<PAGE>
                                                                      Exhibit 13

    2003
ANNUAL REPORT











                      [MAX & ERMA'S RESTAURANTS INC. LOGO]



THE HOMETOWN FAVORITE
<PAGE>
                                                                               .
                                                                               .
                                                                               .

[PICTURE]

<TABLE>
<CAPTION>
RESTAURANT LOCATIONS

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


                                            [MAX & ERMA'S RESTAURANTS INC. LOGO]

<PAGE>

THE COMPANY


The first Max & Erma's restaurant opened in 1972 in Columbus. Max & Erma's
President and CEO Todd Barnum and business partner Barry Zacks purchased the bar
from Max & Erma Visocnik. The sales contract was scratched out on a cocktail
napkin.

Their goal was simple: Serve the best gourmet hamburgers in America.

Over thirty years later, we're still serving the best hamburgers in America, but
much has changed in the process. Max & Erma's has grown up and is a formidable
competitor in the casual dining industry in the Midwest and the Southeast. At
year end, we had 89 company and franchise restaurants operating under the banner
of the "Hometown Favorite."

We have a strong presence in our hometown of Columbus, as well as Atlanta,
Charlotte, Chicago, Cincinnati, Cleveland, Dayton, Detroit, Erie, Grand Rapids,
Indianapolis, Lexington, Louisville, Norfolk, Pittsburgh and Toledo. Max &
Erma's has built a loyal clientele by offering outstanding service and quality,
fresh food. We make our onion rings and cheese skewers from scratch. Our beef,
fish and poultry is fresh, never frozen, including our Friday and Saturday
Special, deep-fried Jumbo Shrimp. Our Apple Pie is made from a recipe we
purchased from an Ohio State Fair Champion way back in 1972.

The goal of our menu creation is to develop food that people crave, such as our
new, hot chocolate chunk cookies. We focus on customer service and live up to
the company purpose statement: We are here to help our guests enjoy their dining
experience so they can't wait to come back.

A civic-minded company, Max and Erma's lives up to its vision, "the Hometown
Favorite." The company is traded on the NASDAQ National Market System under the
symbol, MAXE.

[PICTURE]

[MAX & ERMA'S RESTAURANTS INC. LOGO]

[MAP OF CURRENT COMPANY-OWNED LOCATIONS UNDER DEVELOPMENT, FRANCHISED LOCATIONS,
COMPANY-OWNED LOCATIONS.]


<PAGE>


                              FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
                                                                                    2003             2002     PERCENT CHANGE

<S>                                                                         <C>               <C>               <C>
FOR THE YEAR
Revenues ..............................................................     $167,082,527      $151,991,152           +  9.9%
Operating Income ......................................................        3,213,355         6,638,366           - 51.6%
Income Before Income Taxes ............................................        1,494,417         4,498,149           - 66.8%
Income Taxes ..........................................................                -         1,210,000           -100.0%
Net Income ............................................................        1,494,417         3,288,149           - 54.6%
Net Income Per Diluted Share ..........................................              .56              1.27           - 55.9%
Diluted Shares Outstanding ............................................        2,648,128         2,590,613           +  2.2%
Capital Expenditures ..................................................     $ 19,055,328      $ 17,794,067           +  7.1%


AT YEAR END
Total Assets ..........................................................     $ 61,742,095      $ 61,971,430           -  0.4%
Long-Term Obligations Less Current Maturities .........................       35,836,887        36,862,008           -  2.8%
Stockholders' Equity ..................................................       12,188,642        11,357,882           +  7.3%
Number of Restaurants
  Company-Owned .......................................................               73                67           +  9.0%
  Franchised ..........................................................               16                12           + 33.3%
Number of Employees ...................................................            5,251             4,892           +  7.3%


PERFORMANCE RATIOS
Restaurant Profit Margin ..............................................             10.5%            12.3%
Operating Profit Margin ...............................................              1.9%             4.4%
Net Profit Margin .....................................................              0.9%             2.2%
Return on Beginning Assets ............................................              2.4%             6.0%
Return on Beginning Equity ............................................             13.2%            35.7%
</TABLE>






