreement of claims by Patrick J. McCourt, as Trustee of the Patrick
J. McCourt Trust and as President of McCourt Corporation, (See Item
3, Legal Proceedings).

As a result of the above sources and uses of cash and the expected
continued cash flows, the Company believes it has sufficient liquidity to
meet the needs of the Company in 1998. The Company maintains two $250,000
lines of credit with a local financial institution to meet short term
financial needs. Management believes that as a result of its "back to
basics" approach, the recognition of these reoccurring items, and the
ongoing reduction in operating expenses, the Company's operations will
continue to improve in 1997.

Recent Accounting Pronouncements
--------------------------------

The Financial Accounting Standards Board has issued SFAS No. 128
"Earnings per Share" which modifies the standards for computing earnings
per share. The statement is effective for financial statements issued for
periods ending after December 15, 1997. This statement is not expected to
have a material impact on the Company's computation of earnings per
share.

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.

SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the
standard may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.

16
<PAGE>

establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance.

SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may
have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.

Year 2000 Costs
---------------

The Company, like most owners of computer software, will be required to
modify certain portions of its software so that it will function properly
in the year 2000. Maintenance or modification costs will be expensed as
incurred, while the costs of any new software will be capitalized and
amortized over the software's useful life. Management believes these
"year 2000" costs will be immaterial.

Impact of Inflation
-------------------

The Company does not believe inflation has had a material impact on
earnings during the past several years. The Company has demonstrated an
ability to manage its assets, adjust retail prices, and use long-term
debt for real estate holdings - made less expensive by inflation - and
take such other steps as necessary to mitigate the effects of inflation.

17
<PAGE>

ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

November 30,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and equivalents $ 864,229 $ 793,494
Certificate of deposit 105,430 100,000
Marketable securities 25,383 25,000
Accounts receivable - trade, less allowance for doubtful
accounts of $36,740 and $20,850 in 1997 and 1996 443,810 245,267
Notes receivable 66,217 72,091
Inventories 99,419 102,805
Prepaid expenses and other 51,449 110,644
---------- ----------

Total Current Assets 1,655,937 1,449,301
---------- ----------

Property and Equipment
Land 325,347 325,347
Building and improvements 663,753 693,347
Equipment 527,265 440,705
Furniture and fixtures 138,394 219,464
Vehicles 15,009 15,009
---------- ----------

1,669,768 1,693,872
Less accumulated depreciation 773,576 654,255
---------- ----------

Net Property and Equipment 896,192 1,039,617
---------- ----------

Other Assets
Goodwill, less amortization of $81,118
and $68,045 in 1997 and 1996 229,918 338,241
Notes receivable, less allowance for doubtful
accounts of $-0- and $5,894 in 1997 and 1996 543,342 505,380
---------- ----------

Total Other Assets 773,260 843,621
---------- ----------

Total All Assets $3,325,389 $3,332,539
========== ==========

<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

18
<PAGE>
<TABLE>
<CAPTION>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

November 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Accounts payable $ 106,407 $ 189,929
Accrued liabilities
--Compensation 19,887 21,075
--Other 16,153 13,305
Deferred revenue 115,489 87,000
Long-term debt due in one year 220,520 266,825
----------- -----------

Total Current Liabilities 478,456 578,134

Deferred Revenue 60,867 40,000

Long Term Debt, less amounts due in one year 139,932 175,770
----------- -----------

Total Liabilities 679,255 793,904
----------- -----------

Stockholders' Equity
Common stock, $.01 par value, 6,000,000 shares
authorized, 2,583,114 issued and outstanding 25,832 25,832
Additional paid in capital 3,485,844 3,485,844
Retained earnings (deficit) (865,542) (973,041)
----------- -----------

Total Stockholders' Equity 2,646,134 2,538,635
----------- -----------

Total Liabilities and Stockholders' Equity $ 3,325,389 $ 3,332,539
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

19
<PAGE>
<TABLE>
<CAPTION>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended November 30,
CONSOLIDATED STATEMENTS OF OPERATIONS 1997 1996
---- ----
<S> <C> <C>
Revenues
Food sales $ 931,000 $ 796,990
Franchise fees
--Monthly 785,959 659,074
--Initial 132,543 118,250
Advertising fees 650,909 569,982
Equipment and restaurant sales 575,427 611,064
Commissions and other fees 523,197 367,856
----------- -----------

Total Revenues 3,599,035 3,123,216
----------- -----------

Costs and Expenses
Operating expenses 2,357,938 1,942,490
Cost of food sales 667,854 588,257
Cost of equipment and restaurant sales 470,315 527,005
----------- -----------

Total Costs and Expenses 3,496,107 3,057,752
----------- -----------

Operating Income 102,928 65,464
----------- -----------

Other Income (Expense)
Interest income 108,430 94,899
Interest expense (9,572) (28,235)
Gain (loss) on sale of fixed assets -- (5,880)
Miscellaneous 1,013 (8,891)
----------- -----------

Total Other Income 99,871 51,893
----------- -----------

Income Before Taxes on Income 202,799 117,357

Taxes on Income 95,300 --
----------- -----------

Net Income 107,499 117,357
=========== ===========

Earnings Per Share .04 .05
=========== ===========

Weighted Average Common Shares Outstanding 2,604,720 2,556,720
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

20
<PAGE>
<TABLE>
<CAPTION>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance, at December 1, 1995 2,538,114 $25,382 $ 3,430,044 $(1,090,398) $ 2,365,028

Issuance of common stock 45,000 450 55,800 56,250

Net income -- -- -- 117,357 117,357
---------- ------ ---------- ---------- ----------

Balance, at November 30, 1996 2,583,114 25,832 3,485,844 (973,041) 2,538,635

Net income -- -- -- 107,499 107,499
---------- ------ ---------- ---------- ---------

Balance, at November 30, 1997 2,583,114 $25,832 $ 3,485,844 $ (865,542) $ 2,646,134
========== ======= =========== ========== ==========

<FN>

See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

21
<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended November 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 107,499 $ 117,357
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 135,468 105,226
Taxes on income 95,300 --
Loss on sale of fixed assets -- 5,880
Increase (Decrease) In Cash Due to Changes In
Accounts receivable (198,543) (11,596)
Inventories 3,386 (67,965)
Prepaid expenses and other 59,195 (65,506)
Accounts payable (83,522) 26,457
Accrued liabilities 1,660 (19,344)
Deferred revenues 49,356 (44,000)
--------- ---------

Net Cash Provided by Operating Activities 169,799 46,509
--------- ---------

Cash Flows From Investing Activities
Purchase of property and equipment (69,020) (462,155)
Payments on note receivable 52,912 133,899
Increase in certificate of deposit and marketable securities (5,813) (25,000)
Net proceeds from sale of property and equipment 5,000 13,500
Sale of certificate of deposit and marketable securities -- 154,590
Other assets -- (2,242)
Net Cash Used In Investing Activities (16,921) (186,371)
--------- ---------

Cash Flows From Financing Activities
Proceeds from long-term debt 150,000 --
Payments on long-term debt (232,143) (74,038)
Proceeds from issuance of capital stock -- 56,250
--------- ---------
Net Cash Used In Financing Activities (82,143) (17,788)
--------- ---------

Net Increase (Decrease) in Cash 70,735 (157,650)
Cash and Equivalents, at beginning of period 793,494 951,144
--------- ---------

Cash and Equivalents, at end of period $ 864,229 $ 793,494
========= =========
<FN>

See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

22
<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997

1. SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of Tubby's Inc., its wholly-owned subsidiaries and its fifty-one percent
partnership interest in the McTub Company (Tubby's Express). Intercompany
balances and transactions have been eliminated.

Natures of Operations
---------------------
The Company's and its subsidiaries' revenue is derived from: (1)
franchise and advertising fees for the rights to operate sit down and
carry-out restaurants specializing in submarine sandwiches, hamburgers or
steak sandwiches, pizzas or ice cream; (2) food sales at Company owned
stores; (3) equipment sales to franchisees; and (4) vendor commissions
and rebates. The Company and its franchisees operate restaurants in
Michigan, Ohio, New Jersey, Pennsylvania, Arizona, Missouri, Indiana and
the provinces of Ontario and Alberta Canada.

Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, certificates of deposit, marketable securities and accounts
and notes receivable. At times such cash and equivalents in banks are in
excess of the respective financial institution's FDIC insurance limit.
The Company attempts to minimize credit risk by reviewing all
franchisees' credit history before extending credit and by monitoring
franchisees' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on accounts and notes
receivable, when necessary, based upon factors surrounding the credit
risk of specific customers, historical trends and other information. The
Company also establishes an allowance for possible losses, when
necessary, for declines in market value of its marketable securities.

Fair Values of Financial Instruments
------------------------------------
The carrying amounts of cash, cash equivalents, certificates of deposit,
marketable securities, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these
items.

The carrying amounts of the long-term debt issued pursuant to the
Company's credit agreements approximate fair value because the interest
rates on these instruments approximate market rates.

Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of
the date of the financial statements, and (2) revenues and expenses
during the reporting period. Actual results could differ from these
estimates.

Cash and Equivalents and Certificate of Deposit
-----------------------------------------------

Cash and equivalents consist of cash, certificates of deposit, money
market funds, U.S. Treasury bills and commercial paper with maturity
dates not exceeding three months.

23
<PAGE>

Certificates of deposit with maturity dates exceeding three months are
separately classified on the balance sheet.

Inventories
-----------
Inventories include food and equipment held for resale to franchisees.
Inventories are stated at the lower of cost (primarily on a specific
identification basis) or market.

Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is computed over
the useful lives of the assets ranging from 5 to 19 years, using the
straight-line method. Depreciation expense was $122,395 and $94,550 in
1997 and 1996, respectively.

Goodwill
--------
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at acquisition. The Company amortizes
goodwill over periods not exceeding 40 years. The Company reviews
goodwill for impairment based upon the estimated undiscounted cash flows
over the remaining life of the goodwill. If necessary, impairment will be
measured based on the difference between undiscounted cash flows and the
book value of the related goodwill.

Revenue Recognition
-------------------
Monthly franchise fees are recognized based on the franchisees' sales as
earned, except where collection is not deemed probable. Advertising fees
are recognized as related expenses are incurred

Initial franchise fees and fees from Area Development Agreements
("ADA's") are deferred until the Company has substantially met its
obligations under the franchise agreement, which is generally at the time
the store is opened. Deferred revenues under ADA's are recognized as
revenue on a pro rata basis as each store opens.

Advances under vendor rebate agreements are deferred and recognized as
revenue over the term of the agreements.

Advertising Costs
-----------------
The Company expenses the cost of advertising as incurred. Advertising
expense was approximately $651,000 and $582,000 in 1997 and 1996,
respectively.

Taxes on Income
---------------
Deferred income taxes are recognized for the tax consequences of
temporary differences between the financial reporting bases and the tax
bases of the Company's assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.

Earnings Per Share
------------------
The computation of earnings per share is based on the weighted average
number of outstanding common shares and equivalents. Common share
equivalents included in the computation represent shares issuable upon
assumed exercise of stock options which would have a dilutive effect in
years where there are earnings.

24
<PAGE>

In January 1998, the Company declared a one for ten reverse stock split.
As a result, the amount of outstanding shares has been reduced from
25,831,131 to 2,583,114. In connection with the reverse stock split, the
Company amended it Articles of Incorporation to reduce the number of
shares authorized from 60,000,000 to 6,000,000. Retroactive effect has
been given to all share and per share data contained in the consolidated
financial statements.

