<PAGE>
                                   EXHIBIT 13

                             (MAX & ERMA'S(R) LOGO)

                                                 Love each other. Love the food.

                         Max & Erma's Restaurants, Inc.       2005 ANNUAL REPORT

<PAGE>

                             (MAX & ERMA'S(R) LOGO)

The Company

IN 1972, WE WALKED INTO A SLEEPY, SLIGHTLY FUNKY BAR AND ENVISIONED A DIFFERENT
KIND OF NEIGHBORHOOD GATHERING PLACE. WE DECORATED IT WITH ANTIQUE ARTIFACTS AND
LOCAL COMMUNITY PARAPHERNALIA THAT MADE MAX & ERMA'S A FUN, UNIQUE PLACE TO TAKE
FRIENDS AND FAMILY.

SINCE THAT DAY, OUR GUESTS HAVE TOLD US OUR ALL-AMERICAN FOOD, FRIENDLY SERVICE
AND CASUAL ATMOSPHERE ARE THE REASONS THEY KEEP RETURNING TO MAX & ERMA'S.

WE'VE GROWN OVER THE YEARS, BUT WE REMAIN TRUE TO WHAT MADE US SUCCESSFUL
--DELIVERING A GREAT GUEST EXPERIENCE. WE BELIEVE THAT EXPERIENCE STARTS WITH
OUR FOOD. THAT'S WHY WE USE THE FRESHEST, HIGHEST QUALITY INGREDIENTS IN
EVERYTHING WE MAKE. OUR HAMBURGERS ARE FRESH, NEVER FROZEN. OUR ONION RINGS ARE
CUT AND HAND-BATTERED IN OUR RESTAURANTS. OUR SALMON IS FLOWN IN FOR FRESHNESS.

WE ALSO KNOW THAT OUR GUESTS DESIRE QUICK, YET FRIENDLY SERVICE. WE TREAT THEM
WITH RESPECT, AS OUR FRIENDS AND NEIGHBORS IN A WELCOME, COMFORTABLE
ENVIRONMENT. THE ATTITUDE IS UNPRETENTIOUS AND RELAXED. IT ALL ADDS UP TO A
UNIQUELY SATISFYING EXPERIENCE.

AS TIME GOES ON, WE MAY CHANGE THE MENU, BUILD NEW RESTAURANTS AND ENHANCE THE
DECOR. BUT ONE THING WILL ENDURE -- OUR COMMITMENT TO QUALITY IN OUR FOOD, OUR
SERVICE AND THE PLACE IN WHICH WE DELIVER IT.

WE BELIEVE OUR PASSION FOR THE EXPERIENCE SHINES THROUGH -- IN EVERY MAX &
ERMA'S RESTAURANT, AT EVERY TABLE, EVERY DAY.

                                      (MAP)

<PAGE>


                              Financial Highlights

<TABLE>
<CAPTION>
                                                     2005            2004
                                                 ------------    ------------
<S>                                              <C>             <C>
FOR THE YEAR

Revenues .....................................   $183,705,077    $182,958,795
Operating Income (Loss) ......................       (140,277)      3,133,941
Income (Loss) Before Income Taxes ............     (2,610,085)        960,435
Income Taxes (Credit) ........................     (1,295,000)       (137,000)
Net Income (Loss) ............................     (1,315,085)      1,097,435
Net Income (Loss) Per Diluted Share ..........          (0.52)           0.42
Diluted Shares Outstanding ...................      2,537,277       2,583,762
Capital Expenditures .........................   $  9,966,903    $ 19,443,999

AT YEAR END

Total Assets .................................   $ 73,857,285    $ 71,107,085
Long-Term Obligations Less Current
   Maturities ................................     41,817,482      41,053,030
Stockholders' Equity .........................     13,307,307      14,056,220
Number of Restaurants:
   Company-Owned .............................             79              78
   Franchised ................................             23              20
Number of Employees ..........................          5,344           5,297

PERFORMANCE RATIOS

Operating Profit (Loss) Margin ...............           (0.1)%           1.7%
Net Profit (Loss) Margin .....................           (0.7)%           0.6%
Return on Beginning Assets ...................           (1.8)%           1.8%
Return on Beginning Equity ...................           (9.4)%           9.0%
</TABLE>

                                     Content

01 Financial Highlights

02 Letter to Shareholders

04 Selected Financial Data

05 Management's Discussion and Analysis

10 Financial Statements

15 Notes to Financial Statements

20 Report of Independent Registered Public Accounting Firm

21 Selected Quarterly Financial Data

Max & Erma's Purpose: We are to help our guests enjoy their total dining
experience so they can't wait to come back.

<PAGE>

To Our Shareholders

Writing this letter each year affords me the opportunity to reflect on our work,
seeing how far we've come, and how far we have yet to go. I liken my role in the
company to that of a coach who monitors progress and rewards it, but must also
continually challenge the team to win a tough game. In the year just ended, we
moved forward in some areas, and made some critical decisions. Even with noted
achievements, though, we struggled to put the necessary numbers on the board.
However, we ended the year on a high note, pointing us in a positive future
direction.

FIRST, THE NUMBERS

Revenue for the company increased $700,000 or 0.4% from $183.0 million for 2004
to $183.7 million for 2005. This was a result of opening three restaurants
during 2005, along with an 11% increase in franchise fees and royalties. Same
store sales, the measure of sales in restaurants open 18 months or longer,
decreased by 3.2% during 2005. This decrease is due to heightened levels of
competition and tough economic indicators in the Midwest.

Max & Erma's feels the ripple effects of a tough economy. When utility costs
increase, it impacts us on multiple levels. First, we pay higher utility costs
to run our restaurants. Second, we face increased costs from our vendors,
absorbing their utility cost increases. Finally, we are hit by tough choices on
the consumers' part -- eating out is one of the first things to be cut when gas
at the pump or utility prices increase. It is difficult to pass our increased
costs on to our customers when their wallets are already squeezed.

COST CONTROL

During 2005, we took positive steps to manage our costs, especially in the areas
of payroll & benefits and the cost of goods sold. We were able to decrease our
payroll & benefits expense from 32.7% of sales in 2004 to 32.3% of sales in
2005. This decrease was mainly the result of an improved health care plan and
self-funding our Ohio workers' compensation program, providing a combined
savings of over $1 million. Cost of goods sold has challenged us for two years,
as we saw record high costs in beef and chicken in 2004. During 2005, the total
costs of goods sold decreased from 25.8% in 2004 to 25.5%. We made headway in
decreasing the cost of ground beef, but it is still 15+% higher than typical
historical measures.

THE BOTTOM LINE

For the year, we reported a net loss of $1,315,000 or $(0.52) per diluted share
for 2005 as compared to net income of $1,097,000 or $0.42 per diluted share for
2004. We failed to put the necessary numbers on the board this year. We faced
challenges on many levels of the business -- soft sales caused by intense
competition and consumer belt-tightening; high commodity and utility costs; and
some particularly challenged locations. We are taking action on all fronts to
reverse these trends.

                    (PHOTO OF ROB LINDEMAN (LEFT) PRESIDENT)
                                       AND
          (PHOTO OF TODD B. BARNUM (RIGHT) CEO & CHAIRMAN OF THE BOARD)

<PAGE>

TAKING STOCK

Since the early days of Max & Erma's, we have understood that a critical factor
affecting our success is the quality of our locations. We analyze potential
locations from many perspectives before committing to them. Over time, however,
trade areas change along with the populations surrounding our locations. These
shifts often work against us, leaving us now with several under-performing
locations. During the second quarter of 2005, we recorded a $1.45 million asset
impairment charge related mostly to six under-performing restaurant locations,
two of which were closed during the third quarter. Before closing a restaurant,
we do everything we can to reverse negative trends and turn the situation
around. At times, however, closing the location is the best way to minimize the
future negative impact that the location will cause. It helps us move the
company forward.

THE BEST OPPORTUNITIES FOR FUTURE GROWTH

Because the site selection process is so critical, we completed a feasibility
study of the entire United States this year. The study was meant to reveal our
best opportunities for future growth. In the Midwest, where Max & Erma's has
most of its locations, the economy has suffered. Our plan for future growth in
the Midwest will therefore be to mainly replace underperforming, lease-expiring
sites with new sites in more attractive areas.

The feasibility study identified attractive regions with strong economic
indicators -- Florida, Texas, the southwest -- as the best fit for our future
growth. These areas will therefore be a focus for growth, be it through
franchising or corporate development. We will gain a foothold in the west with
our recently-signed Franchise Development Agreement for ten restaurants over ten
years in the Las Vegas area.

BUILDING A BRAND

Beyond developing quality sites, we know that it is critical for Max & Erma's to
deliver a unique, memorable guest experience. We operate in a highly-competitive
market in which our customers are offered new dining options every day. We
therefore spent much of 2005 developing a comprehensive plan to build the brand
of Max & Erma's. We know we've always run a good restaurant company. It is time
to build a great brand.

Our strategy is based on expressing our passion for the experience -- the
passion we have for people, for food and for the place in which it happens. The
whole company is focused on delivering a passionate guest experience.

To that end, all of the important elements of our offering -- the menu, the
service style, the atmosphere -- are lined up to deliver a uniquely passionate
experience. During 2005, we added fantastic items to our menu, including Lemon
Herb Halibut and a Grilled Vegetable Sandwich. We have re-shaped our training
and reinforcement programs to educate and reward what is truly important to our
guests. We designed a new building prototype which will separate us from our
competitors. It is fun, bright, inviting -- and unique from our competition! We
are poised to build a strong, quality, unique Max & Erma's brand.

To complement the brand strategy, we introduced new marketing methods in the
fourth quarter of 2005. We removed most of the discounting promotions, reserving
them for under-performing locations. Discounting dilutes our brand and
ultimately hurts our profitability. In the place of discounting, we introduced
traffic-driving promotions that attract new guests to the restaurants. We are
optimistic about our new marketing strategy. We believe this model offers the
best of all worlds -- a value for our guests and a traffic-driver for our
restaurants.

BUILDING ON THE TALENT WITHIN

With our strategic growth plans, and the emphasis we're placing on building a
brand, we are laying a strong foundation for Max & Erma's future. The foundation
would not be complete if we did not also address our future leadership plans. I
know that all of our hard work would not yield the results we desire without the
best and brightest minds working on our senior team.

To that end, we continue to restructure our management team, as any company
should, when planning for the future. An important part of Max & Erma's culture
is that we build on the talent within. It works well, as the members of our
senior team draws upon an average of 20 years experience at Max & Erma's. To
lead the team and build Max & Erma's brand in the future, I selected Rob
Lindeman to be the next President of the Company. It is a role I have held for
over 30 years, and proudly turn over to Rob. He was selected for this role
because of his extensive experience in the restaurant operations, his success
with our franchising program, and his ability to perform new responsibilities,
managing several additional departments over the past couple of years. Rob is
passionate about Max & Erma's, and I am confident he will succeed in his new
role.

As for me, I remain as the CEO and Chairman of the Board. My role is to develop
the team and challenge them to achieve greater levels of success. Of course, I
will also help celebrate the successes, as any great coach would do. I look
forward to sharing it all with you.