                                    CONTENT


<TABLE>
<S>                       <C>                                <C>                               <C>
1  Financial Highlights    2 Letter to Shareholders           4 Selected Financial Data         5 Management's Discussion
                                                                                                  and Analysis

10 Financial Statements   15 Notes to Financial Statements   20 Independent Auditors' Report   21 Selected Quarterly Financial Data
</TABLE>


MAX & ERMA'S PURPOSE

We are here to help our guests enjoy their total dining experience so they can't
                               wait to come back.


<PAGE>

TO OUR SHAREHOLDERS                                       [PHOTO]

One of my favorite books about business is Good to Great, Jim Collins' analysis
of America's great business leaders. What Collins discovered from talking to the
leaders of great American businesses was that vision and strategy are not their
top priorities.

Rather, these leaders focus on their people. To succeed, they must:
     - Get the right people on the bus.
     - Get the wrong people off the bus.
     - Get the right people in the right seats.

When you have the right people in the right seats, then you figure out where you
want to drive the bus.

The direction of our bus has never been in doubt. We have a strong and clear
plan for our future. Assuring that we reach those goals and assuring the success
of our company is a continual quest to get the right people in the right seats.

OUR TEAM
We must continually look for the best and brightest candidates to take
leadership roles at Max & Erma's-both in the restaurants and on our executive
management team-to uphold the solid reputation we have built over the past 31
years. In the past year, we have made some strategic moves that we believe will
assure a strong leadership team for Max & Erma's for years to come.

The excitement of these moves comes with a tinge of melancholy. Last year, Mark
Emerson retired as our chief operations officer after 23 spectacular years with
Max & Erma's. When Mark joined our company, we had a half-dozen restaurants.
When he left, we had 73 corporate and 16 franchise locations. We owe a great
deal of our success over the past two-plus decades to Mark.

When Mark told us in 2002 that he was going to retire, we began succession
planning, seeking the people who would form the management team of the future.
Fortunately, we didn't have to look very far. We found the talent within the
walls of Max & Erma's.

Jim Howenstein was named the new vice president of operations, and I couldn't be
happier or more proud. When I first met Jim, he was a server in one of our
Pittsburgh restaurants. That was 13 years ago. Since then, he has held virtually
every job associated with running the restaurants-server, bartender, assistant
manager, general manager, regional manager. Jim acutely understands every aspect
of our day-to-day operations and he'll be a great addition to our management
team. Mark, meanwhile, will consult with Max & Erma's for the next year, helping
Jim in his new post.

Five years ago, Rob Lindeman took over our franchising operation. Under Rob's
leadership, we have expanded the Max & Erma's brand into Green Bay, Wisc., St.
Louis, Philadelphia, suburban Indianapolis and at airports in Cleveland and
Dayton. Today, we have commitments for an additional 27 franchise restaurants.
Last year, Rob also was promoted to the position of chief development officer.
Moving forward, the development of all new Max & Erma's locations, corporate and
franchise, will be under Rob's direction. Like Jim, Rob began his Max & Erma's
career working in a restaurant and has worked his way up the ladder.

Bonnie Brannigan has been our vice president of marketing and planning for seven
years and is, for my money, without peer in the industry. Bonnie is a proven
team player with an intimate understanding of our entire operation. Last year,
Bonnie also took on expanded responsibilities in 2003, assuming the unofficial
title of "Voice of the Consumer." Essentially, in addition to her other
responsibilities, Bonnie becomes guardian of our corporate values on behalf of
our guests.

IN THE KITCHEN
This year we welcomed the addition of Bob Davis, who joined us in May as the new
corporate chef. Bob brings great enthusiasm and creativity to the job, and he
brings a fresh perspective to menu preparation. He is working hard to balance
each menu category with a new style of

                                       02
<PAGE>

[PHOTO]

item that is simple, clean, and balances portion and flavor. His approach to any
new items is, "bold flavor, broad appeal and a simple approach." I think Bob is
catching on to the Max & Erma's concept pretty quickly.