The Financial Accounting Standards Board has issued SFAS No. 128
"Earnings per Share" which modifies the standards for computing earnings
per share. The statement is effective for financial statements issued for
periods ending after December 15, 1997. The statements is not expected to
have a material impact on the Company's computation of earnings per
share.

Long-lived Assets
-----------------
The Company adopted the provision of Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be disposed of" during the year ended
November 30, 1997. SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
related goodwill to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. The effect of
adopting this standard did not have a financial impact on the Company.

The Company reviews the carrying values of its long-lived assets for
possible impairment whenever events or changes in circumstance indicate
that the carrying amount of assets may not be recoverable. The Company
evaluates whether impairment exists on the basis of undiscounted future
cash flows from operations before interest for the remaining useful life
of the assets. Any long-lived assets held for disposal are reported at
the lower of these carrying amounts or fair value less costs to sell.

Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.

SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the
standard may have on future financial statement disclosures. Results of
operation and financial position, however, will be unaffected by
implementation of this standard.

In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
(SFAS 131) which supersedes SFAS No. 14, Financial Reporting for Segments
of a Business Enterprise. SFAS 131 establishes standards for the way that
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance.

2. MARKETABLE SECURITIES

25
<PAGE>

securities are comprised of corporate bonds. During each of the fiscal
years and as of November 30, 1997 and 1996, there were no realized or
unrealized gains or losses reported as cost approximated fair value.

At November 30, 1997, corporate bonds included in available-for-sale
securities have contractual maturities exceeding ten years.

3. INVENTORIES

Inventories at November 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>

1997 1996
-------- -------
<S> <C> <C>
Equipment $ 70,430 $ 80,994
Food and paper goods 28,989 21,811
-------- --------

$ 99,419 $102,805
======== ========
</TABLE>

4. NOTES RECEIVABLE

Notes receivable consisted of the following at November 30, 1997 and
1996.
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Note receivable, due in monthly installments
with interest at 10%, collateralized by a second
mortgage on property, maturing in 2007 $330,296 $347,629

Various notes receivable, due in monthly installments with
interest at various interest rates up to 10%,
collateralized by equipment,
maturing through 2001 279,263 229,842
-------- --------

609,559 577,471
Less amounts due within one year 66,217 72,091
-------- --------

Total Notes Receivable - Noncurrent $543,342 $505,380
======== ========
</TABLE>

The Company's recorded investment in impaired loans totaled $43,000, with
no related credit loss allowance, in 1997 and 1996. The average recorded
investment in impaired loans during 1997 was $43,000, with related
interest income recognized in 1997 of approximately $21,000. Interest
Income on impaired loans is recognized only when payments are received.

5. REVOLVING CREDIT AGREEMENT

In January 1997, the Company entered into a $250,000 line-of-credit with
a bank with interest payable at the bank's prime rate plus one-half
percent (9.0% at November 30, 1997). Short-term borrowings are due on
demand and are secured by a blanket lien on all assets of the Company and
a pledged $100,000 certificate of deposit. No borrowings were outstanding
under the line-of-credit at November 30, 1997 and 1996.

6. LONG-TERM DEBT

Long-term debt consisted of the following at November 30, 1997 and 1996.
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Notes payable- stockholder (see Note 13) $200,000 $200,000
</TABLE>

26
<PAGE>
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Mortgage notes payable in equal monthly installments of $1,930
through March, 2002, at which
time a balloon payment is due; with interest
payable at 9.25% 142,084 180,704

Other obligations payable in equal monthly
installments of $1,100 through September
2000, with interest of up to 9% 18,368 19,857

Notes payable - paid during 1997 -- 42,034
________ ________
360,452 442,595
Less amounts due within one year 220,520 266,825
________ ________
$139,932 $175,770
======== ========
</TABLE>

The Company has pledged substantially all of its property and equipment
as collateral for repayment of debt.

Annual maturities of long-term debt are as follows:
<TABLE>

7. RELATED PARTIES

Two founding stockholders of the Company are directors and are also
officers. These stockholders own approximately 17% of the outstanding
common stock. In addition to their responsibilities to the Company, they
also own and operate three franchised Tubby's restaurants. The following
is a summary of activity with these stockholders and their restaurants as
of and for the years ended November 30, 1997 and 1996.
<TABLE>
<CAPTION>

1997 1996
<S> <C> <C>
Accounts receivable $ 29,191 $ 26,262

Notes receivable, due in quarterly installments
plus interest at 9% -- 24,436

Franchise and advertising fees 151,130 150,215

Interest income 1,431 3,401
</TABLE>

8. INCOME TAXES

Significant components of deferred tax assets and liabilities consist of
the following at November 30, 1997 and 1996.

<TABLE>
Deferred Tax Assets 1997 1996
--------------------- ---- ----
<S> <C> <C>
Net operating loss carry-forwards $615,000 $725,000
Allowance for doubtful accounts 60,000 43,000
Deferred revenue 22,000 13,000
Depreciation 12,000 10,000
Other 1,000 2,000
-------- -----------
</TABLE>

27
<PAGE>
<TABLE>
<S> <C> <C>
Net Deferred Tax Asset 710,000 793,000

Valuation allowance on net
deferred tax asset (710,000) (793,000)
-------- --------
Deferred Taxes $ -- $ --
======== =========
</TABLE>

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

The following reconciles the expected income tax rate to
the effective income tax rate.
<TABLE>
<CAPTION>

1997 1996
----- -----
<S> <C> <C>
Income taxes (benefit) at federal statutory rate 34.0% 34.0%
Tax expense resulting from utilization of NOLs 47.0 --
Valuation allowance adjustment (40.9) (53.7)
Non-deductible goodwill and entertainment
expenses 8.3 14.6
Other (1.4) 5.1
---- ---
Effective Tax Rate 47.0% --%
==== ===
</TABLE>

The Company has acquired net operating loss carry-forwards of
approximately $918,000 which are available to offset future taxable
income. However, to the extent such loss carry-forwards are utilized to
reduce future taxable income, the related tax benefit will first be
credited to goodwill until fully eliminated and then to income. In 1997,
the Company had taxable income of approximately 288,000 which when
utilizing the loss carry-forwards resulted of a reduction of goodwill of
$95,300. Utilization of these losses is limited based on the taxable
income generated by the activity that generated these losses and the
carry-forwards expire beginning in 1999.

The Company also has net operating loss carry-forwards for tax purposes
of approximately $892,000 relating to losses incurred subsequent to the
above mentioned acquisition which expire from 2006, through 2009.

9. STOCK OPTION PLAN

The Company has stock option plans under which key employees may be
granted options to purchase a specific number of shares of the Company's
with option prices approximating market prices at the date of grant.
Options are subject to the terms of each plan.

The Company applies Accounting Principles Board Option No. 25 in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the Plan. Had compensation expense for the
Company's stock option plans has been determined based on the fair value
at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and net income per share would have been the
following pro forma amounts:
<TABLE>
<CAPTION>

1997 1996
---- ----
<S> <C> <C>
Net Income
As reported $ 107,499 117,357
Pro forma 52,276 117,357

Earnings Per Share
As reported .04 .05
Pro forma .02 .05
</TABLE>

As of November 30, 1997, 283,383 shares were reserved under the Incentive
Stock Option Plan and 83,300 were reserved under the non-statutory
Incentive Stock Option Plan. A summary of the options is as follows:

28
<PAGE>

Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Incentive Stock Option Plan
Outstanding, at December 1, 1995
(2,967 exercisable) 112,967 $ 2.50
Exercised (45,000) 1.20
Expired (7,500) 3.10

Outstanding, at November 30, 1996
(60,467 exercisable) 60,467 3.10
Granted 13,500 3.30

Outstanding at November 30, 1997
(60,467 exercisable) 73,967 3.20
</TABLE>

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

Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Non-Statutory Incentive Option Plan
Outstanding at December 1, 1995
and November 30, 1996
(20,000 exercisable) 20,000 $ 3.60
Granted 20,500 1.60
</TABLE>

- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>

Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding at November 30, 1997
(20,000 exercisable) 40,500 2.60
</TABLE>

The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for grants in 1997: dividend yield of 0%;
expected volatility of 74%; risk free interest rate of 6.2%; and expected
lives of 3.3 years.

The weighted average grant date fair value options granted in 1997 was
$2.00.

The following is a summary of stock options outstanding at November 30,
1997:

Options Outstanding
-------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
----------- ------ ------------ -----
<S> <C> <C> <C>
Incentive Stock Option Plan
$ 1.60 -1.90 20,000 7.7 $ 1.80
3.10 -4.40 53,833 7.3 3.70
8.40 134 6.0 8.40
------ --- ------
73,967 7.4 $ 3.20
Non-Statutory Plan
$ 1.50 - 1.90 20,500 9.7 $ 1.60
3.60 20,000 4.0 3.60
------ --- ------
40,500 6.9 $ 2.60
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
Options Exercisable
Weighted Average
Price Range Number Exercise Price
----------- ------ --------------
<S> <C> <C>
Incentive Stock Option Plan
$1.60 -1.90 20,000 $ 1.80
3.10 -4.40 40,333 3.70
8.40 134 8.40
------ ------
60,467 $ 3.10
Non-Statutory Plan
$ 3.60 20,000 $ 3.60

The weighted average exercise price of the 60,467 shares which were
exercisable at November 30, 1996, was $3.10.

10. EMPLOYEE BENEFIT PLAN

In 1997, the Company implemented a 401(k) plan covering substantially all
full-time employees. The Company matches each employee's contribution up
to a predetermined limit. The Company's contribution expense amounted to
approximately $3,000 in 1997.

11. OPERATING LEASES

The Company leases buildings, equipment, and restaurant space under
various operating leases. The future minimum rental payments, under all
operating leases containing minimum annual rental payments, are as
follows:

</TABLE>
<TABLE>

Total rent expense under the operating leases was approximately $120,000
and $129,000 for 1997 and 1996, respectively.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for:
<TABLE>
<CAPTION>

Year Ended November 30, 1997 1996
---- ----
<S> <C> <C>
Interest $17,572 $28,235
Income taxes -- 10,000
</TABLE>

During 1997, the Company exchanged property and equipment for a note
receivable totaling $85,000.

13. LITIGATION SETTLEMENT

30
<PAGE>

which constitutes repayment of the principle of a term note dated in
October 1993. The liability under the term note is included in the
"long-term debt due in one year" caption in the accompanying consolidated
balance sheets. Also, in connection with the agreement, the Company
agreed to pay McCourt $65,000 in 1998 for his 49% interest in McTub
Company. The agreement discharges and releases the Company from any and
all claims with McCourt.

14. SUBSEQUENT EVENTS

o Subsequent to November 30, 1997, the Company entered into a
commitment for the purchase of the building that houses its corporate
headquarters fort the total cost of $425,000. Long term financing
will be obtained in connection with the purchase of the building.

o In February 1998, the Company began a new subsidiary named SUBperior
Distribution Systems, Inc. ("SDS"). SDS was formed by management to
become its distributor of food and restaurant supplies to the
franchised and Company-owned Tubby's Sub Shops. SDS has contracted
with an unaffiliated company that is experienced with multiple
location institutional food distribution to provide the warehouse and
distribution to provide the warehouse and distribution activities
that are required to serve Tubby's Sub Shops. In connection with the
addition of the new subsidiary the Company entered into an additional
line-of-credit agreement, which allows for maximum borrowings of
$250,000 with interest payable at prime plus one-half percent.