/s/ Todd B. Barnum
-------------------------------------
Todd B. Barnum
CEO & Chairman of the Board

"We therefore spent much of 2005 developing a comprehensive plan to build the
brand of Max & good restaurant company. It is time to build a great brand."


                                       03

<PAGE>

                             Selected Financial Data

<TABLE>
<CAPTION>
(In Thousands, except per share and     October 30   October 31    October 26    October 27   October 28   October 29
other data and ratios)                     2005         2004          2003          2002         2001         2000
-----------------------------------     ----------   ----------    ----------    ----------   ----------   ----------
<S>                                     <C>          <C>           <C>           <C>          <C>          <C>
RESULTS OF OPERATIONS
Revenues ............................   $183,705     $  182,959    $  167,083    $ 151,991    $ 141,088     $124,165
Operating Income (Loss) .............       (140)         3,134         3,213        6,638        5,726        2,123
Interest Expense ....................      2,431          2,154         1,680        2,082        2,619        2,293
Income (Loss) Before Income Taxes ...     (2,610)           960         1,494        4,498        3,107         (285)
Net Income (Loss) ...................     (1,315)         1,097         1,494        3,288        2,391          183
Depreciation and Amortization .......      8,444          8,219         6,364        5,659        5,405        5,211
Capital Expenditures ................      9,967         19,444        19,055       17,794       13,544       22,775

PER DILUTED SHARE DATA
Net Income (Loss) ...................   $  (0.52)    $     0.42    $     0.56    $    1.27    $    0.93     $   0.07
Average Shares Outstanding (000's) ..      2,537          2,584         2,648        2,591        2,562        2,629

FINANCIAL POSITION
Cash and Equivalents ................   $  2,911     $    2,188    $    2,616    $   3,407    $   2,351     $  2,762
Working Capital Deficit .............    (12,032)        (9,568)       (7,723)      (8,102)      (9,120)      (7,404)
Property - Net ......................     55,607         55,350        47,037       47,693       42,803       43,654
Total Assets ........................     73,857         71,107        61,742       61,971       54,933       55,201
Long-Term Obligations
   (Less Current Maturities) ........     41,817         41,053        35,837       36,862       32,228       33,474
Stockholders' Equity ................     13,307         14,056        12,189       11,358        9,202        8,170

OTHER DATA AND RATIOS
Average Restaurant Sales ............   $  2,344     $    2,376    $    2,385    $   2,369    $   2,350     $  2,335
Same-Store Sales Increase (Decrease)        (3.2)%         (0.4)%        (0.3)%        0.9%         2.3%         3.9%
Company-owned Restaurants in
   Operation at Year End ............         79             78            73           67           61           56
Operating Profit (Loss) Margin ......       (0.1)%          1.7%          1.9%         4.4%         4.1%         1.8%
Long-Term Debt-to-Equity Ratio ......        3.1            2.9           2.9          3.2          3.5          4.1
Market Price Per Share at Year End ..   $  12.36     $    13.35    $    17.75    $   14.00    $   10.50     $   8.38
Price Earnings Ratio (High/Low) .....        N/M      45.2/31.8     32.5/23.2     12.4/8.3     12.7/9.0          N/M
Return on Beginning Assets ..........       (1.8)%          1.8%          2.4%         6.0%         4.3%          .3%
Return on Beginning Equity ..........       (9.4)%          9.0%         13.2%        35.7%        38.0%         1.7%
</TABLE>


                                       04

<PAGE>

                      Management's Discussion And Analysis

OVERVIEW

We derive revenues and income from the operation and franchising of restaurants.
Our Company-owned and franchised restaurants sell both food and alcoholic
beverages (with the exception of two franchised locations that sell food only).
Our restaurants are primarily located in the mid-west, within a 400 mile radius
surrounding Columbus, Ohio, our Company's headquarters, and to a lesser extent
in the southeast. Our franchised restaurants tend to be located on the outer
edge of the mid-west, i.e., Philadelphia, Green Bay and St. Louis, with
selective markets or locations within the mid-west also operated by franchisees.
In late 2005, we signed a ten-restaurant franchise development agreement for Las
Vegas, Nevada.

We generally lease the real estate for our restaurants and invest approximately
$1.0 million dollars in furniture, fixtures and equipment and building costs not
totally funded by landlords. However in 2005, our average investment per
restaurant was $1,945,000 for the three company-owned restaurants. This increase
was due to the fact that all three were ground leases and only one landlord made
a building construction allowance. We expect that the average investment in
future restaurants will be at or close to the historical average. We anticipate
that new restaurants will generate annual sales of approximately $2.5 million
each and an average restaurant level profit of at least $300,000. Franchisees
generally pay an initial franchise fee of $40,000 per location, plus an annual
royalty of 4% of sales. We anticipate that each additional franchised location
will pay annual royalties of approximately $100,000.

The restaurant industry is very competitive. We typically compete favorably with
several larger, national restaurant chains in most of our locations.
Nonetheless, the amount of competition is one of the most significant factors
affecting the success of a restaurant location. While we seek out less
competitive sites, highly successful locations quickly attract competition,
which may affect sales. In late 2004 and into 2005, same-store sales turned
negative. The most common reason for this decline in sales, on a restaurant by
restaurant basis, is an increased level of competition near the restaurant.

During late 2003 and through most of 2004, our restaurants experienced margin
pressure due to rising beef, chicken, produce, and dairy prices. In late 2004
and into 2005, we began to implement a series of menu specification changes and
systematically re-bid a large number of inventory items. These moves, along with
consolidating our chicken purchasing with one vendor at a then below market
fixed price and a return to more normal costs for produce and dairy, resulted in
a decline in cost of sales, as a percentage of revenues for 2005 as compared to
a mid-2004 high point. Our approach to rising commodity prices has always been
to cautiously raise prices every six months at a rate consistent with inflation
and not over react to shorter-term price spikes. As a result of this policy, we
have generally maintained a gradually declining cost of sales percentage. During
the fourth quarter of 2005, we experienced some further reduction in the costs
of sales percentage resulting from declining market prices for beef due to the
lifting of the ban on importing Canadian beef.

We also have experienced sharply rising healthcare and worker's compensation
insurance costs over the past several years. We have implemented several safety
incentives and began self-funding our Ohio Worker's Compensation insurance
effective late in the fourth quarter of 2004. We believe this program has
lowered worker's compensation expense for our Ohio restaurants by approximately
$590,000 in 2005. During the first quarter of 2004, we implemented a new health
insurance program and increased our employee contribution rates in an effort to
reduce our health insurance costs. As a result, health insurance costs for 2004
declined by approximately $400,000 over 2003. By again increasing employee
contribution levels in 2005, we limited the increase in our health insurance
costs in 2005 to 9%, including additional locations. We believe that the rising
cost of healthcare will continue to be a challenge.

We have bank borrowings in excess of $31.0 million. The related notes carry
variable interest rates. As a result, our Company is exposed to a risk
associated with rising interest rates. To mitigate this risk, we purchased an
interest rate swap, which essentially fixed the rate on approximately 25% of the
outstanding balance. However, rising interest rates in 2005 resulted in higher
interest expense and reduced profitability. The interest rate swap expired
October 31, 2005, and depending upon further increases in interest rates, could
subject us to higher interest expense in 2006.

Approximately two thirds of the outstanding balance under our loan agreement
arose from the repurchase of our common stock. In late 1998, we began a
repurchase program, which has resulted in the repurchase of approximately 2.2
million shares of our common stock primarily over a four-year period. We
currently do not have an authorized stock repurchase program in place.

We are currently committed to debt service and replacement capital expenditures
totaling approximately $6.9 million per year. At current levels of
profitability, cash flow after debt service and replacement capital expenditures
may be less than $2.0 million annually. Because of this and limited availability
of funds under our credit facility, we have reduced our expected growth rate to
one to two restaurants in 2006. The availability of landlord construction
allowances and the sale-leaseback of real estate, both of which result in a
reduced cash investment per new restaurant, will affect the growth rate in 2006.


                                       05

<PAGE>

YEAR-TO-YEAR COMPARISONS AND ANALYSIS RESULTS OF OPERATIONS

The following table sets forth our operating results as a percentage of
revenues:

<TABLE>
<CAPTION>
                                       2005     2004    2003
                                      -----    -----   -----
<S>                                   <C>      <C>     <C>
Revenues ..........................   100.0%   100.0%  100.0%
Cost of Goods Sold ................   (25.5)   (25.8)  (24.7)
Payroll & Benefits ................   (32.3)   (32.7)  (33.0)
Other Operating Expenses ..........   (33.3)   (31.7)  (31.3)
Pre-Opening Expenses ..............    (0.2)    (0.3)   (0.4)
Impairment of Fixed Assets ........    (0.8)      --    (0.7)
Administrative Expenses ...........    (8.0)    (7.8)   (8.0)
Interest Expense ..................    (1.3)    (1.2)   (1.0)
Minority Interest .................      --       --      --
(Income Taxes) Tax Credit .........     0.7      0.1      --
                                      -----    -----   -----
Net Income(Loss) ..................    (0.7)%    0.6%    0.9%
                                      =====    =====   =====
</TABLE>

REVENUES

Revenues for 2005 increased $700,000 or 0.4% from $183.0 million for 2004 to
$183.7 million for 2005. The increase was a result of i) the opening of three
restaurants during 2005, ii) the opening of five restaurants during 2004 and
iii) an 11% increase in franchise fees and royalties from $1,635,000 in 2004 to
$1,821,000 in 2005. These increases offset a $5.1 million or 3.2% decline in
sales at restaurants open 18 months or more, ii) the closing of two under
performing restaurants during 2005, and iii) sales from one additional week in
fiscal 2004. Exclusive of the additional week in 2004, revenues increased $4.3
million or 2.4%.

Revenues for 2004 increased $15.9 million or 9.5% from $167.1 million for 2003
to $183.0 million for 2004. The increase was a result of i) the opening of five
restaurants during 2004, ii) the opening of six restaurants during 2003, iii) a
34% increase in franchise fees and royalties from $1,217,000 in 2003 to
$1,635,000 in 2004 and iv) one additional week in fiscal 2004. Exclusive of the
additional week in 2004, revenues rose $12.3 million or 7.3%. These increases
offset a $670,000 or 0.4% decline in sales at restaurants open 18 months or
more.

We believe the declines in same-store sales over the past two years were a
result of increased competition, a weak mid-western economy and the effect of
rising gasoline and utilities costs on consumer spending. Specifically in 2005,
the same-store sales decline of 3.2%, the largest decline in over twenty years,
was a result of i) an increased level of competition - eighteen of our 79
restaurants had two or more competing restaurants open near or adjacent to our
restaurants during the last twelve months, ii) the opening of two new Max &
Erma's during the fourth quarter of 2004 near two of our existing restaurants,
which contributed to a sales decline of approximately $1,000,000 at the two
older restaurants, iii) a sluggish mid-western economy - recent news articles
indicate that Ohio, Michigan, Illinois, and Pennsylvania, where the vast
majority of our restaurants are located, lag almost all other states in job and
economic growth statistics, and iv) higher gasoline and utility prices - we
believe our target customer, with household income just under $100,000 annually
and coming typically from two wage earners, may be more adversely affected by
rising gas and utility prices than either the typical fast food customer or the
customer of higher priced concepts. Same-store sales were also negatively
impacted $487,000 by Christmas falling on a Saturday in the current year as
compared to mid-week last year and a major winter storm during the fourth week
of January 2005, which impacted most of our markets and resulted in a $383,000
sales decline for the three day weekend.