Our food quality must remain beyond reproach and our "heritage" items must
remain staples on the menu. But the menu must continue to evolve to meet the
changing demands of our guests. Last year, for example, we began experimenting
with healthy choices and testing high protein offerings. These new items will
appear on our menu early next year.

FUTURE GROWTH
Growth has always been a priority at Max & Erma's, but never at the cost of
quality. That's why we have taken a methodical approach to expansion. We opened
six new restaurants in 2003 and all in our established markets-Columbus,
Cleveland, Cincinnati, Toledo, Detroit and Louisville. We plan to open up to
five corporate restaurants in 2004. Of those, we expect locations in Westland,
Michigan, and Virginia Beach to open early in the year.

Last year, we opened franchise locations in Green Bay, suburban Indianapolis,
Evansville, Philadelphia and the Cleveland airport. We expect seven franchise
restaurants to open in 2004. Also, 2003 was the first year that we began
extensive use of a new construction technique-panelized construction. Our
restaurants are now pre-built in a factory and moved in panels to the
construction site. This technique saves time and money and enables us to control
the quality of the construction.

Could we invest more and grow faster?
Absolutely. Is it the wisest use of our resources? Experience tells me no. The
commitment we are making to enhanced training and securing a solid team for the
future will serve us and our shareholders far more than another restaurant.

EARNINGS
Last year, our revenues hit a record $167.1 million, a ten percent increase over
the $152 million in 2002. This, while the August blackout and the Valentine's
Day snowstorm cost the company a total of $589,000 in sales and resulted in a
three-tenths of one percent decline in same-store sales. (Had the blackout and
snowstorm not occurred, we would have seen a small increase in same-store
sales.) For the year, our net income dropped 55 percent and our net income per
share slipped 56 percent.

This slip was triggered by several other factors. We took a nearly $1.1 million
pre-tax charge for the impairment of assets, the result of writing down the
value of two under-performing restaurants. And, there were outside influences.
Beef and chicken prices hit all-time highs during the fourth quarter. Increases
in natural gas prices and the cost of health care and worker's compensation
insurance, also hurt our margins. This year just ended was negatively impacted
by many factors. We have taken swift action in all areas to ensure our
protection against such factors going forward.

LOOKING FORWARD
At Max & Erma's, we have a wonderful history. It is an American success story. A
little over three decades ago, we were a single store in the German Village
section of Columbus. Now, the Max & Erma's brand can be found as far north as
Green Bay and as far south as Atlanta. It can be found in St. Louis to the west
and Virginia Beach to the east.

And, while it's nice to reflect on our past success, we need to keep our eye
squarely on the future and our long-term goals for our company. We made great
strides toward securing our future in 2003.

The right people are in the right seats and this bus is rolling better than
ever.



/s/ Todd R. Barnum
Todd R. Barnum
President and CEO


                                      03

<PAGE>


                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
    (In Thousands, except per share and       October 26     October 27     October 28    October 29     October 31     October 25
    other data and ratios)                          2003           2002           2001          2000           1999           1998
                                              ----------     ----------     ----------    ----------     ----------     ----------

<S>                                           <C>             <C>            <C>           <C>            <C>           <C>
    RESULTS OF OPERATIONS
    Revenues ..............................   $  167,083      $ 151,991      $ 141,088     $ 124,165      $ 108,640     $  100,531
    Operating Income ......................        3,213          6,638          5,726         2,123          1,745          5,243
    Interest Expense ......................        1,680          2,082          2,619         2,293          1,672          1,839
    Income (Loss) Before Income Taxes .....        1,494          4,498          3,107          (285)           (36)         3,322
(1) Cumulative Effect of
     Accounting Change ....................                                                                    (207)
    Net Income ............................        1,494          3,288          2,391           183            141          2,337
(2) Proforma Net Income Assuming
     Retroactive Change ...................                                                                     348          2,390
    Depreciation and Amortization .........        6,364          5,659          5,405         5,211          4,899          5,868
    Capital Expenditures ..................       19,055         17,794         13,544        22,775         14,250         10,016