31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Tubby's, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Tubby's,
Inc. and Subsidiaries as of November 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tubby's, Inc. and Subsidiaries at November 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.

BDO Seidman, LLP

Troy, Michigan
February 3, 1998

32
<PAGE>

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

There is no information required to be reported hereunder.

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------

Information with respect to the directors and executives officers of the
Company, is incorporated herein by reference to the Company's proxy
statement to be filed with the Securities and Exchange Commission
pursuant to the Regulation 14A, not later than 120 days after the end of
the fiscal year covered by this Report.

Directors and Executive Officers of the Registrant
--------------------------------------------------

All of the executive officers of Tubby's as of February 20, 1998, are
shown below. Each of the executive officers has a term of office until
the June, 1998 Board of Directors meeting.
<TABLE>
<CAPTION>

NAME/ AGE POSITION HELD WITH REGISTRANT
--------- -----------------------------
<S> <C>
Robert M. Paganes /41 President and Chief Executive Officer
Peter T. Paganes/55 Vice President
Vincent J. Tatone /41 Secretary
Melvyn Erdos, CPA/49 Treasurer and Chief Financial Officer
</TABLE>

Messrs. Paganes are brothers and shareholders of the Company. There are
no other relationships among the executive officers.

ITEM 10. EXECUTIVE COMPENSATION
-------- ----------------------

The information required in response to this Item is incorporated herein
by reference to the Company's proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the end of the fiscal year covered by this Report.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------

33
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON 8K
-------- --------------------------

Page
<S> <C> <C>
(a) Documents filed as a part of this report:

(1) Financial Statements:

Consolidated Balance Sheets as of November 30, 1997 and 1996.....18, 19

Consolidated Statements of Operations for the Years Ended
November 30, 1997 and 1996...........................................20

Consolidated Statements of Shareholders' Equity for the
Years Ended November 30, 1997 and 1996...............................21

Consolidated Statement of Cash Flows for the Years Ended
November 30, 1997 and 1996...........................................22

Notes to Consolidated Financial Statements...........................23

Report of Independent Auditors.......................................31

(b) Reports on Form 8-K

(1) The Company filed Form 8-K dated January 15, 1998,
reporting the Board of Directors approval of a one for ten
reverse stock split effective January 21, 1998.

Name/Type of Exhibit
03 Articles of Incorporation for new subsidiary -
SUBperior Distribution Systems, Inc.
10 Material Contract - Sun Valley Foods Company
13 Tubby's, Inc. 1997 Annual Report
21 Subsidiaries of the registrant
23 Consent of independent certified public accountants
</TABLE>

<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDED REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

TUBBY'S, INC.

Robert M. Paganes
-----------------
By: Robert M. Paganes
Its: President & Chief Executive Officer

Melvyn Erdos
------------
By: Melvyn Erdos
Its: Treasurer & Chief Financial Officer

(Signed Originals On File)

MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
- -------------------------------------------------------------------------------
(FOR BUREAU USE ONLY)
Date Received
DEC 15 1997 FILED
DEC 17 1997

Administrator
MI DEPT OF CONSUMER & INDUSTRY SERVICES
CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU

William Barish
6029 East Fourteen Mile Road
Sterling Heights, Michigan 48312 EFFECTIVE DATE:

Document will be returned to the name and address you enter above

477-849
ARTICLES OF INCORPORATION
For use by Domestic Profit Corporations
(Please read information and instructions on the last page)

Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned
corporation executes the following Articles:

ARTICLE I
The name of the corporation is:
SUBperior Distribution Systems, Inc.

ARTICLE II

The purpose or purposes for which the corporation is formed is to engage in
any activity within the purpose for which corporations may be formed under
the Business Corporation Act of Michigan.

ARTICLE III

The total authorized shares:
1. Common Shares 60,000
-------------------------------------------------------------
Preferred
Shares -------------------------------------------------------------
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follow:

ARTICLE IV

1. The address of the registered office is:
6029 East Fourteen Mile Road, Sterling Heights, Michigan 48132

2. The mailing address of the registered office, if different than above:

- -------------------------------------------------- Michigan -----------
(Street Address or P.O. Box) (City) (Zip Code)

3. The name of the resident agent at the registered office is:
Vincent J. Tatone

ARTICLE V

The name(s) and address(es) of the incorporator(s) is (are) as follows:

Name
Tubby's Sub Shops, Inc., a Michigan Corporation ID # 081-802

Residence or Business Address
6029 East Fourteen Mile Road
Sterling Heights, MI 48312

ARTICLE VI (Optional, Delete if not applicable)

When a compromise or arrangement or a plan of reorganization of this
corporation is proposed between this corporation and its creditors or any
class of them or between this corporation and its shareholders or any
class of them, a court of equity jurisdiction within the state, on
application of this corporation or of a creditor or shareholder thereof,
or on application of a receiver appointed for the corporation, may order a
meeting of the creditors or class of creditors or of the shareholders or
class of shareholders to be affected by the proposed compromise or
arrangement or reorganization, to be summoned in such manner as the court
directs. If a majority in number representing 3/4 in value of the
creditors or class of creditors, or of the shareholders or class of
shareholders to be affected by the proposed compromise or arrangement or a
reorganization, agree to a compromise or arrangement or a reorganization
of this corporation as a consequence of the compromise or arrangement,
the compromise or arrangement and the reorganization, if sanctioned by
the court to which the application has been made, shall be binding on
all the creditors or class of creditors, or on all the shareholders
or class of shareholders and also on this corporation.

ARTICLE VII (Optional, Delete if not applicable)

Any action required or permitted by the Act to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without
prior notice, and without a vote, if consents in writing, setting forth
the action so taken, are signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary
to authorize or take the action at a meeting at which all shares entitled
to vote on the action were present and voted. The written consents shall
bear the date of signature of each shareholder who signs the consent. No
written consents shall be effective to take the corporate action referred
to unless, within 60 days after the record date for determining
shareholders entitled to express consent to or to dissent from a proposal
without a meeting, written consents dated not more than 10 days before the
record date and signed by a sufficient number of shareholders to take the
action are delivered to the corporation. Delivery shall be to the
corporation's registered office, its principal place of business, or an
officer or agent of the corporation having custody of the minutes of the
proceedings of its shareholders. Delivery made to a corporation's
registered office shall be by hand or by certified or registered mail,
return receipt request.

Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to shareholders who have
been entitled to notice of the shareholders meeting if the action had been
taken at a meeting and who have not consented in writing.

Name of person or organization Preparer's name and business
remitting fees: telephone number:

- ------------------------------ -----------------------------
( )
- ------------------------------ -----------------------------

INFORMATION AND INSTRUCTIONS

1. The articles of incorporation cannot be filed until this form, or a
comparable document is submitted.

2. Submit one original of this document. Upon filing, the document will be
added to the records of the Corporation, Securities and Land Development
Bureau. The original will be returned to the address in the box on the
front as evidence of filing.

Since this document will be maintained on optical disk media, it is
important that the filing be legible. Documents with poor black and white
contrast, or otherwise illegible, will be rejected.

3. This document is to be used pursuant to the provisions of Act 284, P.A.
of 1972 by one or more persons for the purpose of forming a domestic
profit corporation.

4. Article I -- The corporate name of a domestic profit corporation is
required to contain one of the following words or abbreviations:
"Corporation", "Company", "Incorporated", "Limited", "Corp.", "Co.",
"Inc.", or "Ltd.".

5. Article II -- State, in general terms, the character of the particular
business to be carried on. Under section 202(b) of the Act, it is
sufficient to state substantially, alone or with specifically enumerated
purposes, that the corporation may engage in any activity within the
purposes for which corporations may be formed under the Act. The Act
requires, however, that educational corporations state their specific
purposes.

6. Article III -- Indicate the total number of shares which the corporation
has authority to issue. If there is more than one class or series of
shares, state the relative rights, preferences and limitations of the
shares of each class in Article III(2).

7. Article IV -- A post office box may not be designated as the address of
the registered office.

8. Article V -- The Act requires one or more incorporators. Educational
corporations are required to have at least three (3) incorporators. The
address(es) should include a street number and name (or other
designation), city and state.

9. The duration of the corporation should be stated in the articles only if
not perpetual.

10. This document is effective on the date endorsed "filed" by the Bureau. A
later effective date, no more than 90 days after the date of delivery,
may be stated as an additional article.

11. The articles must be signed in ink by each incorporator. The names of the
incorporators as set out in article V should correspond with the
signatures.

12. FEES: Make remittance payable to the State of Michigan. Include
corporation name on check or money order.

NONREFUNDABLE FEE........................................... $10.00
ORGANIZATIONAL FEE: first 60,000 authorized shares or
portion thereof ............................................ $50.00
TOTAL MINIMUM FEE .......................................... $60.00
ADDITIONAL ORGANIZATION FEE FOR ORGANIZED SHARES OVER 60,000;
each additional 20,000 authorized share or
portion thereof............................. $30.00
maximum fee per filing for first 10,000,000
authorized shares........................... $5,000.00
each additional 20,000 authorized shares or
portion thereof in excess of 10,000 shares.. $30.00
maximum fee per filing for authorized shares.. $2,000.00

13. Mail form and fee to: The office is located at:

Michigan Department of Consumer
& Industry Services 6545 Mercantile Way
Corporation, Securities and Lansing, MI 48910
Land Development Bureau Telephone: (517) 334-6302
Corporation Division
P.O. Box 30054
Lansing, MI 48909-7554
<PAGE>
Use space below for additional Articles or for continuation of previous
Articles. Please identify any Article being continued or added. Attach
additional pages if needed.

I, (We), the incorporator(s) sign my (our) name(s) this day of
-----
December , 1997
------------

Tubby's Sub Shops, Inc.
- ------------------------------ ------------------------------

By: /s/ Robert Paganes
- ------------------------------ ------------------------------
Robert Paganes

Its: President
- ------------------------------ ------------------------------

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

EXHIBIT 10

WAREHOUSING AND DISTRIBUTION AGREEMENT

This Warehousing and Distribution Agreement (hereinafter the
"Agreement"), made and entered into this 5th day of November, 1997, in
the City of Sterling Heights, State of Michigan, by and between Sun Valley
Foods Company, d/b/a AAA Warehouse & Cold Storage Company, a Michigan
Corporation ("AAA"), and Subperior Distribution Systems, Inc., a Michigan
corporation (hereinafter referred to as "SDS").

RECITALS

A. AAA has facilities available for public warehousing services,
inventory certification services, and other inventory control services for
fresh and frozen foods, fountain and bottled beverages and dry goods intended
for human consumption, as well as paper, plastic, small wares and cleaning
supplies. AAA operates a warehouse consisting of 150,000 square feet, and a
fleet of 20 delivery trucks and three tractor-trailer trucks.

B. SDS, a wholly owned subsidiary of Tubby's, Inc., in connection
with the conducting of Tubby's ordinary business affairs, desires to employ
AAA to perform warehousing and distribution services for SDS. As of the date
of this Agreement there are 85 Tubby's Sub Shops in Michigan, 3 in Ohio, 1 in
Pennsylvania, 2 in Arizona and 1 in Edmonton, British Columbia, Canada (the
"Sub Shops"). SDS anticipates substantial growth in the number of Sub Shops
during the term of this Agreement on a national basis.

<PAGE>

C. AAA desires to perform distribution services for SDS to all Sub
Shops located in Michigan and Ohio, and to assist SDS in arranging for
distribution to Sub Shops located in other states and Canada.