These factors resulted in an 8% decline in customer counts in 2005. The effect
of this was offset in part by a 12% increase in same-store to go sales and a 4%
increase in the per person guest check average. The increase in the per person
guest check average was a result of an approximately 2% menu price increase in
2005 and the introduction of higher priced menu items.

We anticipate revenue growth of approximately 4% in 2006 as a result of the
opening of one to two Company-owned restaurants and the opening of five
franchised restaurants. The three Company-owed restaurants opened in 2005 should
make a significant contribution to 2006 revenues. Through the end of 2005, they
reported average weekly sales of $58,835 as compared to a chain-wide average
weekly average of $45,068. The eight restaurants opened since the start of 2004
generated average weekly sales of $52,798 during 2005. One site was under
contract to purchase at October 30, 2005. No restaurants were under
construction.

We anticipate a continued increase in franchise fees and royalties. At October
30, 2005, twenty-three franchised restaurants were in operation as compared to
twenty at October 31, 2004 and sixteen at October 26, 2004. As of October 30,
2005, we anticipate the opening of an additional five franchised restaurants
during 2006. At October 30, 2005, we had seven multi-unit franchise agreements
signed, requiring the development of 33 additional restaurants over the next ten
years.

COSTS AND EXPENSES

Cost of goods sold, as a percentage of revenues, increased from 24.7% for 2003
to 25.8% for 2004 and then declined to 25.5% for 2005. The increase from 2003 to
2004 was a result of significantly higher beef and chicken costs since mid-2003,
and to a lesser extent higher dairy costs in 2004. Rising beef and chicken
prices added approximately $600,000 to cost of goods sold in 2003 and an
additional $2.35 million in 2004. Rising dairy prices, primarily in the second
half of 2004, added an additional $550,000 to cost of goods sold in 2004. The
decline from 2004 to 2005 was a result of a decline from the record high ground
beef and chicken prices of 2004, a reduction in dairy and produce prices,
implementation of various cost savings measures, and an approximate two percent
menu price increase over last year. As a result, we have reduced cost of goods
sold, as a percentage of revenues, from its third quarter 2004 high point to
current levels. Ground beef prices remained high through the third quarter of
2005, but began to decline in the fourth quarter, due to the lifting of the ban
on importing Canadian beef, which will increase the supply of beef in the U.S.

Payroll and benefits as a percentage of revenues, declined from 33.0% for 2003
to 32.7% for 2004 and then declined to 32.3% for 2005. The decreases were
primarily a result of lower health insurance expense due to a change in our
health plan during the first quarter of 2004, which reduced health insurance
expense by approximately $400,000. The further reduction in benefits expense in
2005 was due primarily to a $590,000 savings associated with self-funding our
Ohio

                         Max & Erma's Restaurants, Inc.


                                       06

<PAGE>

workers' compensation expense. Payroll expense over the periods reported was
generally stable.

Other operating expense as a percentage of revenues increased from 31.3% for
2003 to 31.7% for 2004. The increase was due to higher advertising, gas and
electric and restaurant operating supply expenses. Increases in these expenses
offset a $800,000 or 40 basis point savings in occupancy costs related to the
purchase of previously leased equipment. Other operating expenses increased from
31.7% for 2004 to 33.3% for 2005. The increase of $3,046,000 was primarily a
result of increased marketing expenses ($885,000), cleaning expenses ($479,000),
carryout supplies ($100,000), higher credit and gift card fees ($315,000),
higher natural gas prices ($290,000), and increased repairs and maintenance
expense ($200,000), and real estate taxes ($304,000). The increase in other
operating expenses, as a percentage of revenues, was exacerbated by the decline
in same-store sales in 2005, as many of the expenses in this category are of a
fixed nature.

Pre-opening costs, as a percentage of revenues, declined from 0.4% in 2003 to
0.3% in 2004 and to 0.2% in 2005. The decline in this expense is a result of the
number and timing of restaurant openings each year. We opened six restaurants in
2003, five in 2004, and three in 2005.

ASSET IMPAIRMENT

Annually, or more frequently if events or circumstances change, a determination
is made by management to ascertain whether goodwill or any long-lived assets
have been impaired based upon several criteria including but not limited to
revenue trends, discounted operating cash flows and other operating factors. In
performing this review, we consider the age of the restaurant and any
significant economic events, recognizing that these restaurants may take 24 to
36 months to become or return to profitability.

At the end of 2003, management evaluated these criteria and determined that the
long-lived assets associated with the Company's restaurants located in Grand
Rapids, Michigan and Prospect, Kentucky were impaired. Accordingly, in the
fourth quarter of 2003, we recorded a $1,070,000 write-down of the carrying
value of these impaired assets based upon the discounted cash flow of each
restaurant. We subsequently closed these two restaurants during the third
quarter of 2005.

During the second quarter of 2005, we recorded a $1.45 million asset impairment
charge related to six under performing restaurants and to write off costs
associated with the proposed de-registration of our common stock. We expensed
$1.26 million for the write down of restaurant assets at the six restaurants and
for payment to a landlord to obtain a release from one of the leases. We closed
two of the restaurants during the third quarter of 2005. The restaurants that
closed were both within three years of the end of their current lease terms.
Three of the restaurants are in shopping centers where factors associated with
the center have negatively impacted our business. The two restaurants that
closed had operating losses for 2005 of $385,000, including the cost of closing.
We currently expect to operate the other four restaurants through the remainder
of their lease terms, but may consider a sale or sub-lease of any of the
locations. The restaurant assets at these restaurants were written down to
estimated fair value based upon future discounted cash flows. The write down of
restaurant assets at these four restaurants will reduce annual depreciation
expense by approximately $120,000. We believe that the closing or write down of
the impaired locations, along with related overhead savings, should result in
annual savings of approximately $800,000.

We also expensed $190,000 of costs associated with the proposed de-registration
of our common stock. Because the Securities and Exchange Commission extended the
date of compliance with the Sarbanes-Oxley Act for non-accelerated filers and
because of several initiatives which may reduce the compliance costs, we elected
to terminate the proposed de-registration transaction during the second quarter
of 2005. Accordingly, we wrote off approximately $190,000 of costs, primarily
legal, accounting, and professional fees, associated with the transaction.

ADMINISTRATIVE EXPENSES

Administrative expenses, as a percentage of revenues, declined from 8.0% in 2003
to 7.8% in 2004 and then increased back to 8.0% for 2005. In dollar terms,
administrative expenses increased 7% from 2003 to 2004 and 4% from 2004 to 2005.
Administrative expenses have increased each year generally due to raises for
corporate personnel and additional personnel to support the Company's internal
and franchise growth.

INTEREST EXPENSE

Interest expense increased 28% from $1,680,000 in 2003 to $2,154,000 in 2004 and
then increased an additional 13% in 2005 to $2,431,000.

In 2003 and 2004, our interest rate was based upon the ratio of bank
indebtedness to earnings before interest, taxes, depreciation and amortization.
If the ratio is above 2.5 to 1, our interest rate would be LIBOR plus 3.5
percent or prime plus 3/4 percent. If the ratio is below 2.5 to 1 but above 2.0
to 1, our interest rate would be LIBOR plus 3.0 per cent or prime plus 1/4
percent. If the ratio falls below 2.0 to 1, the interest rate would be reduced
further to LIBOR plus 2.5 percent or prime minus 1/4 percent. For 2003 the
interest was LIBOR plus 3 percent and prime plus 1/4 percent on the term loan
and revolving credit portions of the credit agreement, respectively. Based upon
results for the year ended October 26, 2003, the interest rate was increased to
LIBOR plus 3.5 percent and prime plus 3/4 percent, respectively, for all of
2004.

In 2005, our interest rate was based upon the ratio of bank indebtedness plus
future minimum rental commitments multiplied by 8 to earnings before interest
taxes, depreciation and amortization, and rent. Based upon results for fiscal
2004, our interest for fiscal 2005 remained at LIBOR plus 3.5 percent and prime
plus 3/4 percent. Additionally, we used an interest rate protection agreement to
fix a portion of the outstanding balance under our credit agreement. The
interest rate protection agreement expired October 31, 2005.

The increase in interest expense from 2003 to 2004 was primarily a result of our
borrowing an additional $6,000,000 at the start of 2004 to purchase equipment
that was previously leased under operating leases. Additionally, our interest
rate increased because of increases in LIBOR and the prime interest rate and
because pricing under our credit agreement moved to a higher tier, as previously
described. These increases offset a reduction in the higher fixed rate portion
of our outstanding balance. At October

                         Max & Erma's Restaurants, Inc.


                                       07

<PAGE>

31, 2004, the outstanding balance under our credit agreement was $31.1 million,
30% of which was at the higher fixed rate of 9.9%. The interest rate on the
remaining 70% or $21.8 million had increased to 5.5% from 4.25% at October 26,
2003.

The increase in interest expense from 2004 to 2005 was a result of further
increases in LIBOR and the prime interest rate. The outstanding balance under
our revolving credit agreement remained almost unchanged at $31.2 million at
October 30, 2005, with approximately 20% of that amount at the higher fixed rate
of 9.9%. The interest rate on the remaining 80% had increased to 7.5% at October
30, 2005. We capitalized $417,000, $170,000, and $94,000 of construction period
interest during 2003, 2004, and 2005, respectively.

INCOME TAXES

At the level of pre-tax income reported in 2003 and 2004, the FICA tax on tips
credit offset all federal, state, and local income tax expense and resulted in
no income tax expense in 2003 and an income tax credit of $137,000 in 2004.

In 2005, we reported a tax credit of $1.3 million, which reflects the tax
benefit of the reported loss before income taxes and the FICA tax on tips credit
of approximately $1.0 million for 2005. Additionally, during the third quarter
of 2005, the state of Ohio eliminated its corporate franchise income tax and
replaced it with a commercial activity tax to be included in administrative
expenses. Accordingly, we recorded an income tax expense of $550,000 in the
third quarter of 2005, which represents a charge to write-off previously
recorded State of Ohio deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital ratio remained at 0.4 to 1 at both October 31, 2004 and
October 30, 2005. Historically we have been able to operate with a working
capital deficiency because i) restaurant operations are primarily conducted on a
cash basis, ii) high turnover (about once every 10 days) permits limited
investment in inventory, and iii) trade payables for food purchases usually
become due after receipt of cash from the related sales.

During 2005, our Company expended approximately $9,967,000 for property
additions and $52,821,000 to reduce long-term obligations and increased cash on
hand $723,000. Funds for such expenditures were provided primarily by
$52,793,000 from proceeds of long-term obligations, $10,475,000 from operations,
$252,000 from the sale of stock. We routinely draw down and repay our revolving
credit line, the gross amounts of which are included in the above numbers.