    PER DILUTED SHARE DATA
(1) Cumulative Effect of
     Accounting Change ....................                                                               $    (.06)
    Net Income ............................   $      .56      $    1.27      $     .93     $     .07      $     .04     $      .55
(2) Proforma Net Income Assuming
     Retroactive Change ...................                                                                     .10            .57
    Revenues ..............................        63.10          58.67          55.07         47.23          32.43          23.78
    Assets ................................        23.32          23.92          21.44         21.00          16.39          10.87
    Stockholders' Equity ..................         4.60           4.38           3.59          3.11           3.25           4.41
    Average Shares Outstanding ............        2,648          2,591          2,562         2,629          3,350          4,226

    FINANCIAL POSITION
    Cash and Equivalents ..................   $    2,616      $   3,407      $   2,351     $   2,762      $   1,319     $    2,151
    Working Capital Deficit ...............       (7,723)        (8,102)        (9,120)       (7,404)        (6,271)        (2,632)
    Property-Net ..........................       47,037         47,693         42,803        43,654         46,841         38,097
    Total Assets ..........................       61,742         61,971         54,933        55,201         54,897         45,958
    Long-Term Obligations
     (Less Current Maturities) ............       35,837         36,862         32,228        33,474         33,914         20,010
    Stockholders' Equity ..................       12,189         11,358          9,202         8,170         10,878         18,648

    OTHER DATA AND RATIOS
    Average Restaurant Sales ..............   $    2,385      $   2,369      $   2,350     $   2,335      $   2,239     $    2,140
    Same-Store Sales Increase (Decrease)...          (.3)%           .9%           2.3%          3.9%            .2%           (.7)%
    Company-Owned Restaurants
     in Operation at Year End .............           73             67             61            56             53             49
    Restaurant Profit Margin ..............         10.5%          12.3%          11.4%         11.2%          11.9%          12.3%
    Operating Profit Margin ...............          1.9%           4.4%           4.1%          1.8%           2.1%           5.2%
    Long-Term Debt-to-Equity Ratio ........          2.9            3.2            3.5           4.1            3.1            1.1
    Market Price Per Share at Year End ....   $    17.75      $   14.00      $   10.50     $    8.38      $    6.63     $     6.38
    Price Earnings Ratio (High/Low) .......    32.5/23.2       12.4/8.3       12.7/9.0           N/M            N/M      14.8/10.7
    Return on Beginning Assets ............          2.4%           6.0%           4.3%           .3%            .3%           3.7%

    Return on Beginning Equity ............         13.2%          35.7%          38.0%          1.7%            .8%          11.7%
</TABLE>

(1)  Fiscal 1999 includes the cumulative effect of a change in accounting
     principal, net of tax, due to the expensing of pre-opening costs in
     accordance with Statement of Position 98-5, "Reporting on the Costs of
     Start-Up Activities."

(2)  Proforma amounts in fiscal years 1999 and 1998 reflect the amounts the
     Company would have reported had all pre-opening costs been expensed as
     incurred prior to the adoption of Statement of Position 98-5 (see 1 above).


                                       04

<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

REVENUE
Revenues for 2003 increased $15.1 million or 9.9% from $152.0 million for 2002
to $167.1 million for 2003. The increase was a result of i) the opening of six
restaurants during 2003, ii) the opening of six restaurants during 2002 and iii)
a 46% increase in franchise fees and royalties from $834,000 in 2002 to
$1,217,000 in 2003. These increases offset a $370,000 or 0.3% decline in sales
at restaurants open 18 months or more.