D. AAA has the holding capabilities to handle a minimum of 45 days
supply of all products used in the operation of Tubby's Sub Shops and has the
ability to distribute and deliver all products, including perishable food
inventory to Tubby's Sub Shops located in Michigan and Ohio, and to arrange
for the distribution and delivery of all products used in the operation of
the Sub Shops to Sub Shops in other states and provinces in the United States
and Canada, of the inventory warehoused by AAA for SDS.

NOW, THEREFORE, in consideration of the promises and mutual
agreements herein contained and of the payment by SDS to AAA of the sums
hereinafter specified, it is agreed as follows:

1. AAA agrees to furnish and SDS hereby employs AAA to furnish
public warehouse, distribution and delivery services of all products,
including non-perishable and perishable food products used in the operation
of the Sub Shops and employs AAA as SDS's exclusive distributor to franchised
and Company owned Sub Shops. This Agreement is contingent on unit
participation such that there is an average weekly number of delivered cases
of at least 5000 cases at the expiration of the first 6 months after this
Agreement is executed. In the event that the average weekly number of
delivered cases does not exceed 5000 (computed by averaging the last six
weeks deliveries), then either party may terminate this Agreement by
notifying the other Party

<PAGE>

within 60 days after the expiration of the first six (6) months, in which
case the parties will work together and exercise their best efforts to
reasonably unwind this project.

2. AAA owns, controls or will procure and agrees to furnish to SDS
warehouse buildings, rooms and/or premises sufficient in number and capacity
for inventory of approximately 400 separate items, for an initial period of
six (6) months, and approximately 250 separate items thereafter (including
extensions) with sufficient inventory to maintain a 4 to 1 ratio of inventory
to weekly sales in amounts sufficient to supply all existing and future Sub
Shops. Said inventory shall be so located as to adequately secure the safety
of the goods and merchandise to be warehoused and to secure the safety of all
persons working in or about the warehouse premises, including providing
adequate safety devices and working conditions. AAA agrees to furnish basic
office space and equipment, including a phone, desk, chair and office
supplies for SDS employees to complete job requirements.

3. AAA shall be obligated to furnish public warehouse services,
inventory certification services or other collateral control services for SDS
under the terms and conditions of this Agreement at the rates and fees agreed
to herein.

4. AAA agrees to maintain the warehouse and agrees to issue its
warehouse receipts upon goods and merchandise which SDS may store or cause to
be stored in said buildings, rooms and/or premises.

5. SDS agrees to promptly pay at net fourteen (14) days from invoice
date for the regular warehouse and delivery services performed by AAA's
agents and employees, pursuant to the Schedule of Charges attached as
"Exhibit A" to this Agreement.

<PAGE>

6. AAA agrees to have SDS named as an additional loss payee in all
insurance policies carried by AAA in an amount sufficient to fully cover and
insure all commodities or inventory stored with, or in the custody or control
of AAA pursuant to this Agreement.

7. AAA shall have a continuing warehouseman's lien on all goods and
merchandise of SDS in AAA's warehouse for any amounts owed AAA pursuant to
this Agreement.

8. The attached Schedule of Charges shall remain in effect, and
continue until January 1, 1999. The Schedule of Charges shall then be amended
to reflect increases (or decreases, if any) in expenses (including but not
limited to direct wages, benefits, taxes, insurance, fuel, utilities, and
interest) according to the mutual agreement of the parties on the basis of
audited and verified expenses.

9. AAA hereby agrees to reimburse SDS for any loss of, damage to, or
shortage of any goods or merchandise that may be stored in said warehouse or
with respect to which Warehouse Receipts, Inventory Certificates or other
inventory control documents have been issued to the extent such loss exceeds
two percent (2%) on an annual basis of the average inventory stored, per
annum. For example, if the average value of SDS inventory is $600,000, two
percent (2%) would equal $12,000 and AAA would be responsible for all losses
during each one year period to the extent those losses exceeded $12,000. Any
over deliveries (i.e., inventory delivered to the warehouse which exceeds
inventory ordered) shall be SDS's property and AAA's obligations under this
Agreement shall apply to such additional inventory.

<PAGE>

10. AAA agrees to assist and supply SDS with all inventory control
services and inventory certificates (which may be required by SDS pursuant to
this Agreement), including any extensions thereof, based upon the Schedule of
Charges attached hereto as "Exhibit A". SDS agrees to execute all additional
agreements required by AAA for such inventory control services requested by
SDS to be provided by AAA.

11. This Agreement shall continue in full force and effect for a
period of three (3) years from the date of this Agreement and shall
automatically continue for successive periods of three (3) years each unless
either party gives to the other, written notice to terminate at least twelve
(12) months prior to the expiration of any such three-year periods. In
addition, SDS or AAA may terminate this Agreement at any time provided it
gives at least twelve (12) months notice provided, however, that such notice
shall not be effective unless all charges and expenses owed by the
terminating party have been paid current to terms as of the time the notice
is given (the terms pursuant to which the party was required to pay any
charges or expenses).

12. During the term of this Agreement, the Parties shall hold in
strictest confidence and not disclose to any person, firm or organization any
information, business or customer information, trade secret or any other
secret or confidential matter relating to the services, sales or business of
either party hereto, except as such disclosure may be required or authorized
in connection with the performance of this Agreement. The foregoing
obligations shall not apply to any information which is in the public domain
at the time of disclosure.

13. Each of the parties hereto agrees that during the term of this
Agreement, and for a period of one (1) year thereafter, it will not either
directly or through entities

<PAGE>

controlled by or under common control with it, use or make use of any
proprietary information obtained pursuant to this Agreement.

14. Each of the parties hereto agrees that during the term of this
Agreement, and for a period of one (1) year thereafter, neither party may
hire employees that have been employed by the other party during the term of
the Agreement. The Parties agree that the damages for a breach of the
provisions of paragraph 12, 13 or 14 are subject to all direct and
foreseeable damages arising out of a breach of this Agreement.

15. AAA agrees to deliver only products and supplies to franchised
or Company Sub Shops which have been approved through Tubby's Product
Approval Process.

16. AAA shall offer skip-a-day ordering and shall provide order
control forms. Each store will have set day and time windows for delivery and
AAA will use its best efforts to maintain the time windows. AAA will offer a
Voice-Mail ordering system and will provide a cut off time of 2:00 pm two
days prior to each stores shipment date and will provide that adjustments can
be made up until 2:00 pm the day prior to shipment.

17. AAA shall have a goal of zero out-of-stocks and no
substitutions, shall never exceed 2% out-of-stocks and shall provide delivery
up to twice per week to all Tubby's Sub Shop locations as long as AAA orders
the inventory. When SDS staff begins ordering the inventory, AAA shall never
exceed 2% picking error as long as inventories are adequate.

18. In the event that there is an error in any store's order, AAA
shall provide emergency deliveries. If AAA was in error, there shall be no
emergency delivery charge. If the store or SDS was in error, emergency
deliver charges equal to $25.00

<PAGE>

per hour for week day deliveries and $45.00 per hour for weekend deliveries
shall be paid in addition to normal rates. Such emergency deliveries shall
only be made to stores located in Michigan. In the event that emergency
deliveries are required by stores located outside of Michigan, if AAA was in
error, it shall be responsible for all emergency delivery costs; if the store
or SDS was in error, SDS shall be responsible for such costs. The parties
shall work together to arrange for out-of-state emergency deliveries.

19. Any and all notices, requests, demands and other communications
permitted or required hereunder shall be in writing and shall be deemed given
on receipt, if personally delivered or sent by facsimile, or three (3)
business days after mailing if mailed, postage prepaid, to the parties as
follows, or at such other addresses as they may indicate by written notice
given as herein provided:

If to AAA If to SDS, Inc.
- --------- ---------------
Sun Valley Food Company, D/B/A
AAA Warehouse & Cold Storage Company SDS, Inc.
P.O. Box 38368 Tubby's, Inc.
Detroit, MI 48238 6029 East 14 Mile Road
Telephone: (313)342-5300 Sterling Heights, MI 48312
Facsimile: (313)342-5309 Telephone (810)978-8829
Facsimile: (810)977-8083

20. This Agreement, including "Exhibit A" attached hereto, is and
shall be deemed to be the complete and final expression of the agreement
between the parties as to the matters herein contained and relative thereto,
and supersedes any previous agreements between the parties pertaining to such
matters. If any part of this

<PAGE>

Agreement is held to be invalid or unenforceable under the laws of any
jurisdiction where this Agreement is to be governed or sought to be enforced,
the remaining provisions shall be enforceable to the maximum extent permitted
by law provided the remaining provisions effectuate the intent of the parties
as manifested herein.

21. This Agreement may only be amended by written agreement executed
by the parties hereto, or their respective successors or assigns. This
Agreement and the entire relationship of the parties hereto shall be governed
by the laws of Michigan and any litigation between the parties shall be
brought only in the Courts of the State of Michigan.

22. The parties acknowledge to each other that AAA will commence
receiving SDS inventories on or about December 31, 1997 and will begin
delivering to the participating franchised and Company owned Sub Shops on or
about January 15, 1998.

23. AAA shall collect payment for deliveries on behalf of SDS at the
time of such deliveries pursuant to individual account credit terms
established by SDS. AAA shall not be required to accept payment in the form
of cash. AAA shall not be liable for collections on deliveries or for bad
receivables debt.

24. Tubby's , Inc., a New Jersey corporation, by executing this
Agreement agrees to guarantee the obligations of SDS to AAA pursuant to this
Agreement.

In witness whereof, AAA and SDS, and Tubby's, Inc., have caused this
Agreement to be executed by a duly authorized officer on the day and year
first herein written.

<PAGE>

AAA Warehouse and Cold Storage Company, Subperior Distribution Systems, Inc.
a Michigan Corporation

By: /s/ By: /s/ Robert M. Paganes
------------------------------ ---------------------
Its: President Its: President

Tubby's, Inc.,
a Michigan Corporation

By: /s/ Robert M. Paganes
---------------------
Robert M. Paganes
Its: President

TUBBY'S, INC.

1997

ANNUAL REPORT

<PAGE>

TUBBY'S, INC.

FISCAL 1997: BRAND AWARENESS AND
NATIONAL GROWTH

Dear Shareholders:

Tubby's is proud to announce that in 1997 it achieved and exceeded
its goals and expectations. The Company saw a 15.2% increase in revenues and
a 57.2% increase in operating income. While the dollar amounts may appear
modest, the Company is confident that it has established a sound foundation
on which to pursue aggressive franchise development and growth on a national
basis.

The Company continued to strive for accelerated but controlled
national growth through its Development Agent Program. Development Agents
("DA's") are awarded the marketing rights for a geographical area and are
given the right to solicit, refer, monitor and provide continued support to
franchisees in exchange for franchise and royalty fees. In 1997, the Company
awarded Development Agent Agreements to eight qualified DA's for areas in
Texas, Missouri, Indiana, Illinois, Pennsylvania, Northern Michigan and in
the Provinces of Alberta, British Columbia and Ontario Canada. Pursuant to
those agreements, new Tubby's Sub Shops have been established in Missouri,
Indiana, Pennsylvania, Northern Michigan, British Columbia and Ontario
Canada.

Also in 1997, the Company increased its co-branding efforts in
non-traditional venues. The Company currently has stores within British
Petroleum, Shell, Citgo and Total Petroleum stations and anticipates the
opening of its first store within a Marathon petroleum station in the Spring
of 1998. These efforts have opened doors to the tremendous development
potential of co-branding within the petroleum industry.