We intend to open one to two restaurants during fiscal 2006. At October 30,
2005, we were contractually committed to the purchase of one new restaurant for
which we were in the process of obtaining approvals and permits. The estimated
cost to complete the one site to which we were contractually committed at
October 30, 2005, was approximately $3.2 million. We also anticipate capital
expenditures of approximately $3.0 million on existing restaurants.

Funding for new restaurants and replacement capital expenditures is expected to
be provided by cash flow from operations, the sale-leaseback of real estate,
landlord construction allowances and our revolving credit line. All of our
Company's assets collateralize borrowings under our revolving credit agreement.
At October 30, 2005, we had approximately $1.7 million available under our $15.0
million revolving credit agreement. We also had a $2.5 million commitment for
the sale-leaseback of one restaurant.

On August 21, 2003, our Board of Directors authorized the repurchase of up to
200,000 shares of our common stock through August 21, 2004, and subsequently
extended the authorization through August 21, 2005. Through August 21, 2005, we
had repurchased 71,000 shares at a cost of $1,254,000 under the authorization,
which then expired. The shares were repurchased because we believe that the
market price of our common shares at the time of repurchase presented an
attractive opportunity and because the repurchase of shares increases the
relative percentage ownership of all remaining shareholders.

We believe that the major portion of future restaurant development costs will be
provided by sale-leaseback transactions or landlord contributions and, to the
extent necessary, cash flow from operations, and that remaining cash flow from
operations will be sufficient to meet debt repayment schedules.

We lease certain land, building and equipment under various operating lease
agreements. The initial lease terms range from five to thirty years and expire
between 2007 and 2025. In several cases, we are obligated to pay taxes,
insurance, common area charges and other expenses related to the leased
properties.

At October 30, 2005, we were committed to the following significant financial
obligations:

<TABLE>
<CAPTION>
                       Operating      Capital     Long-Term    Construction
                        Leases        Leases       Debt (1)     Commitments
                     ------------   ----------   -----------   ------------
<S>                  <C>            <C>          <C>           <C>
Less than
1 Year ...........   $ 14,557,539   $   90,000   $ 6,093,000    $3,200,000
1-3 Years ........     28,795,585      180,000    13,858,872            --
3-5 Years ........     27,719,835      180,000    11,420,496            --
More than
5 Years ..........    181,720,428      720,000     8,220,488            --
                     ------------   ----------   -----------    ----------
Total ............   $252,793,387   $1,170,000   $39,592,856    $3,200,000
                     ============   ==========   ===========    ==========
</TABLE>

(1)  Includes interest at 7.5%, which was the rate in effect at October 30, 2005
     under the company's Revolving Credit Agreement.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In December 2004, SFAS No. 123(R), Share-Based Payment, a replacement of SFAS
No. 123, Accounting for Stock-Based Compensation and rescission of APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("SFAS 123(R)") was issued.
SFAS No. 123(R) requires compensation costs related to share-based payment
transactions to be recognized in the consolidated financial statements. With
limited exceptions, the amount of compensation cost will be measured based upon
the grant date fair value of the equity or liability issued. In addition,
liability awards will be remeasured each reporting period and compensation cost
will be recognized over the period that an employee provides service in exchange
for the award. SFAS 123(R) is effective for public companies as of the beginning
of the first fiscal year beginning after June 15, 2005. We will be implementing
SFAS 123(R) beginning October 31, 2005.

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB No. 143, ("FIN 47"). FIN
47 addresses financial accounting and reporting for obligations associated

                         Max & Erma's Restaurants, Inc.


                                       08

<PAGE>

with retirement of tangible long-lived assets and the associated asset
retirement costs. FIN 47 clarifies that the term "conditional asset retirement
obligation" as used in FASB 143 refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
provisions of FIN 47 are effective no later than the end of fiscal years ending
after December 15, 2005. We have not yet completed our assessment of the impact
of FIN 47 on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154)". SFAS 154 replaces APB No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 defines
retrospective application as the application of a different accounting principle
to prior accounting periods as if that principle had always been used or as the
adjustment of previously issued financial statements to reflect a change in the
reporting entity. SFAS 154 also redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error.
SFAS 154 is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Operations and Financial Condition
discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. On an ongoing basis, we evaluate our
estimates and judgments. We believe that of our significant accounting policies,
the following may involve a higher degree of judgment and complexity.

DERIVATIVE INSTRUMENTS

Our Company utilizes interest rate swap agreements to manage interest rate
exposure on floating-rate obligations. We do not use derivative instruments
unless there is an underlying exposure and, therefore, do not use derivative
instruments for trading or speculative purposes. The evaluation of hedge
effectiveness is subject to assumptions based on the terms and timing of the
underlying exposures. All derivative instruments are recognized in the
Consolidated Balance Sheet at estimated fair value.

ASSET IMPAIRMENTS

We review each restaurant to ascertain whether property and equipment and
intangibles have been impaired based on the sum of expected future undiscounted
cash flows from operating activities. If the estimated net cash flows are less
than the carrying amount of such assets, we will recognize an impairment loss in
an amount necessary to write down the assets to a fair value as determined from
expected future discounted cash flows.

SAME-STORE SALES

Our Company discloses certain information regarding the performance of certain
restaurants in operation at least 18 consecutive months in our management's
discussion and analysis. We exclude restaurants from this calculation that do
not meet this definition. In addition, restaurants are excluded when unusual
events or circumstances outside our control significantly change the business of
the restaurant.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. The words "plan," "anticipate,"
"believe," "expect," "estimate," and "project" and similar words and expressions
identify forward-looking statements which speak only as of the date hereof.
Forward-looking statements in this MD&A include statements regarding the average
investment in future restaurants (paragraph 2), anticipated sales at new
restaurants (paragraph 2), anticipated royalties from additional franchised
restaurants (paragraph 2), the belief that we compete favorably with larger
restaurant chains (paragraph 3), the belief that self-funding Ohio Worker's
Compensation insurance lowered its expense (paragraph 5), the belief that rising
healthcare costs will continue to be a challenge (paragraph 5), the expectation
of adding one to two restaurants in 2006 (paragraph 8), the belief that the
decline in same-store sales was a result of competition, a weak mid-west economy
and rising gas and utility prices (paragraph 12), the belief that our target
customer is more impacted by rising gas and utility prices (paragraph 12), the
anticipated revenue growth from the opening of new restaurants (paragraph 14),
the anticipated increase in franchise fees and royalties (paragraph 15), the
anticipated opening of franchise restaurants (paragraph 15), the expectation
that we will continue to operate the four restaurants whose assets were impaired
(paragraph 22), the belief that the closing or writed down of impaired locations
will result in annual savings of $800,000 (paragraph 22), the estimated costs
and sources of funds to complete new restaurant and replacement capital
expenditures (paragraphs 34, 35, and 37), the belief that the market price of
the Company's common shares was an attractive investment opportunity at the time
of repurchase (paragraph 36).

Investors are cautioned that forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, our ability to open or franchise new restaurants as planned, changes
in competition in markets where we operate restaurants, our ability to control
administrative expenses, changes in interest rates, changes in cash flows from
operations, the availability of real estate for purchase or lease and other
risks, uncertainties and factors described in our most recent Annual Report on
Form 10-K and other filings from time to time with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise any
forward-looking statements.

                         Max & Erma's Restaurants, Inc.


                                       09

<PAGE>

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                          October 30     October 31
                                                                             2005           2004
                                                                         ------------   -----------
<S>                                                                      <C>            <C>
ASSETS

CURRENT ASSETS:
Cash and equivalents .................................................   $  2,910,889   $ 2,187,529
Receivables:
   Trade and other ...................................................        172,685       576,277
   Franchise .........................................................        457,324       353,639
                                                                         ------------   -----------
      Total receivables ..............................................        630,009       929,916
Inventories ..........................................................      1,401,368     1,377,366
Supplies .............................................................        636,417       722,340
Prepaid expenses .....................................................        471,470       512,995
Deferred income taxes ................................................        650,000       700,000
                                                                         ------------   -----------
      TOTAL CURRENT ASSETS ...........................................      6,700,153     6,430,146

PROPERTY-AT COST:
Land and buildings ...................................................     33,445,024    28,782,009
Leasehold improvements ...............................................     32,552,563    33,121,205
Equipment and fixtures ...............................................     38,295,142    36,167,097
                                                                         ------------   -----------
   Total property ....................................................    104,292,729    98,070,311
Less accumulated depreciation and amortization .......................     48,686,165    42,720,109
                                                                         ------------   -----------
      PROPERTY-NET ...................................................     55,606,564    55,350,202

OTHER ASSETS:
Goodwill (less accumulated amortization of 2005 and 2004--$863,629) ..         62,073        62,073
Deferred costs (less accumulated amortization of
   2005--$299,357; 2004--$211,561) ...................................        726,935       532,976
Deferred income taxes ................................................      8,784,000     6,850,000
Miscellaneous (less accumulated amortization of
   2005--$181,578 and 2004--$139,897) ................................      1,977,560     1,881,688
                                                                         ------------   -----------
      TOTAL OTHER ASSETS .............................................     11,550,568     9,326,737
                                                                         ------------   -----------
TOTAL ................................................................   $ 73,857,285   $71,107,085
                                                                         ============   ===========
</TABLE>

See notes to consolidated financial statements.


                                       10

<PAGE>

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                    October 30    October 31
                                                                                       2005          2004
                                                                                   -----------   -----------
<S>                                                                                <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term obligations ....................................   $ 4,227,282   $ 4,160,314
Accounts payable ...............................................................     4,725,923     4,344,753
Construction payables ..........................................................       863,135       989,466
Accrued liabilities:
   Payroll and related taxes ...................................................     2,718,540     1,914,099
   Taxes, other than income taxes ..............................................     2,097,075     2,196,583
   Interest ....................................................................       656,525       415,876
   Gift cards ..................................................................     1,661,105       202,565
   Utilities ...................................................................       817,496       736,362
   Other .......................................................................       965,415     1,037,817
                                                                                   -----------   -----------
      Total accrued liabilities ................................................     8,916,156     6,503,302
                                                                                   -----------   -----------
      TOTAL CURRENT LIABILITIES ................................................    18,732,496    15,997,835

LONG-TERM OBLIGATIONS-
   Less current maturities .....................................................    41,817,482    41,053,030

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Preferred stock-$.10 par value; authorized 500,000 shares, none outstanding
      Common stock-$.10 par value; authorized 2005 and 2004--5,000,000 shares;
      issued and outstanding: 2005--2,546,778 shares; 2004--2,507,328 shares ...       254,677       250,732
   Additional paid in capital ..................................................       678,225       319,404
   Accumulated other comprehensive loss ........................................            --      (203,406)
   Retained earnings ...........................................................    12,374,405    13,689,490
                                                                                   -----------   -----------
      TOTAL STOCKHOLDERS' EQUITY ...............................................    13,307,307    14,056,220
                                                                                   -----------   -----------
TOTAL ..........................................................................   $73,857,285   $71,107,085
                                                                                   ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                       11

<PAGE>

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                          ------------------------------------------
                                           October 30     October 31     October 26
                                              2005           2004           2003
                                           (52 weeks)     (53 weeks)     (52 weeks)
                                          ------------   ------------   ------------
<S>                                       <C>            <C>            <C>
REVENUES ..............................   $183,705,077   $182,958,795   $167,082,527
                                          ------------   ------------   ------------