Revenues for 2002 increased $10.9 million or 7.7% from $141.1 million for 2001
to $152.0 million for 2002. The increase was a result of i) the opening of six
Max & Erma's restaurants during 2002, ii) the opening of five Max & Erma's
restaurants during 2001, iii) a $1.1 million or 0.9% increase in sales at
restaurants opened 18 months or more (exclusive of a restaurant located in a
mall undergoing reconstruction and a restaurant where freeway construction
severely limited access) and iv) a 64% increase in franchise fees and royalties
from $508,000 in 2001 to $834,000 for 2002.

The 0.3% decline in same-store sales in 2003 was primarily a result of a major
Valentine's Day snowstorm and the August 2003 blackout which hit the Northeast.
The Company estimates that these two events resulted in same-store sales losses
of $426,000 and $163,000, respectively. Exclusive of these two events same-store
sales would have been slightly positive. Beyond these two isolated events,
Management believes that same-store sales in 2003 were also negatively impacted
by an extremely harsh winter, the Iraqi war and the overall weak economy.

The 0.9% increase in same-store sales in 2002 was primarily a result of menu
price increases and the introduction of slightly higher priced menu items.

Over the periods reported, the Company has raised menu prices annually by
approximately 2 to 3%. The Company's policy is to increase prices moderately,
twice a year, in an effort to maintain margins. This, along with the
introduction of slightly higher priced menu items, has resulted in an annual
increase of 2 to 5% in the average per person guest check, but has been
partially offset by a 2 to 3% decline in customer counts. As a result same-store
sales have been only slightly positive to flat from 2001 through 2003.

The Company anticipates revenue growth of approximately 10% in 2004 as a result
of the opening of four to five Company-owned restaurants and the opening of five
to seven franchised restaurants. Two Company-owned restaurants were under
construction at October 26, 2003 and are expected to open during the first half
of 2004. Two additional sites were under contract to purchase or lease. Five
additional sites had been approved and were in some stage of negotiations.

The Company anticipates a continued increase in franchise fees and royalties. At
October 26, 2003, sixteen franchised restaurants were in operation as compared
to twelve at October 27, 2002 and nine at October 28, 2001. At October 26, 2003,
two franchised restaurants were under construction in Philadelphia, Pennsylvania
and the Cincinnati, Ohio airport. In addition to these two restaurants, the
Company anticipates the opening of an additional three to five franchised
restaurants during 2004. At October 26, 2003, the Company had six multi-unit
franchise agreements signed, requiring the development of 26 additional
restaurants over the next nine years.

OPERATING INCOME
The following table sets forth the Company's operating
income as a percentage of revenues:

<TABLE>
<CAPTION>
                                         October 26   October 27   October 28
                                               2003         2002         2001
--------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>
Revenues ................................    100.0%       100.0%       100.0%
Cost of Goods Sold ......................    (24.7)       (24.5)       (25.4)
Payroll & Benefits ......................    (33.0)       (32.3)       (32.3)
Other Operating Expenses ................    (31.3)       (30.4)       (30.6)
Preopening Costs ........................     (0.4)        (0.4)        (0.3)
Administrative Expenses .................     (8.0)        (8.0)        (7.3)
Asset Impairment Charge .................     (0.6)           -            -
                                             -----        -----        -----
Operating Income ........................      2.0%         4.4%         4.1%
                                             =====        =====        =====
</TABLE>

Cost of goods sold, as a percentage of revenues declined from 25.4% for 2001 to
24.5% for 2002 due to lower beef, dairy and seafood costs in 2002 and menu price
increases of approximately 2% during 2002. Cost of goods sold, as a percentage
of revenues, increased from 24.5% for 2002 to 24.7% for 2003. The increase was a
result of significantly higher beef and chicken costs, which completely offset
the effect of a 2 to 3 percent price increase during 2003. Beef and chicken
costs, exclusive of new menu items, increased approximately $600,000 from 2002
to 2003, much of which occurred during the second half of the year. Without
higher beef and chicken costs, cost of goods sold, as a percentage of revenues,
would have been approximately 35 basis points lower.