The Company exceeded its expectations in connection with expanding
its purchasing department. The Company formed a new food distribution
subsidiary, SUBperior Distribution Systems, Inc. ("SDS"). SDS, which has been
fully operational since February 3, 1998, directly negotiates with suppliers,
purchases and distributes all products used in the operation of Tubby's Sub
Shops. SDS has and will continue to result in numerous substantial benefits
to the Company and its franchisees. In addition to price reductions, SDS's
primary focus is on quality control and efficient product distribution. The
formation of this new subsidiary will substantially increase the Company's
revenues.

In 1997, the Company continued to increase its brand awareness on a
national basis by participating and exhibiting its products at several
national trade shows. Tubby's products are prepared and served at these shows
allowing people everywhere to taste the superior quality of Tubby's products
over the competition.

<PAGE>

The Company's strategy for 1998 is to continue striving for
accelerated but controlled national growth; the Company will continue to
award territories to DA's on a national basis and, simultaneously, will
strive to maintain and increase profitability. At the same time, the Company
will consistently pursue improvements in service, quality and appearance as
part of its ongoing process to monitor and improve quality control at the
individual store level. On the basis of this strategy, along with an
increased national marketing budget, the Company anticipates unprecedented
future growth which should result in increased revenues and profits. Tubby's
management firmly believes that it is on the verge of great things and will
diligently pursue its goals to exceed expectations for its Shareholders,
Franchisees, Employees and Customers.

On behalf of the Board of Directors, we extend our appreciation to
you, our Shareholders, for your support and belief in our shared future. We
also thank our employees and franchisees for our success and achievements in
the past and coming year.

/s/ Peter T. Paganes /s/ Robert M. Paganes
- ------------------------------- ---------------------------------
Peter T. Paganes, Robert M. Paganes
Chairman of the Board President & CEO

<PAGE>

TUBBY'S, INC.

DESCRIPTION OF BUSINESS

About the Company

Tubby's, Inc. franchises restaurants under the trade names "Tubby's Sub
Shops", "Tubby's Express", and "Stuff Yer Face." Tubby's Sub Shops and
Tubby's Express restaurants specialize in 20 varieties of submarine and pita
sandwiches, featuring assorted salami, steak, burger and taco subs, all made
to order. Sizes vary from six inches to five-foot party subs. The Company
operates and franchises Tubby's Express specialty Sub Shops in Sears retail
stores in Michigan.

Stuff Yer Face Restaurants are sit-down, full-service restaurants utilizing
waitress and waiter services. Their operations are based on the promotion of
a specialty sandwich called a "Stromboli." The Stromboli filling includes
combinations of meatballs, sausage, pepperoni, veal, steak, chicken, shrimp,
and vegetables.

Each concept emphasizes fresh, top-quality ingredients, moderate prices and
fast courteous service in a pleasant atmosphere. At November 30, 1997, there
were 81 Tubby's Sub Shops, four Stuff Yer Face and three Tubby's Express
restaurants in operation. Franchise outlets are located in Michigan, New
Jersey, Ohio, Pennsylvania, Arizona, and the Canadian provinces of Edmonton
and Ontario. Indiana and Missouri franchised outlets were added soon after
year-end.

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at 10:00 a.m. EST, on
Thursday, May 21, 1998, at the Cherry Creek Golf Course, 52000 Cherry Creek
Drive, Shelby Township, Michigan 48316.

FORM 10-KSB

To obtain a free copy of the 1997 Form 10-KSB, as filed with the SEC, please
write to: Investor Relations, Tubby's, Inc., 6029 East Fourteen Mile Road,
Sterling Heights, Michigan 48312-5801.

<PAGE>

TUBBY'S, INC.

FIVE YEAR FINANCIAL HIGHLIGHTS

The following is a summary of selected financial data for Tubby's, Inc.:

<TABLE>
<CAPTION>
For The Years Ended November 30
(Thousands, except ------------------------------------------------------
per share amounts) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ..................... 3,599 3,123 3,662 3,737 2,839
Net Income (Loss) ........... 107 117 274 (921) (491)
Costs and Expenses .......... 3,496 3,058 3,531 4,604 3,271
Depreciation and Amortization 135 105 125 198 131
Capital Expenditures ........ 69 462 6 227 919
Total Assets ................ 3,325 3,333 3,270 2,683 4,279
Long-Term Debt .............. 140 176 246 330 780
Net Income(Loss) Per Share .. $ 0.04 $ 0.05 $ 0.10 $(0.50) $(0.30)
Dividends Per Share ......... -- -- -- -- --
</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.

Financial Overview

Tubby's and its consolidated subsidiaries experienced an increase in 1997
Total Revenues of $475,819, or 15.2%. The Company earned income before taxes
of $202,799, in 1997 versus $117,357, in 1996. The increase in revenues is
attributable to increases in Food Sales of $134,010, or 16.8%, Monthly
Franchise Fees of $126,885, or 19.3%, Advertising Fees of $80,927, or 14.2%,
and Commissions and other fees of $155,341, or 42.2%. Equipment and
restaurant sales decreased by $35,637 or 5.8%. Ten new franchised stores
opened in 1997 as well as six additional stores opened pursuant to
Development Agent Agreements, ("DA"). Additionally, two company owned
restaurants were sold or leased to franchisees in 1997.

Operating Income in 1997 of $102,928 increased by 57.2% or $37,464 as
compared to 1996. This increase in Operating Income was primarily a result of
the $155,341 increase in Commissions and other fees as well as less dramatic
increases in the other categories of revenue as referred to above. Operating
expenses increase from 62.2% of Total Revenues in 1996 to 65.5% or an
increase of $415,448 in 1997. Cost of food sales decreased from 73.8% of Food
Sales in 1996 to 71.7% in 1997. Cost of Equipment and restaurants sales also
decreased disproportionately from 86.5% of revenue in 1996 to 81.7% in 1997.
Other Income also increased by 92.5% to $99,871 in 1997 reflecting increased
interest income and decreased interest expense.

One Company owned and operated restaurant was sold to a franchisee in
September, 1997. An additional Company owned and operated restaurant that had
been reacquired from a delinquent franchisee in 1996 was leased to a
franchisee in June, 1997, with an option to purchase it after two years. Both
restaurants continue to operate as Tubby's Sub Shops. The Food sales
attributed to these restaurants were $150,714 in 1997.

In November, 1995, the Company hired a new director of franchise development.
This individual brought to Tubby's five years of restaurant industry
experience in franchise sales. The Company attended, as an exhibitor, several
national industry trade shows in its effort to gain national recognition and
expand into new regions of the country. Among the impressive results of 1997,
DA Agreements representing one hundred-two new Tubby's Sub Shops, over the
next eight years, were initiated for potions of Texas, Missouri, Indiana,
Illinois, Michigan and the provinces of Alberta, British Columbia and
Ontario, Canada. Stores that are expected to result from the implementation
of DA Agreements are the contractual responsibility of the DAs. Tubby's
anticipates that these agreements will be fulfilled on a timely basis as
stipulated in their respective contracts. Six Tubby's Sub Shops opened
pursuant to DA Agreements in 1997. Ten other Tubby's Sub Shops opened in
1997.

Tubby's currently conducts most of its business in the Metropolitan Detroit,
Michigan region. The Detroit area economy is largely tied to the results of
the domestic automotive industry. Employment and spending patterns of the
people living in this area tend to mirror the operating results of these
companies and their suppliers. During the last several years the domestic
automobile industry improved significantly. As the domestic automobile
industry hired additional workers the local economy also improved as did the
operating results of many of Tubby's franchised restaurants. The strength of
Detroit's local economy is expected to continue in 1998. As additional stores
are opened in other cities, royalty fee income derived from these

<PAGE>

stores will at least be partially dependent upon the economy in those areas.
Although weather can be a factor in the sales of the Company's products, the
Company does not consider this business to be seasonal.

Results of Operations

Comparison of the years ended November 30, 1997 and 1996

Tubby's and its consolidated subsidiaries experienced an increase in 1997
Total Revenues of $475,819 or 15.2%. The Company earned income before taxes
of $202,799 in 1997 versus $117,357 in 1996 which is a 72.8% increase. Net
Income after taxes was $107,499 in 1997 versus $117,357 in 1996 when no taxes
on income were reflected (see Footnote #8 of the Notes to Consolidated
Financial Statements).

The increase in revenues is attributable to increased Food sales of $134,010,
or 16.8%, Monthly Franchise fees of $126,885, or 19.3%, Advertising fees of
$80,927, or 14.2%, and Commissions and other fees of $155,341, or 42.2%.
Equipment and restaurant sales decreased by $35,637 or 5.8%. Ten new
franchised stores opened in 1997 as well as six additional stores opened
pursuant to DA agreements. Additionally, two Company owned restaurants were
sold or leased to franchisees in 1997.

The increase in Food sales revenues is primarily attributable to one Company
owned restaurant that was opened and one existing restaurant that was
reacquired from a delinquent franchisee both in the fourth quarter of 1996.
The Company owned restaurant was sold to a franchisee in September, 1997. The
reacquired restaurant was leased with an option to buy to a new franchisee in
June, 1997. Both restaurants continue to operate as Tubby's Sub Shops. The
Food sales attributable to these restaurants were $150,714 in 1997. Operating
Income in 1997 derived from Food sales increased by $54,413 or 26.1% from
1996. The increase in operating Income from Food sales was largely
attributable to the two restaurants previously mentioned.

The increased Monthly Franchise fees of $126,885 and Advertising fees of
$80,927 in 1997 reflect increases in system wide sales resulting from the
opening of new Tubby's Sub Shops and the accelerated efforts of the Company's
marketing department. The Company believes that the strong economy will
continue into 1998. With at least fourteen new Tubby's Sub Shops planned for
the first six months of 1998 and more planned for the remainder of the year,
and with the additional efforts of the Company's new marketing manager,
system wide food sales should dramatically increase resulting in increased
fees collected.

The increase in Initial Franchise fees of $14,293 in 1997 consists of the
amounts received from two new Tubby's Sub Shops and fees received from
sixteen franchisees who either transferred ownership of existing franchisee
owned restaurants or opened additional restaurants at reduced licensing fees
in 1997. Initial fees in 1996 consisted of amounts received from two new
franchisees and fees received from thirteen franchisees who either
transferred ownership of existing Tubby's Sub Shops or opened additional
restaurants at reduced licensing fees. Reduced Initial licensing fees are
collected from Tubby's Sub Shops opened pursuant to a DA Agreement, opened in
non-traditional sites, or opened by existing franchisees.

The Company experienced a decrease in Equipment and restaurant sales of
$35,637 as result of the trend towards franchisees opening non-traditional
Tubby's Sub Shops or opening restaurants pursuant to DA Agreements. In both
of these situations, the Company frequently sells the franchisee the
appropriate restaurant equipment but frequently does not participate in the
construction of the leasehold improvements either due the restaurant being
located in an established business site such as a service station or being
located outside of the Detroit region.

<PAGE>

The Company did increase the Operating Income derived from Equipment and
restaurant sales by $21,053 or 25% as a result of increased profit margins.