OPERATING EXPENSES:
Cost of goods sold ....................     46,868,766     47,134,328     41,313,643
Payroll and benefits ..................     59,315,489     59,870,241     55,199,447
Other operating expenses ..............     61,074,546     58,028,046     52,290,654
Administrative expenses ...............     14,744,764     14,189,562     13,299,529
Preopening costs ......................        391,789        602,677        695,950
Impairment of fixed assets ............      1,450,000             --      1,069,949
                                          ------------   ------------   ------------
   TOTAL OPERATING EXPENSES ...........    183,845,354    179,824,854    163,869,172
                                          ------------   ------------   ------------

OPERATING (LOSS) INCOME ...............       (140,277)     3,133,941      3,213,355

INTEREST EXPENSE ......................      2,431,305      2,154,254      1,680,435

MINORITY INTEREST IN INCOME OF
   AFFILIATED PARTNERSHIP .............         38,503         19,252         38,503
                                          ------------   ------------   ------------

(LOSS) INCOME BEFORE INCOME TAXES .....     (2,610,085)       960,435      1,494,417
                                          ------------   ------------   ------------

INCOME TAXES:
Federal
   Current ............................        604,000        380,000        540,000
   Deferred credit ....................     (2,459,000)      (627,000)      (700,000)
State and local
   Current ............................         95,000        260,000        168,000
   Deferred tax (credit) ..............        465,000       (150,000)        (8,000)
                                          ------------   ------------   ------------
      TOTAL INCOME TAXES (CREDIT) .....     (1,295,000)      (137,000)            --
                                          ------------   ------------   ------------

NET (LOSS) INCOME .....................   $ (1,315,085)  $  1,097,435   $  1,494,417
                                          ============   ============   ============

NET (LOSS) INCOME PER SHARE:
Basic .................................   $      (0.52)  $       0.45   $       0.61
                                          ============   ============   ============
Diluted ...............................   $      (0.52)  $       0.42   $       0.56
                                          ============   ============   ============

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................      2,537,277      2,459,767      2,441,700
                                          ============   ============   ============
Diluted ...............................      2,537,277      2,583,762      2,648,128
                                          ============   ============   ============
</TABLE>

See notes to consolidated financial statements.


                                       12

<PAGE>

                 Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                       ACCUMULATED
                                      COMMON STOCK       ADDITIONAL       OTHER
                                  --------------------     PAID IN    COMPREHENSIVE     RETAINED
                                    SHARES     AMOUNT      CAPITAL    (LOSS) INCOME     EARNINGS       TOTAL
                                  ---------   --------   ----------   -------------   -----------   -----------
<S>                               <C>         <C>        <C>          <C>             <C>           <C>
BALANCE, OCTOBER 27, 2002         2,346,798   $234,680    $     --      $(794,290)    $11,917,492   $11,357,882
Issuance of stock through
   option plan, including
   $112,043 related tax benefit     172,960     17,296                                    406,590       423,886
Shares repurchased                  (70,157)    (7,016)                                (1,226,444)   (1,233,460)
Comprehensive income:
   Change in fair value of
      interest rate protection
      agreement, net of
      income tax ($78,570)                                                145,917                       145,917
   Net income                                                                           1,494,417     1,494,417
                                                                                                    -----------
      Comprehensive income                                                                            1,640,334
                                  ---------   --------    --------      ---------     -----------   -----------

BALANCE, OCTOBER 26, 2003         2,449,601    244,960                   (648,373)     12,592,055    12,188,642
Issuance of stock through
   option plan, including
   $152,466 related tax benefit      58,889      5,888     340,009                                      345,897
Shares repurchased                   (1,162)      (116)    (20,605)                                     (20,721)
Comprehensive income:
   Change in fair value of
      interest rate protection
      agreement, net of
      income tax ($158,598)                                               444,967                       444,967
   Net income                                                                          1,097,435      1,097,435
                                                                                                    -----------
      Comprehensive income                                                                            1,542,402
                                  ---------   --------    --------      ---------     -----------   -----------

BALANCE, OCTOBER 31, 2004         2,507,328    250,732     319,404       (203,406)     13,689,490    14,056,220
Issuance of stock through
   option plan, including
   $110,611 related tax benefit      39,450      3,945     358,821                                      362,766
Comprehensive loss:
   Change in fair value of
      interest rate protection
      agreement, net of
      income tax ($109,526)                                               203,406                       203,406
   Net loss                                                                            (1,315,085)   (1,315,085)
                                                                                                    -----------
      Comprehensive loss                                                                             (1,111,679)
                                  ---------   --------    --------      ---------     -----------   -----------
BALANCE, OCTOBER 30, 2005         2,546,778   $254,677    $678,225      $      --     $12,374,405   $13,307,307
                                  =========   ========    ========      =========     ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                       13

<PAGE>

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED
                                                                   ------------------------------------------
                                                                    October 30     October 31     October 26
                                                                       2005           2004           2003
                                                                    (52 weeks)     (53 weeks)     (52 weeks)
                                                                   ------------   ------------   ------------
<S>                                                                <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..............................................   $ (1,315,085)  $  1,097,435   $  1,494,417
                                                                   ------------   ------------   ------------
Adjustments to reconcile net (loss) income to net cash
   provided by operating activities:
   Depreciation and amortization ...............................      8,443,967      8,219,095      6,364,044
   Deferred income tax credit ..................................     (1,994,000)      (777,000)      (708,000)
   Accretion of deferred sale/leaseback gain ...................       (126,267)      (126,267)      (126,267)
   Minority interests in income of Affiliated Partnership ......         38,503         19,252         38,503
   Impairment of fixed assets ..................................      1,011,000             --      1,069,949
   Loss on disposition of assets ...............................        206,237        214,435        204,445
   Proceeds from lease incentives ..............................      1,000,000      2,430,000      1,000,000
   Changes in assets and liabilities:
      Receivables, inventories, supplies and prepaid expenses ..        403,208       (865,071)      (484,377)
      Other assets .............................................       (387,936)       (46,769)      (196,151)
      Accounts payable, accrued and other liabilities ..........      3,195,194      1,165,649        945,511
                                                                   ------------   ------------   ------------
         Total adjustments .....................................     11,789,906     10,233,324      8,107,657
                                                                   ------------   ------------   ------------
         NET CASH PROVIDED BY OPERATING ACTIVITIES .............     10,474,821     11,330,759      9,602,074
                                                                   ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions .............................................     (9,966,903)   (19,443,999)   (19,055,328)
Changes in other assets ........................................         77,731        127,959        234,239
Proceeds from the sale of property .............................         31,333      2,807,133     12,322,527
                                                                   ------------   ------------   ------------
         NET CASH USED IN INVESTING ACTIVITIES .................     (9,857,839)   (16,508,907)    (6,498,562)
                                                                   ------------   ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations .................    (52,820,697)   (84,232,469)   (63,157,061)
Proceeds from long-term obligations ............................     52,793,019     88,907,129     60,376,756
Debt issue costs ...............................................        (79,596)       (78,765)      (153,465)
Proceeds from exercise of stock options ........................        252,155        193,431        311,843
Distributions to minority interests in Affiliated
   Partnership .................................................        (38,503)       (19,252)       (38,503)
Cash paid for purchase of common stock .........................             --        (20,721)    (1,233,460)
                                                                   ------------   ------------   ------------
         NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ...        106,378      4,749,353     (3,893,890)
                                                                   ------------   ------------   ------------

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................        723,360       (428,795)      (790,378)

CASH AND EQUIVALENTS--BEGINNING OF YEAR ........................      2,187,529      2,616,324      3,406,702
                                                                   ------------   ------------   ------------
CASH AND EQUIVALENTS--END OF YEAR ..............................   $  2,910,889   $  2,187,529   $  2,616,324
                                                                   ============   ============   ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
   Interest-net of $93,958, $170,407, and $417,250
      capitalized in 2005, 2004 and 2003 .......................   $  2,103,280   $  2,136,691   $  1,744,530
                                                                   ============   ============   ============
Income taxes ...................................................   $    299,245   $    689,856   $    887,015
                                                                   ============   ============   ============
Noncash activities-
   Property additions financed by construction payables ........   $    863,135   $    989,466   $    979,851
                                                                   ============   ============   ============
</TABLE>

See notes to consolidated financial statements.


                                       14

<PAGE>

                   Notes to Consolidated Financial Statements

AS OF OCTOBER 30, 2005 AND OCTOBER 31, 2004, AND FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED OCTOBER 26, 2005

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS--Max & Erma's Restaurants, Inc. and subsidiary (the
"Company") owns and operates restaurants under the trade name "Max &
Erma's--Neighborhood Gathering Place." At October 30, 2005, there are 102 Max &
Erma's restaurants in operation (98 at October 31, 2004) (principally located in
the Midwestern United States). The Company owns all of the restaurants, except
for one that is owned by a separate limited partnership ("Affiliated
Partnership") in which the Company is the controlling general partner, and 23
which are franchised to unrelated parties (20 at October 31, 2004).

At October 30, 2005, the Company was contractually committed to the purchase of
one new Max & Erma's restaurant. The estimated cost to complete this restaurant
is approximately $3,200,000.

CONSOLIDATION--The consolidated financial statements include the accounts of the
Company and the Affiliated Partnership. All significant intercompany
transactions and balances have been eliminated.

CASH AND EQUIVALENTS--The Company considers all checking accounts, cash funds
and highly liquid debt instruments with a maturity of less than three months at
the date of purchase, to be cash equivalents. All cash is principally on deposit
with four banks.

INVENTORIES--Inventories are valued at the lower of cost, using the first-in,
first-out ("FIFO") method, or market, and consist of food and beverages.

PRE-OPENING COSTS--The Company expenses such costs as they are incurred in
accordance with Statement of Position No. 98-5, Reporting on the Costs of
Start-up Activities.

DEPRECIATION AND AMORTIZATION OF PROPERTY--Depreciation and amortization of
property are computed generally using the straight-line method based on the
estimated useful lives of the assets or the terms of the leases as follows:

<TABLE>
<CAPTION>
                                                                          Years
                                                                        --------
<S>                                                                     <C>
Buildings ...........................................................   15 to 30
Leasehold improvements ..............................................   10 to 15
Equipment and fixtures ..............................................    3 to 15
</TABLE>

LEASEHOLD IMPROVEMENTS--Leasehold improvements reimbursed by the landlord
through construction allowances are capitalized as leasehold improvements with
the construction allowances recorded as deferred lease incentives. Such
leasehold improvements and related deferred lease incentives are amortized on a
straight-line basis over the lesser of the life of the asset or the lease term.

OTHER ASSETS--In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, goodwill is no longer
amortized. Deferred costs include debt issuance costs that relate to various
debt agreements and are being amortized over the terms of the agreements.
Miscellaneous assets principally consist of liquor license costs, which are no
longer amortized in accordance with SFAS No. 142.