Commissions and other fees are comprised of vendor rebates, marketing rights,
and rental income of existing Company owned franchisee operated Tubby's Sub
Shops. Vendor rebates increased in 1997 by $49,005 or 15.5% as compared to
1996. This increase resulted primarily from the increased systems wide food
sales mention above. Rental income increased by $17,968 or 34.4% as compared
to 1996. The increase in rental income resulted from the rental, in July of
1996, of a newly acquired existing Tubby's Sub Shop to a franchisee for the
entire year of 1997. Marketing rights were first received in 1997 by the
Company. In 1997, the Company received $45,019 for Marketing rights sold
pursuant to DA Agreements.

Operating expenses increased in 1997 by $415,448 or 21.4%. Additionally,
Operating expenses increased disproportionately from 62.2% to 65.5% of Total
Revenue. Operating expenses have increased as the Company continues to
expand. The previously unfilled staff positions of purchasing and marketing
were staffed at an expense of approximately $100,000 in 1997. Building rent
of Company owned stores increased by about $38,000. Building rent is expected
to decrease in the coming year as two Company owned restaurants were either
sold or leased to franchisees. Advertising, promotional, and various
marketing and franchise development expenses increased by $393,000 in 1997 as
the Company expanded its marketing efforts in regions where Tubby's are
located and further emphasis was placed on franchise development in other
regions of North America. Certain operating expenses decreased, also. The
most noteworthy decrease occurred in Legal fees which declined by $95,272 or
86.4% resulting from an overall decline in legal activity that required
outside counsel and most other legal matters being handled by in-house
counsel.

Interest Income increased by $13,531 or 14.3% in 1997. This increase was
attributable to interest income of $21,168 received from a franchisee
currently in bankruptcy proceedings. Interest income is recorded when
received. Management anticipates that interest income will decrease in 1998
as Tubby's growth accelerates. The Company's working capital is utilized
during the construction phase, on a short term basis, to finance the new
construction and equipment purchases of franchised restaurants. Upon the
completion of a new restaurant, the franchisee is invoiced for the
construction and equipment costs with a profit margin. As the pace of new
restaurant construction accelerates; additional amounts of working capital
will be utilized and interest income derived from idle funds will decrease as
a result. Additionally, in February, 1998, the Company initiated operation of
its SUBperior Distribution Systems, Inc. (SDS) subsidiary that sells food and
proprietary items to its Franchisees. Due to characteristics of its business
cycle, SDS is expected to maintain a sizable inventory and accounts
receivable. To maximize profits SDS will also take advantage of purchase
discounts that are normally available. The Company will utilize its excess
funds to provide short term funding as required.

Interest Expense decreased in 1997 by $18,663 or 66.1% when compared to 1996.
Management expects this trend to not continue in 1998. As noted in the
preceding paragraph, SDS is expected to utilize some portion or all of the
Company's excess funds. To the extent that additional funds are required, the
Company may utilize its revolving lines of credit. SDS maintains a $250,000
revolving line of credit with a financial institution in addition to a
similar line of credit maintained by Tubby's Sub Shops, Inc. Interest for
both lines of credit accrue on the unpaid balance at 1/2% over the prime rate
charged by the financial institution. As of November 30, 1997, there were no
borrowings under either line of credit.

<PAGE>

Liquidity and Capital Resources

Cash and Equivalents combined with Investments increased by $76,548 when
compared to 1996. The acquisition of property and equipment utilized $69,020
of cash in 1997 as compared to $462,155 in cash in 1996. An increase in
Accounts Receivable of $198,543 and a decrease in Accounts Payable of $83,522
utilized Cash and Equivalents of $282,065.

Cash Flows From Operating Activities Was $169,799 in 1997

Operating Activities Creating Significant Cash Inflows:
o Net Income of $107,499.
o Non-cash adjustments to the Net Income included Depreciation and
Amortization for 1997 of $135,468 and Taxes on Income of $95,300,
(see Footnote #8 of the Notes to Consolidated Financial
Statements).
o Decreases in Prepaid expenses of $59,195 resulting from the payment
of certain non-reoccurring marketing expenses.
o Increases in Deferred revenue of $49,356 representing primarily the
prepayment of initial licensing fees for Tubby's Sub Shops that are
expected to open during the first two quarters of 1998.

Operating Activities Creating Significant Cash Out Flows:
o Accounts receivable increased by $198,543 primarily as a result of
equipment sales occurring near the end of the fourth quarter.
o Decreases in Accounts payable of $83,522 resulting from
acceleration of processing of accounts payable.

Cash Flows Used By Investing Activities Was $16,921 in 1997

Cash Flows From Investing Activities:
o Net Proceeds From Sale Of Property and Equipment of $5,000.
o Payments on Notes receivable of $52,912.

Cash Used In Investing Activities:
o Purchase of Certificate of Deposit and Investments of $5,813.
o Purchases of Property and Equipment of $69,020.

Cash Flows From Financing Activities decreased by $82,143

Items Creating Cash In Flows:
o Proceeds From long-term debt of $150,000 results from the
refinancing through a new financial institution of Company owned
but franchisee operated Tubby's Sub Shop.

Cash Used In Financing Activities:
o Payments of Long-Term Debt of $232,143 relates to principal
reduction on notes owed by the Company relating to the refinancing
mentioned above and other payments of Company debt.

<PAGE>
Other Liquidity Related Items

During fiscal year 1994, Tubby's concentrated on a "back to basics"
approach to its business. The Company concentrated on eliminating
unprofitable operations, consolidating administrative functions and
development of new sub shop franchises. With a leaner and more focused
management team, the Company was able in 1995 to concentrate on its core
business of franchising Tubby's Sub Shops and becoming profitable. In
1996, the Company continued its focus on its core business of
franchising Tubby's Sub Shops while remaining profitable. During 1996
and 1997 the Company began the implementation of its strategy to become
a national chain of franchised restaurants rather then a regional chain
as it had been in previous years. The Company initiated four DA
Agreements in 1996 and an additional six DA Agreements in 1997.

Expense control remains a critical element leading to the continued
profitability of the Company. Management is continuing its ongoing
review of expenses and is initiating cost reductions where appropriate.
In the fourth quarter of the 1994 fiscal year management initiated
significant salary and expense reductions--the full benefit of which is
still being realized.

During 1998, the Company has identified several items which will impact
cash flow and the liquidity of the Company. Those items are:

Items Creating Cash Inflows

o In the first quarter of 1998, the Company expects to complete those
locations that were under construction at the end of 1997 and realize
$181,000 in cash from the respective sales at that time.

o In February, 1998, the Company launched its new subsidiary, SUBperior
Distribution Systems, Inc., SDS"). SDS was created by management to
become its distributor of food and restaurant supplies to the franchisee
and Company owned Tubby's Sub Shops. SDS has contracted with an
unrelated Detroit based company that is experienced with multiple
location institutional food distribution to provide warehouse and
distribution services that are necessary to serve Tubby's Sub Shops. The
Company believes SDS will be able to provide its franchised and Company
owned restaurants with uniform and consistently high quality products at
equivalent or lower prices then previously charged.

o The Company anticipates the construction and opening of as many as
fourteen new restaurants in the first two quarters of 1998. If these
restaurants open as planned, the Company will realize operating income
from the sale of equipment of about $10,000 from each store. The Company
will also receive initial licensing fees, and ongoing monthly royalty
and advertising fees. Reduced fees are derived from stores that are
opened pursuant to DA Agreements.

The Company also has sufficient equipment inventory (see Footnote #3 of the
Consolidated Financial Statements) to meet some of the needs of the new
Franchisees entering the system. Based on the existing commitments for new
Franchisees, the Company anticipates that it will convert most of its
existing inventory to cash in the 1998 year.

<PAGE>

Items Creating Cash Outflows

o At November 30 ,1997, the Company had four restaurants at various
stages of construction. These new locations will require significant
additional expenditures before completion. These restaurants are
franchise owned and operated. Upon their completion, the Company will
recoup its investments in these locations. The Company believes that it
has sufficient liquidity to complete these restaurants.

o The Company's SDS subsidiary will require a significant investment in
inventory to meet the needs of its restaurants and those owned by
franchisees. As the inventory is sold it will be replenished and
accounts receivable generated. The Company believes that with a
combination of internal funding and existing lines of credit sufficient
funds are available to maintain its inventory and accounts receivable.

o In January, 1998, pursuant to its corporate headquarters lease, the
Company notified its landlord of their intention to purchase the
building at the contract price of $425,000. The Company has a confirmed
commitment for funding the entire purchase. The terms of the commitment
are 100% financing at a fixed rate of 8.25% for five years with a
fifteen year amortization. After five years, a new commitment will be
required.

o In January, 1998, the Company paid $265,000 pursuant to a settlement
agreement of claims by Patrick J. McCourt, as Trustee of the Patrick J.
McCourt Trust and as President of McCourt Corporation, (See Item 3,
Legal Proceedings).

As a result of the above sources and uses of cash and the expected continued
cash flows, the Company believes it has sufficient liquidity to meet the
needs of the Company in 1998. The Company maintains two $250,000 lines of
credit with a local financial institution to meet short term financial needs.
Management believes that as a result of its "back to basics" approach, the
recognition of these reoccurring items, and the ongoing reduction in
operating expenses, the Company's operations will continue to improve in
1998.

Recent Accounting Pronouncements

The Financial Accounting Standards Board has issued SFAS No. 128 "Earnings
per Share" which modifies the standards for computing earnings per share. The
statement is effective for financial statements issued for periods ending
after December 15, 1997. This statement is not expected to have a material
impact on the Company's computation of earnings per share.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements.

<PAGE>

standard may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.

SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.

Year 2000 Costs

The Company, like most owners of computer software, will be required to
modify certain portions of its software so that it will function properly in
the year 2000. Maintenance or modification costs will be expensed as
incurred, while the costs of any new software will be capitalized and
amortized over the software's useful life. Management believes these "year
2000" costs will be immaterial.

Impact of Inflation

The Company does not believe inflation has had a material impact on earnings
during the past several years. The Company has demonstrated an ability to
manage its assets, adjust retail prices, and use long-term debt for real
estate holdings - made less expensive by inflation - and take such other
steps as necessary to mitigate the effects of inflation.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

November 30,
--------------------------
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current Assets
Cash and equivalents $ 864,229 $ 793,494
Certificate of deposit 105,430 100,000
Marketable securities 25,383 25,000
Accounts receivable - trade, less allowance for doubtful
accounts of $36,740 and $20,850 in 1997 and 1996 443,810 245,267
Notes receivable 66,217 72,091
Inventories 99,419 102,805
Prepaid expenses and other 51,449 110,644
---------- ----------

Total Current Assets 1,655,937 1,449,301
---------- ----------

Property and Equipment
Land 325,347 325,347
Building and improvements 663,753 693,347
Equipment 527,265 440,705
Furniture and fixtures 138,394 219,464
Vehicles 15,009 15,009
---------- ----------

Less accumulated depreciation 773,576 654,255
---------- ----------

Net Property and Equipment 896,192 1,039,617
---------- ----------

Total Other Assets 773,260 843,621
---------- ----------

Total All Assets $3,325,389 $3,332,539
========== ==========

<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
November 30,
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
---- ----
<S> <C> <C>
Current Liabilities
Accounts payable $ 106,407 $ 189,929
Accrued liabilities
--Compensation 19,887 21,075
--Other 16,153 13,305
Deferred revenue 115,489 87,000
Long-term debt due in one year 220,520 266,825
----------- -----------

Total Current Liabilities 478,456 578,134

Deferred Revenue 60,867 40,000

Long Term Debt, less amounts due in one year 139,932 175,770
----------- -----------