ASSET IMPAIRMENTS--Annually, or more frequently if events or circumstances
change, a determination is made by management to ascertain whether property and
equipment and other intangibles have been impaired based on the sum of expected
future undiscounted cash flows from operating activities. If the estimated net
cash flows are less than the carrying amount of such assets, the Company will
recognize an impairment loss in an amount necessary to write down the assets to
a fair value. In performing its review, the Company considers the age of the
restaurant and any significant economic events, recognizing that certain
restaurants may take 24 to 36 months to become or return to profitability. In
evaluating its goodwill, the Company estimates the fair value of the operations
at each reporting date to determine if any impairment exists. See Note 9
regarding provision for impairment of assets.

REVENUE RECOGNITION--Revenue from restaurant sales is recognized when food and
beverage products are sold. Franchise fees for new franchises are recognized as
revenue when substantially all commitments and obligations have been fulfilled,
which is generally upon commencement of operations by the franchisee. The
Company recognizes royalties on a franchisee's sales in the period in which the
sales occur. Included in revenues are franchise fees and royalties of
approximately $1,821,000, $1,635,000, and $1,217,000 in 2005, 2004, and 2003,
respectively.

SELF-INSURANCE--The Company is primarily self-insured for workers' compensation.
Self-insurance liabilities are determined actuarially based on claims filed and
estimates for claims incurred but not reported.

ADVERTISING--The Company expenses the costs of advertising (including production
costs) the first time the advertising takes place. Advertising expense was
approximately $5,041,000, $4,155,000, and $3,214,000 for fiscal 2005, 2004 and
2003, respectively.

CONTINGENT RENT--The Company expenses contingent rent based on a quarterly gross
sales basis.

INCOME TAXES--The Company is subject to Federal, state and local income taxes.
Income taxes are provided for all taxable items included in the consolidated
statements of income in accordance with SFAS No. 109, Accounting for Income
Taxes.

NET INCOME (LOSS) PER SHARE--Basic income (loss) per share amounts are based on
the weighted average number of shares of common stock outstanding during the
years presented. Diluted income per share amounts are based on the weighted
average number of shares of common stock and dilutive stock options outstanding
during the years presented (stock options


                                       15

<PAGE>

are excluded from the calculation if a net loss is reported as the effect of
such options is anti-dilutive). Options to purchase 221,950 and 40,950 shares of
common stock were outstanding in 2005 and 2004 (none in 2003), respectively, but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares or the Company reported a net loss for the year and, therefore,
the effect would be antidilutive. The chart below presents a reconciliation
between basic and diluted weighted average shares outstanding:

<TABLE>
<CAPTION>
                               2005        2004        2003
                            ---------   ---------   ---------
<S>                         <C>         <C>         <C>
Basic weighted average
   shares outstanding ...   2,537,277   2,459,767   2,441,700
Dilutive effect of
   stock options ........          --     123,995     206,428
                            ---------   ---------   ---------
Basic weighted average
   shares outstanding ...   2,537,277   2,583,762   2,648,128
                            =========   =========   =========
</TABLE>

STOCK OPTIONS--SFAS No. 123, Accounting for Stock-Based Compensation, defines a
fair value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, but are
required to disclose in a note to the financial statements proforma net income
(loss) and earnings (loss) per share as if the Company had applied the fair
value method of accounting. The Company applies APB No. 25 in accounting for its
stock-based compensation plans and has not recorded compensation expense for any
of the years presented. Had compensation cost been determined on the basis of
fair value pursuant to SFAS No. 123 for options granted in fiscal 1996 through
2005, net income (loss) and earnings (loss) per share would have been as
follows:

<TABLE>
<CAPTION>
                                            2005         2004         2003
                                        -----------   ----------   ----------
<S>                                     <C>           <C>          <C>
Net income (loss):
   As reported ......................   $(1,315,085)  $1,097,435   $1,494,417
                                        ===========   ==========   ==========
   Pro forma ........................   $(1,321,469)  $  224,722   $  617,285
                                        ===========   ==========   ==========
Basic earnings (loss) per share:
   As reported ......................   $     (0.52)  $     0.45   $     0.61
                                        ===========   ==========   ==========
   Pro forma ........................   $     (0.52)  $     0.09   $     0.25
                                        ===========   ==========   ==========
Diluted earnings (loss) per share:
   As reported ......................   $     (0.52)  $     0.42   $     0.56
                                        ===========   ==========   ==========
   Pro forma ........................   $     (0.52)  $     0.09   $     0.23
                                        ===========   ==========   ==========
</TABLE>

The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 4.31% and 4.52% for 2004 and 2003,
respectively; an expected life of the options of 5 to 10 years; no expected
dividend yield and a volatility factor of 18% and 28% in 2004 and 2003,
respectively. The weighted average per share fair value of the options granted
in 2004 and 2003 was $6.74 and $7.04, respectively. There were no stock options
granted in 2005.

SEGMENT--The Company presently operates in one segment as determined in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.

FISCAL YEAR-END--The Company and its Affiliated Partnership each have a 52-53
week accounting period which ends on the last Sunday in October. Fiscal years
2005 and 2003 each contained 52 weeks and fiscal year 2004 contained 53 weeks.

ESTIMATES--The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual amounts may differ from
these amounts.

COMMITMENTS AND CONTINGENCIES--The Company is involved in various claims and
legal proceedings arising from the normal course of business. While the ultimate
liability, if any, from these proceedings is presently indeterminable, in the
opinion of management, these matters should not have a material adverse effect
on the consolidated financial statements of the Company.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS--In December 2004, SFAS No.
123(R), Share-Based Payment, a replacement of SFAS No. 123, Accounting for
Stock-Based Compensation and rescission of APB Opinion No. 25, Accounting for
Stock Issued to Employees, ("SFAS 123(R)") was issued. SFAS No. 123(R) requires
compensation costs related to share-based payment transactions to be recognized
in the consolidated financial statements. With limited exceptions, the amount of
compensation cost will be measured based upon the grant date fair value of the
equity or liability issued. In addition, liability awards will be remeasured
each reporting period and compensation cost will be recognized over the period
that an employee provides service in exchange for the award. SFAS 123(R) is
effective for public companies as of the beginning of the first fiscal year
beginning after June 15, 2005. The Company will be implementing SFAS 123(R)
beginning October 31, 2005.

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB No. 143, ("FIN 47"). FIN
47 addresses financing accounting and reporting for obligations associated with
retirement of tangible long-lived assets and the associated asset retirement
costs. FIN 47 clarifies that the term "conditional asset retirement obligation"
as used in FASB 143 refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. FIN 47
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provisions of FIN
47 are effective no later than the end of fiscal years ending after December 15,
2005. The Company has not yet completed its assessment of the impact of FIN 47
on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154"). SFAS 154 replaces APB No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154 defines
retrospective application as the application of a different accounting principle
to prior accounting periods as if that principle had always been used or as the
adjustment of previously issued financial statements to reflect a change in the
reporting entity. SFAS 154 also redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error.
SFAS 154 is effective for accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005.

                         Max & Erma's Restaurants, Inc.


                                       16

<PAGE>

2. OWNERSHIP OF RESTAURANT BY AFFILIATED PARTNERSHIP

One restaurant is owned by an Affiliated Partnership in which the Company is the
general partner. As a general partner, the Company is liable for all of the
debts and liabilities of the Affiliated Partnership. During fiscal 2005, 2004,
and 2003, the Company's share of the remaining partnership's profits and losses
was approximately 70%, 70%, and 60%, respectively. The increase in 2004 is due
to the increase in cash flow from the partnership compared to its net income. At
October 30, 2005 and October 31, 2004, no amounts were due to Affiliated
Partners.

3. LONG-TERM OBLIGATIONS

Long-term obligations as of October 30, 2005 and October 31, 2004, consist of
the following:

<TABLE>
<CAPTION>
                                              October 30,   October 31,
                                                  2005          2004
                                              -----------   -----------
<S>                                           <C>           <C>
Debt:
   Revolving credit agreement .............   $13,346,239   $ 9,321,328
   Equipment Note .........................     3,250,000     4,750,000
   Amended term loan ......................    14,600,000    17,000,000
   Capital leases .........................       655,343       678,900
                                              -----------   -----------
      Total debt ..........................    31,851,582    31,750,228
Deferred gain on sale/leaseback (Note 4) ..     1,513,853     1,640,120
Deferred lease incentives (Note 1) ........     5,400,420     4,699,212
Accrued rent (Note 4) .....................     6,561,292     6,266,219
Interest rate protection agreement ........            --       312,932
Deferred compensation plan ................       717,617       544,633
                                              -----------   -----------
   TOTAL LONG-TERM OBLIGATIONS ............    46,044,764    45,213,344
Less current maturities of debt ...........    (4,227,282)   (4,160,314)
                                              -----------   -----------
TOTAL LONG-TERM OBLIGATIONS - LESS
   CURRENT MATURITIES .....................   $41,817,482   $41,053,030
                                              ===========   ===========
</TABLE>

The Company's credit agreement with a bank, as amended on September 22, 2003,
permitted it to borrow on a term loan with an original principal amount of
$20,600,000 ("Amended Term Loan"). Amounts outstanding under the Amended Term
Loan are payable in quarterly installments of $600,000 plus interest. In
addition, the Company has available a revolving commitment ("Revolving Credit
Agreement") of $15,000,000. In 2003, the Company amended its revolving credit
agreement to provide for a second term loan of $6,000,000. In 2004, the Company
used the loan proceeds of its second term loan to purchase $6,400,000 of
previously leased equipment. The loan provides for monthly payments of $125,000,
plus interest, beginning December 31, 2003, through December 31, 2007. Both the
term and revolving credit loans have provisions for extension of maturity dates
and conversion to fully amortized term loans. Beginning with the fiscal year
ending October 26, 2003, the Company was required to make excess cash flow
payments, not to exceed $500,000, to reduce outstanding principal balances
provided the Company meets certain net income requirements. No excess cash flow
payments were made in 2005, 2004 and 2003. Each loan bears interest at a
fluctuating quarterly rate based upon the prime or LIBOR rate determined by the
ratio of the Indebtedness of the Company to EBITDA of the Company. At October
30, 2005, the equipment note and amended term loan rates ranged from 5.50% to
7.50%. The rates on the revolving credit borrowings ranged from 5.19% to 7.19%
at October 30, 2005. In addition, the Company must pay a quarterly commitment
fee on the unused portion of the commitment and an annual agency fee.
Substantially all of the Company's assets collateralize the credit agreement.

The provisions of the Company's credit agreement require various financial
indicators to be maintained at the end of each quarterly reporting period. At
October 30, 2005, the Company was not in compliance with its ratio of
liabilities to tangible net worth, fixed charge ratio, and senior debt ratio.
The Company received a waiver dated December 12, 2005 from its lenders
addressing the deficiencies and has amended such covenants in fiscal 2006. The
Company was in compliance with all other debt covenants as of October 30, 2005.

The Company entered into a $20,000,000 interest rate protection agreement in
fiscal 2000, as required by the credit agreement described above, to manage its
exposure to the variability of cash flows primarily related to the interest rate
changes on borrowing costs. The swap fully amortized over the life of the
contract and expired on October 31, 2005 (remaining balance of approximately
$8,571,000 at October 31, 2004). The Company paid the bank a quarterly fixed
rate of 6.48% and received a quarterly variable rate payment based on the LIBOR
rate. The agreement was designated as a cash flow hedge. Hedging effectiveness
was assessed periodically. The effective portion of periodic gains and losses of
the contract were deferred in other comprehensive income. Any portion of the
contract that was ineffective was recognized in earnings immediately. The
protection agreement had a total fair value of approximately $313,000 at October
31, 2004, which is reflected as a long-term liability and accumulated other
comprehensive loss (net of taxes of $110,000, totaling $203,000). For fiscal
2005, 2004 and 2003, the ineffective portion of the protection agreement was not
material to the Company's consolidated financial statements. The Company
reclassified approximately $313,000 of net derivative losses to interest expense
in 2005.

Future maturities of long-term debt obligations at October 30, 2005, are as
follows (see Note 4 for maturities of other long-term obligations):

YEAR ENDING IN OCTOBER

<TABLE>
<S>                      <C>
2006                     $ 3,900,000
2007                       5,234,624
2008                       5,319,248
2009                       4,902,581
2010                       4,735,915
Thereafter                 7,103,871
                         -----------
TOTAL                    $31,196,239
                         ===========
</TABLE>

4. LEASES

The Company leases certain land and buildings used in the restaurant operations
under various long-term capital and operating lease agreements. The initial
lease terms range from five to 30 years and expire between 2006 and 2025. The
leases include renewal options for five to twenty additional years. Several
leases require, in addition to the base rent, additional rent based on
percentages of the restaurant's annual gross revenue, as defined. The Company is
also obligated to pay certain real estate taxes, insurance, common area charges
and various other expenses related to the properties. The leases are
collateralized by subordinated liens on the leasehold improvements, equipment,
and fixtures.

The Company leases vehicles and equipment used in the restaurant operations
under both capital and operating lease agreements. Lease terms range from two to
six years and expire through 2009. The Company is required to pay certain taxes,
insurance and other expenses related to the leased property. The Company also
leases other equipment for periods of one year or less.

                         Max & Erma's Restaurants, Inc.


                                       17

<PAGE>

The following is a summary of property under capital leases at October 30, 2005
and October 31, 2004, included in the accompanying consolidated balance sheets:

<TABLE>
<CAPTION>
                                   October 30,    October 31,
                                       2005           2004
                                   -----------    -----------
<S>                                <C>            <C>
ASSET DESCRIPTION
Buildings ......................   $ 1,045,000    $ 1,045,000
Equipment and fixtures .........       499,846        568,984
                                   -----------    -----------
   TOTAL .......................     1,544,846      1,613,984
Less accumulated amortization ..    (1,396,769)    (1,415,908)
                                   -----------    -----------
NET ............................   $   148,077    $   198,076
                                   ===========    ===========
</TABLE>

Future minimum lease payments under the capital leases and the present value of
such payments at October 30, 2005, are as follows:

YEAR ENDING IN OCTOBER

<TABLE>
<S>                                          <C>
2006 .....................................   $   90,000
2007 .....................................       90,000
2008 .....................................       90,000
2009 .....................................       90,000
2010 .....................................       90,000
Thereafter ...............................      720,000
                                             ----------
   TOTAL MINIMUM LEASE PAYMENTS ..........    1,170,000
Less amount representing interest ........     (514,657)
                                             ----------
   Present value of minimum lease
      payments ...........................      655,343
Less current maturities ..................      (26,009)
                                             ----------
TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
   LESS CURRENT MATURITIES ...............   $  629,334
                                             ==========
</TABLE>

At October 30, 2005, the future minimum rental commitments under noncancellable
operating leases with an initial term in excess of one year are as follows:

YEAR ENDING IN OCTOBER

<TABLE>
<S>             <C>
2006 ........   $ 14,557,539
2007 ........     14,386,253
2008 ........     14,409,332
2009 ........     14,008,523
2010 ........     13,711,312
Thereafter ..    181,720,428
                ------------
   TOTAL ....   $252,793,387
                ============
</TABLE>

The above future minimum rental amounts include the land portion of certain
capital leases, but exclude renewal options and additional rent based on sales
or increases in the United States Consumer Price Index ("USCPI"). For operating
leases which require increasing rental payments over the term of the lease, the
Company records rent expense on a straight-line basis. The related accrued rent
will generally reverse over the next 15 years.

In 2004 and prior years, the Company entered into sale-leaseback transactions
with regard to the land, buildings, fixtures and improvements at eleven
restaurant sites whereby the Company leases back the restaurant sites under
operating leases over twenty-year periods. Generally, the base rents of the
leases will be adjusted by the lesser of a defined percentage or a factor of the
increase in USCPI at each anniversary date, as defined. These transactions did
not result in a significant gain or loss to the Company.

Rent expense, including common area charges but excluding taxes, insurance, and
other expenses related to all operating leases consists of the following:

<TABLE>
<CAPTION>
                                        2005           2004          2003
                                    ------------   -----------   -----------
<S>                                 <C>            <C>           <C>
Minimum rent ....................    $15,709,259   $15,148,347   $16,392,102
Contingent rent based on
   percentage of gross revenue ..        139,471       183,263       166,109
                                     -----------   -----------   -----------
   TOTAL ........................    $15,848,730   $15,331,610   $16,558,211
                                     ===========   ===========   ===========
</TABLE>

The Company has agreements with a partnership in which an outside director of
the Company is a partner that grants rights to the partnership to install and
operate coin-operated amusement equipment in certain restaurants. Under the
agreements, the Company has received games revenue averaging approximately
$49,000 per year over the last three years.

5. INCOME TAXES

The Company's effective tax (benefit) rate varies from the statutory Federal
income tax rate as a result of the following factors:

<TABLE>
<CAPTION>
                                    2005         2004         2003
                                -----------   ----------   ---------
<S>                             <C>           <C>          <C>
Provision (benefit)
   at statutory rate ........   $  (887,000)  $  327,000   $ 508,000
State income taxes-
   net of Federal benefit ...         7,000       70,000     110,000
Jobs related tax credit .....       (90,000)     (58,000)    (51,000)
FICA tax credit .............      (881,000)    (867,000)   (637,000)
State of Ohio adjustment ....       550,000           --          --
Revision of deferred taxes ..            --      375,000          --
Other-net ...................         6,000       16,000      70,000
                                -----------   ----------   ---------
   TOTAL PROVISION
      (BENEFIT) .............   $(1,295,000)  $(137,000)   $      --
                                ===========   ==========   =========
</TABLE>

During 2005 the Company expensed $550,000 of previously recorded State of Ohio
deferred tax assets because the State of Ohio eliminated its corporate franchise
tax and replaced it with a commercial activity tax included in administrative
expenses. During 2004 the Company revised its calculation of deferred tax assets
based on additional information concerning the allocation of income among the
various states the Company does business in resulting in a $375,000 reduction of
deferred tax assets.

The tax effects of significant items comprising the Company's net deferred tax
asset are as follows:

<TABLE>
<CAPTION>
                                    October 30,   October 31,
                                        2005          2004
                                    -----------   -----------
<S>                                 <C>           <C>
DEFERRED TAX ASSETS (LIABILITIES)
Accrued rent ....................    $2,418,000   $2,614,000
Depreciation ....................     2,308,000    1,484,000
Deferred gain ...................       629,000      767,000
Officers' benefits ..............       473,000      479,000
Gift cards ......................       625,000       90,000
Interest rate swap ..............            --      110,000
FICA tax credit .................     3,046,000    2,053,000
Partnership .....................        80,000       90,000
                                     ----------   ----------
   TOTAL DEFERRED TAX ASSETS ....     9,579,000    7,687,000
                                     ----------   ----------
Prepaid insurance and other .....      (145,000)    (137,000)
                                     ----------   ----------
   TOTAL DEFERRED TAX
      LIABILITIES ...............      (145,000)    (137,000)
                                     ----------   ----------
NET DEFERRED TAX ASSET ..........    $9,434,000   $7,550,000
                                     ==========   ==========
</TABLE>

The FICA tax credits expire $172,000 in 2023, $1,402,000 in 2024 and $1,472,000
in 2025.

                         Max & Erma's Restaurants, Inc.


                                       18

<PAGE>

6. STOCK OPTION AND BONUS PLANS

On December 11, 2001, the Company adopted the 2002 Stock Option Plan (the "2002
Plan"). The 2002 Plan provides that the Company may grant options to certain key
employees of the Company and its affiliates, consultants and advisers who render
services to the Company and its affiliates, and directors of the Company who are
employees of neither the Company nor any affiliate ("Non-employee Directors").
The terms of the 2002 Plan are at the sole discretion of a committee of three
non-employee members of the Company's board of directors (the "Committee").
Under the 2002 Plan, the Company may grant 250,000 shares. The Committee will
determine the option price per share of each incentive stock option granted
under the 2002 Plan. The option price may not be less than the fair market value
of a share on the date of grant of such option. If the grantee owns more than
10% of the total combined voting stock of the Company, the exercise price of the
option must be at least 110% of the fair market value. At October 30, 2005,
90,580 shares under option were exercisable and 94,050 shares were reserved for
future grants under the 2002 Plan.

Also in effect at October 30, 2005, are the 1992 and 1996 Stock Option Plans
(collectively the "Plans"). Options granted under the Plans may be either
incentive stock options or non-statutory stock options. The terms of the options
granted under the Plans are at the sole discretion of a committee of three
non-employee members of the Company's board of directors. The Plans provide that
the Company may grant options (generally at fair market value at the date of
grant) for not more than 412,500 and 400,000 shares of common stock,
respectively, to certain key employees, officers and directors. Options granted
under the Plans are generally first exercisable three years after the date of
grant and expire six years after the date of grant, according to the terms of
each option. At October 30, 2005, 42,000 shares under option were exercisable
and 9,550 shares were reserved for future grants under the 1992 Stock Option
Plan. Under the 1996 Stock Option Plan, 24,000 shares under option were
exercisable and 6,500 shares were reserved for future grants at October 30,
2005.

The following summarizes the stock option transactions:

<TABLE>
<CAPTION>
                                                                WEIGHTED
                                                 NUMBER OF       AVERAGE
                                                  OPTIONS    EXERCISE PRICE
                                                 ---------   --------------
<S>                                              <C>         <C>
Balance, October 27, 2002 ....................    522,200       $  7.77
   Granted ...................................    165,000         14.26
   Exercised .................................   (306,500)        (7.39)
   Cancelled .................................     (2,000)        (7.31)
                                                 --------       -------
Balance, October 26, 2003 ....................    378,700         10.91
   Granted ...................................     30,950         17.51
   Exercised .................................    (85,999)        (6.73)
   Cancelled .................................    (10,000)       (11.13)
                                                 --------       -------
Balance, October 31, 2004 ....................    313,651         12.69
   Exercised .................................    (63,301)        (9.51)
   Cancelled .................................    (28,400)       (13.96)
                                                 --------       -------
Balance, October 30, 2005 ....................    221,950       $ 13.44
                                                 ========       =======
</TABLE>

The following summarizes information regarding stock options outstanding at
October 30, 2005:

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                    ------------------------------------   ----------------------
                       Number       Weighted                  Number
                    Outstanding     Average     Weighted   Exercisable   Weighted
                         at        Remaining     Average        at        Average
Range of Exercise   October 30,   Contractual   Exercise   October 30,   Exercise
      Prices            2005          Life        Price        2005       Price
-----------------   -----------   -----------   --------   -----------   --------
<S>                 <C>           <C>           <C>        <C>           <C>
$7.00-$10.30           60,000         4.2        $ 9.59       60,000      $ 9.59
$13.75-$17.75         161,950         7.2        $14.87       96,580      $14.70
</TABLE>

The 1992 and 1996 Option Plans permit optionees to tender shares to the Company
in lieu of cash for the exercise of stock options. In fiscal 2005, 2004, and
2003, 34,800, 56,000, and 133,540 shares, respectively, were tendered for the
exercise of 23,351, 27,110, and 258,000 options, respectively. During fiscal
2004, and 2003, the Company repurchased 1,162, and 69,882 shares, respectively,
(none in 2005) of common stock at the fair market value from certain officers at
a cost of $20,720 and $1,228,644, respectively.