Total Liabilities 679,255 793,904
----------- -----------

Total Stockholders' Equity 2,646,134 2,538,635
----------- -----------

<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS 1997 1996
---- ----
<S> <C> <C>
Revenues
Food sales $ 931,000 $ 796,990
Franchise fees
--Monthly 785,959 659,074
--Initial 132,543 118,250
Advertising fees 650,909 569,982
Equipment and restaurant sales 575,427 611,064
Commissions and other fees 523,197 367,856
----------- -----------

Total Revenues 3,599,035 3,123,216
----------- -----------

Costs and Expenses
Operating expenses 2,357,938 1,942,490
Cost of food sales 667,854 588,257
Cost of equipment and restaurant sales 470,315 527,005
----------- -----------

Total Costs and Expenses 3,496,107 3,057,752
----------- -----------

Operating Income 102,928 65,464
----------- -----------

Other Income (Expense)
Interest income 108,430 94,899
Interest expense (9,572) (28,235)
Gain (loss) on sale of fixed assets -- (5,880)
Miscellaneous 1,013 (8,891)
----------- -----------

Total Other Income 99,871 51,893
----------- -----------

Income Before Taxes on Income 202,799 117,357

Taxes on Income 95,300 --
----------- -----------

Net Income $ 107,499 $ 117,357
=========== ===========

Earnings Per Share $ .04 $ .05
=========== ===========

Weighted Average Common Shares Outstanding 2,604,720 2,556,720
=========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, at December 1, 1995 2,538,114 $ 25,382 $ 3,430,044 $(1,090,398) $ 2,365,028

Issuance of common stock 45,000 450 55,800 56,250

Net income -- -- -- 117,357 117,357
----------- ----------- ----------- ----------- -----------

Balance, at November 30, 1996 2,583,114 25,832 3,485,844 (973,041) 2,538,635

Net income -- -- -- 107,499 107,499
----------- ----------- ----------- ----------- -----------

Balance, at November 30, 1997 2,583,114 $ 25,832 $ 3,485,844 $ (865,542) $ 2,646,134
=========== =========== =========== =========== ===========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 107,499 $ 117,357
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 135,468 105,226
Taxes on income 95,300 --
Loss on sale of fixed assets -- 5,880
Increase (Decrease) In Cash Due to Changes In:
Accounts receivable (198,543) (11,596)
Inventories 3,386 (67,965)
Prepaid expenses and other 59,195 (65,506)
Accounts payable (83,522) 26,457
Accrued liabilities 1,660 (19,344)
Deferred revenues 49,356 (44,000)
--------- ---------

Net Cash Provided by Operating Activities 169,799 46,509
--------- ---------

Cash Flows From Investing Activities
Purchase of property and equipment (69,020) (462,155)
Payments on note receivable 52,912 134,936
Increase in certificate of deposit and marketable securities (5,813) (25,000)
Net proceeds from sale of property and equipment 5,000 13,500
Sale of certificate of deposit and marketable securities -- 154,590
Other assets -- (2,242)
--------- ---------
Net Cash Used In Investing Activities (16,921) (186,371)
--------- ---------

Net Increase (Decrease) in Cash 70,735 (157,650)
Cash and Equivalents, at beginning of period 793,494 951,144
--------- ---------

Cash and Equivalents, at end of period $ 864,229 $ 793,494
========= =========
<FN>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
</TABLE>

<PAGE>

TUBBY'S, INCORPORATED & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997

1. SUMMARY OF ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Tubby's Inc., its wholly-owned subsidiaries and its fifty-one percent
partnership interest in the McTub Company (Tubby's Express). Intercompany
balances and transactions have been eliminated.

Natures of Operations

The Company's and its subsidiaries' revenue is derived from: (1) franchise
and advertising fees for the rights to operate sit down and carry-out
restaurants specializing in submarine sandwiches, hamburgers or steak
sandwiches, pizzas or ice cream; (2) food sales at Company owned stores; (3)
equipment sales to franchisees; and (4) vendor commissions and rebates. The
Company and its franchisees operate restaurants in Michigan, Ohio, New
Jersey, Pennsylvania, Arizona, Missouri, Indiana and the provinces of Ontario
and Alberta Canada.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents, certificates of
deposit, marketable securities and accounts and notes receivable. At times
such cash and equivalents in banks are in excess of the respective financial
institution's FDIC insurance limit. The Company attempts to minimize credit
risk by reviewing all franchisees' credit history before extending credit and
by monitoring franchisees' credit exposure on a continuing basis. The Company
establishes an allowance for possible losses on accounts and notes
receivable, when necessary, based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The Company also
establishes an allowance for possible losses, when necessary, for declines in
market value of its marketable securities.

Fair Values of Financial Instruments

The carrying amounts of cash, cash equivalents, certificates of deposit,
marketable securities, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity of these items.

The carrying amounts of the long-term debt issued pursuant to the Company's
credit agreements approximate fair value because the interest rates on these
instruments approximate market rates.

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and (2) revenues and expenses during the reporting
period. Actual results could differ from these estimates.

<PAGE>
Cash and Equivalents and Certificate of Deposit

Cash and equivalents consist of cash, certificates of deposit, money market
funds, U.S. Treasury bills and commercial paper with maturity dates not
exceeding three months.

Certificates of deposit with maturity dates exceeding three months are
separately classified on the balance sheet.

Inventories

Inventories include food and equipment held for resale to franchisees.
Inventories are stated at the lower of cost (primarily on a specific
identification basis) or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed over the
useful lives of the assets ranging from 5 to 19 years, using the
straight-line method. Depreciation expense was $122,395 and $94,550 in 1997
and 1996, respectively.

Goodwill

Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at acquisition. The Company amortizes goodwill
over periods not exceeding 40 years. The Company reviews goodwill for
impairment based upon the estimated undiscounted cash flows over the
remaining life of the goodwill. If necessary, impairment will be measured
based on the difference between undiscounted cash flows and the book value of
the related goodwill.

Revenue Recognition

Monthly franchise fees are recognized based on the franchisees' sales as
earned, except where collection is not deemed probable. Advertising fees are
recognized as related expenses are incurred

Initial franchise fees and fees from Area Development Agreements ("ADA's")
are deferred until the Company has substantially met its obligations under
the franchise agreement, which is generally at the time the store is opened.
Deferred revenues under ADA's are recognized as revenue on a pro rata basis
as each store opens.

Advances under vendor rebate agreements are deferred and recognized as
revenue over the term of the agreements.

Advertising Costs

The Company expenses the cost of advertising as incurred. Advertising expense
was approximately $651,000 and $582,000 in 1997 and 1996, respectively.

Taxes on Income

Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.

Earnings Per Share

The computation of earnings per share is based on the weighted average number
of outstanding common shares and equivalents. Common share equivalents
included in the

<PAGE>

computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in years where there are earnings.

In January 1998, the Company declared a one for ten reverse stock split. As a
result, the amount of outstanding shares has been reduced from 25,831,131 to
2,583,114. In connection with the reverse stock split, the Company amended it
Articles of Incorporation to reduce the number of shares authorized from
60,000,000 to 6,000,000. Retroactive effect has been given to all share and
per share data contained in the consolidated financial statements.

The Financial Accounting Standards Board has issued SFAS No. 128 "Earnings
per Share" which modifies the standards for computing earnings per share. The
statement is effective for financial statements issued for periods ending
after December 15, 1997. The statements is not expected to have a material
impact on the Company's computation of earnings per share.

Long-lived Assets

The Company adopted the provision of Statement of Financial Accounting
Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be disposed of" during the year ended
November 30, 1997. SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
related goodwill to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting this
standard did not have a financial impact on the Company.

The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstance indicate that the
carrying amount of assets may not be recoverable. The Company evaluates
whether impairment exists on the basis of undiscounted future cash flows from
operations before interest for the remaining useful life of the assets. Any
long-lived assets held for disposal are reported at the lower of these
carrying amounts or fair value less costs to sell.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements.

SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, the standard may have on
future financial statement disclosures. Results of operation and financial
position, however, will be unaffected by implementation of this standard.

<PAGE>

operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.

SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to
be restated. Because of the recent issuance of this standard, management has
been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.

2. MARKETABLE SECURITIES

The Company has classified its marketable securities as available-for-sale
and are reported at fair market value with unrealized gains or losses
reported as a component of stockholders' equity. Available-for-sale
securities are comprised of corporate bonds. During each of the fiscal years
and as of November 30, 1997 and 1996, there were no realized or unrealized
gains or losses reported as cost approximated fair value.

At November 30, 1997, corporate bonds included in available-for-sale
securities have contractual maturities exceeding ten years.

3. INVENTORIES

Inventories at November 30, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Equipment $ 70,430 $ 80,994
Food and paper goods 28,989 21,811
-------- --------

$ 99,419 $102,805
======== ========
</TABLE>

4. NOTES RECEIVABLE

Notes receivable consisted of the following at November 30, 1997 and 1996.

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note receivable, due in monthly installments
with interest at 10%, collateralized by a second
mortgage on property, maturing in 2007 $330,296 $347,629

Various notes receivable, due in monthly installments with
interest at various interest rates up to 10%,
collateralized by equipment,
maturing through 2001 279,263 229,842
-------- --------

609,559 577,471
Less amounts due within one year 66,217 72,091
-------- --------

Total Notes Receivable - Noncurrent $543,342 $505,380
======== ========
</TABLE>

<PAGE>
The Company's recorded investment in impaired loans totaled $43,000, with no
related credit loss allowance, in 1997 and 1996. The average recorded
investment in impaired loans during 1997 was $43,000, with related interest
income recognized in 1997 of approximately $21,000. Interest Income on
impaired loans is recognized only when payments are received.

5. REVOLVING CREDIT AGREEMENT

In January 1997, the Company entered into a $250,000 line-of-credit with a
bank with interest payable at the bank's prime rate plus one-half percent
(9.0% at November 30, 1997). Short-term borrowings are due on demand and are
secured by a blanket lien on all assets of the Company and a pledged $100,000
certificate of deposit. No borrowings were outstanding under the
line-of-credit at November 30, 1997 and 1996.

6. LONG-TERM DEBT

Long-term debt consisted of the following at November 30, 1997 and 1996.

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Notes payable - stockholder (see Note 13) $200,000 $200,000

Mortgage notes payable in equal monthly installments of
$1,930 through March, 2002, at which
time a balloon payment is due; with interest
payable at 9.25% 142,084 180,704

Other obligations payable in equal monthly
installments of $1,100 through September
2000, with interest of up to 9% 18,368 19,857

Notes payable - paid during 1997 -- 42,034
-------- --------
360,452 442,595
Less amounts due within one year 220,520 266,825
-------- --------
$139,932 $175,770
======== ========
</TABLE>

The Company has pledged substantially all of its property and equipment as
collateral for repayment of debt.

Annual maturities of long-term debt are as follows:

<PAGE>

7. RELATED PARTIES

Two founding stockholders of the Company are directors and are also officers.
These stockholders own approximately 17% of the outstanding common stock. In
addition to their responsibilities to the Company, they also own and operate
three franchised Tubby's restaurants. The following is a summary of activity
with these stockholders and their restaurants as of and for the years ended
November 30, 1997 and 1996.

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accounts receivable $ 29,191 $ 26,262

Notes receivable, due in quarterly installments
plus interest at 9% -- 24,436

Franchise and advertising fees 151,130 150,215

Interest income 1,431 3,401
</TABLE>

8. INCOME TAXES

Significant components of deferred tax assets and liabilities consist of the
following at November 30, 1997 and 1996.