7. EMPLOYEE BENEFIT PLANS

Max & Erma's 401(k) Savings Plan and Trust allows employees who have attained
age 21 and have completed one year of service to defer receipt of a portion of
their compensation and contribute such amounts to various investment funds. The
Company matches a percentage of the employees' contributions.

The Company adopted a Deferred Compensation Plan effective January 1, 1999, to
provide a tax deferred compensation to a select group of management or highly
compensated employees of the Company through deferrals of cash compensation and
Company related contributions. Participants in the plan may contribute up to 25%
of their compensation. Employer contributions are permitted up to the first 4%
of compensation the participant has contributed in combination with the
Company's 401(k) Savings Plan and Trust. Employer contributions are fully vested
after five years of service. The fair value of the investment included in other
assets and offsetting liability was approximately $718,000 at October 30, 2005.

Total expense for these plans for 2005, 2004, and 2003, was approximately
$281,000, $348,000, and $245,000, respectively.

8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and equivalents, receivables, accounts and
construction payables, and accrued liabilities at October 30, 2005, October 31,
2004, and October 26, 2003, approximate their fair value due to the short-term
maturities of these items.

The carrying amount of the Company's long-term debt and interest rate protection
agreement approximated their fair values at October 30, 2005, October 31, 2004,
and October 26, 2003. The fair value of the Company's long-term debt is
estimated based on the current interest rates offered for debt of the same
remaining maturities. The fair value of the Company's interest rate protection
agreement, which expired on October 31, 2005, was based on quoted market values
offered for the same or similar agreements.

9. IMPAIRMENT OF ASSETS

During fiscal 2005 the Company recorded a $1,450,000 asset impairment charge.
The charge consisted of $1,260,000 (including $439,000 of cash charges) related
to six underperforming restaurants for the write-down of restaurant assets based
on a discounted cash flow analysis and the payment to a landlord to obtain a
release from one of the leases. Two of the restaurants were closed in 2005. The
Company also expensed $190,000 to write-off costs associated with the proposed
deregistration of its common stock which was terminated in 2005.

During fiscal 2003 the Company recorded a $1,070,000 impairment charge on its
fixed assets. The loss consisted of the write-down of certain leasehold
improvement costs of two of the Company's restaurants based on the Company's
analysis of discounted cash flows.

                         Max & Erma's Restaurants, Inc.


                                       19

<PAGE>

Report of Independent Registered Public Accounting Firm

TO THE STOCKHOLDERS AND DIRECTORS OF MAX & ERMA'S RESTAURANTS, INC.:

We have audited the accompanying consolidated balance sheets of Max & Erma's
Restaurants, Inc. and subsidiary (the "Company") as of October 30, 2005 and
October 31, 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended October 30, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Max & Erma's Restaurants, Inc. and
subsidiary at October 30, 2005 and October 31, 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
October 30, 2005, in conformity with accounting principles generally accepted in
the United States of America.


/s/ Deloitte & Touche LLP

Columbus, Ohio
December 13, 2005

                       Max & Erma's Officers and Directors

WILLIAM E. ARTHUR, Director, Of Counsel, Porter, Wright, Morris & Arthur, LLP
TODD B. BARNUM, Chairman of the Board, Chief Executive Officer, and Director
STEVE CATANESE, Regional Vice President of Operations THOMAS R. GREEN, Director,
Chief Executive Officer, Lancaster Pollard & Company MARY HAMILL, Vice President
of Human Resources and Information Technology GREGORY L. HEYWOOD, Regional Vice
President of Operations JAMES HOWENSTEIN, Chief Operating Officer ROBERT A.
LINDEMAN, President MICHAEL D. MURPHY, Director, Private Investor WILLIAM C.
NIEGSCH, JR., Executive Vice President, Chief Financial Officer, Treasurer,
Secretary, and Director TIMOTHY C. ROBINSON, Director, Senior Vice President and
Chief Financial Officer, Children's Hospital, Inc. ROBERT A. ROTHMAN, Director,
Managing Partner, Amusement Investment Company


                                       20

<PAGE>

                        Selected Quarterly Financial Data

<TABLE>
<CAPTION>
                                    INCOME                       DILUTED         STOCK PRICE
(Thousands, except     TOTAL    (LOSS) BEFORE   NET INCOME   EARNINGS (LOSS)   ---------------
per share data)      REVENUES    INCOME TAXES     (LOSS)        PER SHARE       High      Low
-----------------    --------   -------------   ----------   ---------------   ------   ------
<S>                  <C>        <C>             <C>          <C>               <C>      <C>
2005
First Quarter ....   $ 57,270      $   820       $   655         $ 0.26        $15.59   $12.35
Second Quarter ...     43,025       (1,799)         (944)         (0.37)        15.67    12.44
Third Quarter ....     42,813         (846)         (946)         (0.37)        15.50    14.01
Fourth Quarter ...     40,597         (785)          (80)         (0.03)        14.75    12.05
                     --------      -------       -------         ------        ------   ------
   YEAR ..........   $183,705      $(2,610)      $(1,315)        $(0.52)       $15.67   $12.05
                     ========      =======       =======         ======        ======   ======

2004
First Quarter ....   $ 53,422      $ 1,204       $   891         $ 0.34        $19.00   $17.50
Second Quarter ...     41,882          627           497           0.19         18.25    14.10
Third Quarter ....     42,090         (174)          (71)         (0.03)        17.23    14.85
Fourth Quarter ...     45,565         (697)         (220)         (0.09)        16.00    13.35
                     --------      -------       -------         ------        ------   ------
   YEAR ..........   $182,959      $   960       $ 1,097         $ 0.42        $19.00   $13.35
                     ========      =======       =======         ======        ======   ======
</TABLE>

The Company's common stock trades on the NASDAQ National Market under the symbol
MAXE.

At November 30, 2005 there were 606 stockholders of record of the Company's
common stock.

The closing price for the Company's common stock at October 30, 2005 was $12.36.

Stockholder Information

QUARTERLY CALENDAR:

Max & Erma's operates on a fiscal year ending on the last Sunday in October.
Generally, quarterly results are announced within 30 days after the end of each
quarter and audited results are announced within 60 days after year-end.

<TABLE>
<CAPTION>
FISCAL 2006   QUARTER-END DATES
-----------   -----------------
<S>           <C>
1st quarter   February 19, 2006
2nd quarter   May 14, 2006
3rd quarter   August 6, 2006
4th quarter   October 29, 2006
</TABLE>

DIVIDENDS:

The Company paid no cash dividends in fiscal 2003, 2004 or 2005. The Company
presently intends to retain its earnings to finance the growth and development
of its business and does not anticipate paying any cash dividends in the
foreseeable future.

GENERAL COUNSEL:
Porter, Wright, Morris & Arthur, LLP
Columbus, Ohio

INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS:
Deloitte & Touche LLP
Columbus, Ohio

STOCK TRANSFER AGENT AND REGISTRAR:
National City Bank
Corporate Trust Administration
P.O. Box 94915 Cleveland, OH 44101-4915
216-222-2644

Stockholders are advised to notify the Transfer Agent of changes in address or
problems regarding missing or incorrect stock certificates.

10-K REPORT:

Stockholders may obtain, without cost, a copy of Form 10-K for the Company's
fiscal year ended October 30, 2005, by writing to:

     William C. Niegsch, Jr.
     Max & Erma's Restaurants, Inc.
     P.O. Box 297830
     4849 Evanswood Drive
     Columbus, Ohio 43229

<PAGE>

                             (MAX & ERMA'S (R) LOGO)

Restaurant Locations

Akron, Ohio
Ann Arbor, Michigan
Atlanta, Georgia
   Dunwoody
   Gwinnett
Canton, Ohio
Charlotte, North Carolina
   Huntersville
   University Place
Chicago, Illinois
   Arlington Heights
   Burr Ridge
   Deerpark
   Gurnee
   Hoffman Estates
   Vernon Hills
   Warrenville
   Woodridge
Cincinnati, Ohio
   Cincinnati Airport *
   Crestview, KY
   Eastgate
   Hamilton
   Hyde Park
   Kenwood
   Union Centre
   Wilmington *
Cleveland, Ohio
   Brooklyn
   Cleveland Hopkins
      International Airport (2) *
   Mentor
   Middleburg Heights
   Solon
   Westlake
Columbus, Ohio
   Chillicothe *
   City Center
   Crowne Plaza *
   Dublin
   Easton
   East Broad Street
   Gahanna
   German Village
   Hilliard
   Polaris
   Port Columbus
      International Airport *
   Reynoldsburg
   Route 161 at U.S. 71
   Sawmill Road
   Upper Arlington
   Westerville
Dayton, Ohio
   Beavercreek
   Dayton Airport *
   Dayton Mall
   Miller Lane
Detroit, Michigan
   Auburn Hills
   Birmingham
   Canton
   Farmington Hills
   Livonia
   Novi
   Plymouth
   Rochester Hills
   Sterling Heights
   Westland
Eastern Virginia
   Norfolk
   Virginia Beach
Erie, Pennsylvania
Grandville, Michigan
Green Bay, Wisconsin
   Bay Park *
   Green Bay *
Huntington, West Virginia *
Indianapolis, Indiana
   Carmel
   Castleton
   College Park
   Eagle Creek
   Edinburgh *
   Evansville *
   Greenwood
   Mishawaka *
   Seymour *
Lansing, Michigan
Lexington, Kentucky
   Beaumont Centre
   Man O' War
Louisville, Kentucky
   Hurstbourne
   The Summit
Niles, Ohio
Philadelphia, Pennsylvania
   Downingtown *
   Oaks *
Pittsburgh, Pennsylvania
   Cranberry
   Downtown Pittsburgh
   Fox Chapel
   Gibsonia
   Monroeville
   Parkway West
   Peters Township
   Shadyside
   South Hills
Richmond, Virginia *
St. Louis, Missouri
   Downtown *
   Mid Rivers Mall *
Sandusky, Ohio *
Toledo, Ohio *
   Maumee
   Ohio Turnpike (2) *
   Perrysburg
   Sylvania

Locations open as of
October 30, 2005

*    Franchised Locations