<TABLE>
<CAPTION>
Deferred Tax Assets 1997 1996
- ------------------- ---- ----
<S> <C> <C>
Net operating loss carry-forwards $ 615,000 $ 725,000
Allowance for doubtful accounts 60,000 43,000
Deferred revenue 22,000 13,000
Depreciation 12,000 10,000
Other 1,000 2,000
--------- ---------

Net Deferred Tax Asset 710,000 793,000

Valuation allowance on net deferred tax asset (710,000) (793,000)
--------- ---------
Deferred Taxes $ -- $ --
========= =========
</TABLE>

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

The following reconciles the expected income tax rate to the effective
income tax rate.

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income taxes (benefit) at federal statutory rate 34.0% 34.0%
Tax expense resulting from utilization of NOLs 47.0 --
Valuation allowance adjustment (40.9) (53.7)
Non-deductible goodwill and entertainment
expenses 8.3 14.6
Other (1.4) 5.1
----- -----
Effective Tax Rate 47.0% --%
===== =====
</TABLE>

<PAGE>
of approximately $288,000 which when utilizing the loss carry-forwards
resulted of a reduction of goodwill of $95,300. Utilization of these losses
is limited based on the taxable income generated by the activity that
generated these losses and the carry-forwards expire beginning in 1999.

The Company also has net operating loss carry-forwards for tax purposes of
approximately $892,000 relating to losses incurred subsequent to the above
mentioned acquisition which expire from 2006 through 2009.

9. STOCK OPTION PLAN

The Company has stock option plans under which key employees may be granted
options to purchase a specific number of shares of the Company's stock with
option prices approximating market prices at the date of grant. Options are
subject to the terms of each plan.

The Company applies Accounting Principles Board Option No. 25 in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation expense for the Company's stock
option plans has been determined based on the fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's net income and net
income per share would have been the following pro forma amounts:

<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Income
As reported $107,499 $117,357
Pro forma 52,276 117,357

Earnings Per Share
As reported .04 .05
Pro forma .02 .05
</TABLE>

As of November 30, 1997, 283,383 shares were reserved under the Incentive
Stock Option Plan and 83,300 were reserved under the non-statutory Incentive
Stock Option Plan. A summary of the options is as follows:

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Incentive Stock Option Plan
Outstanding, at December 1, 1995
(2,967 exercisable) 112,967 $2.50
Exercised (45,000) 1.20
Expired (7,500) 3.10

Outstanding, at November 30, 1996
(60,467 exercisable) 60,467 3.10
Granted 13,500 3.30

Outstanding at November 30, 1997
(60,467 exercisable) 73,967 3.20
</TABLE>
- -----------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Non-Statutory Incentive Option Plan
Outstanding at December 1, 1995
and November 30, 1996
(20,000 exercisable) 20,000 $ 3.60
Granted 20,500 1.60
<CAPTION>
- --------------------------------------------------------------------------
<S> <C> <C>
Outstanding at November 30, 1997
(20,000 exercisable) 40,500 2.60
</TABLE>

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1997: dividend yield of 0%; expected volatility of
74%; risk free interest rate of 6.2%; and expected lives of 3.3 years.

The weighted average grant date fair value options granted in 1997 was $2.00.

The following is a summary of stock options outstanding at November 30, 1997:

<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Weighted Average Weighted
Remaining Average
Contractual Exercise
Price Range Number Life (Years) Price
- --------------------------------------------------------------------
<S> <C> <C> <C>
Incentive Stock Option Plan
$ 1.60 - 1.90 20,000 7.7 $ 1.80
3.10 - 4.40 53,833 7.3 3.70
8.40 134 6.0 8.40
------ --- --------
73,967 7.4 $ 3.20

Non-Statutory Plan
$ 1.50 - 1.90 20,500 9.7 $ 1.60
3.60 20,000 4.0 3.60
------ --- --------
40,500 6.9 $ 2.60
<CAPTION>
Options Exercisable
-------------------
Weighted Average
Price Range Number Exercise Price
- ---------------------------------------------------------------
<S> <C> <C>
Incentive Stock Option Plan
$ 1.60 - 1.90 20,000 $ 1.80
3.10 - 4.40 40,333 3.70
8.40 134 8.40
------ ------

Non-Statutory Plan
$ 3.60 20,000 $ 3.60
------ ------
</TABLE>

<PAGE>
The weighted average exercise price of the 60,467 shares which were
exercisable at November 30, 1996, was $3.10.

10. EMPLOYEE BENEFIT PLAN

In 1997, the Company implemented a 401(k) plan covering substantially all
full-time employees. The Company matches each employee's contribution up to a
predetermined limit. The Company's contribution expense amounted to
approximately $3,000 in 1997.

11. OPERATING LEASES

The Company leases buildings, equipment, and restaurant space under various
operating leases. The future minimum rental payments, under all operating
leases containing minimum annual rental payments, are as follows:

Total rent expense under the operating leases was approximately $120,000 and
$129,000 for 1997 and 1996, respectively.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for:

<TABLE>
<CAPTION>
Year Ended November 30, 1997 1996
---- ----
<S> <C> <C>
Interest $17,572 $28,235
Income taxes -- 10,000
</TABLE>

During 1997, the Company exchanged property and equipment for a note
receivable totaling $85,000.

13. LITIGATION SETTLEMENT

In January 1998, the Company entered into a release and settlement agreement
with Patrick J. McCourt (McCourt), minority shareholder of McTub Company, in
connection with the litigation between the Company and McCourt. The agreement
required the Company to pay McCourt the sum of $200,000 which constitutes
repayment of the principle of a term note dated in October 1993. The
liability under the term note is included in the "long-term debt due in one
year" caption in the accompanying consolidated balance sheets. Also, in
connection with the agreement, the Company agreed to pay McCourt $65,000 in
1998 for his 49% interest in McTub Company. The agreement discharges and
releases the Company from any and all claims with McCourt.

<PAGE>
14. SUBSEQUENT EVENTS

o Subsequent to November 30, 1997, the Company entered into a commitment for
the purchase of the building that houses its corporate headquarters for
the total cost of $425,000. Long term financing will be obtained in
connection with the purchase of the building.

o In February 1998, the Company began a new subsidiary named SUBperior
Distribution Systems, Inc. ("SDS"). SDS was formed by management to become
its distributor of food and restaurant supplies to the franchised and
Company-owned Tubby's Sub Shops. SDS has contracted with an unaffiliated
company that is experienced with multiple location institutional food
distribution to provide the warehouse and distribution activities that are
required to serve Tubby's Sub Shops. In connection with the addition of
the new subsidiary the Company entered into an additional line-of-credit
agreement, which allows for maximum borrowings of $250,000 with interest
payable at prime plus one-half percent.

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Tubby's, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Tubby's, Inc.
and Subsidiaries as of November 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tubby's,
Inc. and Subsidiaries at November 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ BDO Seidman, LLP

Troy, Michigan
February 3, 1998

<PAGE>

SHARE TRADING RANGE

The following table sets forth the high and low stock prices for the
Company's $.01 par value common stock as reported by NASDAQ for the fiscal
years indicated.

The following quotations do not include retail mark-ups, markdowns or
commissions and represent prices between dealers and not necessarily actual
transactions. The past performance of the Tubby's, $.01 par value common
stock is not necessarily indicative of future performance.

<TABLE>
<CAPTION>
1996 1997
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Quarter 1 $7-13/16 $1-1/4 Quarter 1 $4-1/16 $2-1/2
Quarter 2 4-11/16 2-1/2 Quarter 2 4-3/8 2-13/16
Quarter 3 3-3/4 2-3/16 Quarter 3 4-3/8 2-3/16
Quarter 4 3-7/16 1-9/16 Quarter 4 5 2-1/2
</TABLE>

As of February 20, 1998, the approximate number of shareholders of record of
the Company was 7,000. The Company has never paid cash dividends on its
common stock. Payment of dividends is within the discretion of the Company's
Board of Directors and depends, among other factors, on earnings, capital
requirements and the operating and financial condition. At the present time,
the Company's anticipated financial capital requirements will be such that it
intends to follow a policy of retaining earnings in order to finance the
development of its business.

The Company announced that effective January 21, 1998, that it had declared a
reverse stock split. As a result of this split, the amount of its outstanding
shares has been reduced from approximately 26 million to less than 2.6
million. In connection with the reverse split, Tubby's amended its Articles
of Incorporation to reduce the amount of its authorized shares from 60
million to 6 million shares so that the percentage of authorized shares that
remains unissued does not exceed the percentage of authorized shares that was
unissued before the share combination.

<PAGE>

Shareholder Information

OFFICERS DIRECTORS CORPORATE OFFICES ACCOUNTANTS
<S> <C> <C> <C>
Robert M. Paganes Robert M. Paganes 6029 East Fourteen Mile Road BDO Seidman, LLP
President, Director President, Director Sterling Heights, MI 48312-5801 755 W. Big Beaver, # 1900
Troy, Michigan 48084

P. Terrance Paganes P. Terrance Paganes LEGAL COUNSEL SHAREHOLDERS
Vice-President, Vice-President, Dickinson, Wright, Moon, The approximate number of
Director Director Van Dusen & Freeman shareholders at November
500 Woodward, Suite 4000 30, 1997 was 7,000.
Detroit, Michigan 48226-3425

Vincent J. Tatone Vincent J. Tatone TRANSFER AGENT
Secretary, Director Secretary, Director Continental Stock Transfer
& Trust Company
2 Broadway, 19th Floor
New York, NY 10004

Melvyn B. Erdos, CPA John M. Fayad
Chief Financial Officer, Director
Treasurer
Ron Boraks
Director

IN-HOUSE COUNSEL
Vincent J. Tatone

</TABLE>

TUBBY'S, INC.
LIST OF SUBSIDIARIES
NOVEMBER 30, 1997

EXHIBIT 21

Name State of Incorporation
---- ----------------------
Tubby's Sub Shop Advertising, Inc. Michigan
The SubLine Company, Inc. Michigan
Tubby's Company Stores, Inc. Michigan
Tubby's Sub Shops, Inc. Michigan

Name State of Partnership
---- --------------------
The McTub Company Michigan

Exhibit 23

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

Tubby's, Inc. and Subsidiaries
Sterling Heights, Michigan

We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement (Form S-8) of our
report dated February 3, 1998, relating to the consolidated financial
statements of Tubby's, Inc. and Subsidiaries appearing in the Company's
Annual Report on Form 10-KSB for the year ended November 30, 1997.

BDO Seidman, LLP

Troy, Michigan
February 27, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> $ 969,659
<SECURITIES> 25,383
<RECEIVABLES> 1,090,109
<ALLOWANCES> 36,740
<INVENTORY> 99,419
<CURRENT-ASSETS> 1,655,937
<PP&E> 1,669,768
<DEPRECIATION> 773,576
<TOTAL-ASSETS> 3,325,389
<CURRENT-LIABILITIES> 478,456
<BONDS> 0
<COMMON> 25,832
0
0
<OTHER-SE> 2,620,302
<TOTAL-LIABILITY-AND-EQUITY> 3,325,389
<SALES> 1,506,427
<TOTAL-REVENUES> 3,708,478
<CGS> 1,138,169
<TOTAL-COSTS> 2,367,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 9,572
<INCOME-PRETAX> 202,799
<INCOME-TAX> 95,300
<INCOME-CONTINUING> 107,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,449
<EPS-PRIMARY> .04
<EPS-DILUTED> .04

</TABLE>