Payroll and benefits, as a percentage of revenues, remained steady at 32.3% for
both 2001 and 2002 and then increased to 33.0% in 2003. The increase was almost
entirely a result of higher benefit costs, primarily health insurance and
worker's compensation insurance costs.

Other operating expenses, as a percentage of revenues, decreased from 30.6% for
2001 to 30.4% for 2002. The decrease was a result of reduced advertising and
utility costs which offset higher occupancy costs. Other operating expenses, as
a percentage of revenues, increased from 30.4% for 2002 to 31.3% for 2003. The
increase was due to higher carry-


                         MAX & ERMA'S RESTAURANTS INC.

                                       05

<PAGE>

out and paper supplies, as carryout sales grew 29% in 2003, increased natural
gas costs and higher occupancy costs. The Company anticipates reduced occupancy
costs in fiscal 2004 due to the purchase of most of its leased equipment early
in fiscal 2004 and a decision to no longer lease equipment for new locations.
The reduction in equipment rental, net of depreciation on the purchased
equipment, should reduce other operating expenses by approximately three
quarters of a percentage point, as a percentage of revenues.

Pre-opening costs, as a percentage of revenues, remained relatively steady at
0.3% to 0.4% over the periods reported. The variation in this expense is a
result of the number and timing of restaurant openings each year. The Company
opened five restaurants in 2001 and six in each of 2002 and 2003.

Administrative expenses, as a percentage of revenues, increased from 7.3% in
2001 to 8.0% in both 2002 and 2003. The increase from 2001 to 2002 was due to
the fact that the growth in administrative expenses exceeded the growth in
revenues from 2001 to 2002. In dollar terms, administrative expenses increased
18% from 2001 to 2002 and 10% from 2002 to 2003. Administrative expenses have
generally increased 5 to 10 percent per year due to raises for corporate
personnel and additional personnel to support the Company's growth and franchise
growth. The additional increase from 2001 to 2002 was a result of significantly
higher performance-based bonus expenses in 2002 as unit level profit margins
improved by a full percentage point from 2001 to 2002.

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, undiscounted operating cash flows and other operating factors.
In performing its review, the Company considers 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, upon
expiration of the 36 month periods, the Company recorded a $1,070,000 write-down
of the carrying value of these impaired assets based upon the discounted cash
flow of each restaurant.

INTEREST EXPENSE
Interest expense decreased 20% from $2,619,000 in 2001 to $2,082,000 in 2002 and
then declined an additional 19% to $1,680,000 in 2003.

The Company's interest rate is based upon the ratio of bank indebtedness to
earnings before interest, taxes, depreciation and amortization. If the ratio is
above 2.5 to 1, the Company's interest rate would be LIBOR plus 3.5 percent or
prime plus 3/4 percent. If the ratio falls below 2.5 to 1, the Company's
interest rate would be reduced to LIBOR plus 3 percent 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. Based upon results
for the year ended October 28, 2001, the interest was reduced to LIBOR plus 3
percent and prime plus 1/4 percent at the start of fiscal 2002 on the term loan
and revolving credit portions of the credit agreement, respectively, and
remained at or below those rates during 2003. Additionally, the Company uses an
interest rate swap to fix a portion of the outstanding balance under its credit
agreement.

The decrease in interest expense from 2001 to 2002 was a result of reduced
market interest rates and a decline in the interest rate calculated under the
Company's credit agreement, plus a decline in the fixed rate portion of the
outstanding borrowings. At October 28, 2001, the balance outstanding under the
Company's credit agreement was approximately $27.0 million of which
approximately 65% was at a fixed interest rate of 9.9%, with the balance at a
variable interest rate of 5.75%.

At October 27, 2002, the outstanding balance under the Company's credit
agreement had increased to $28.8 million, primarily as a result of the
repurchase of 133,000 shares of the Company's common stock at a cost of $1.8
million. However, the interest rate on the fixed rate portion of the outstanding
balance had declined to 9.5% and the variable rate had declined to 5.0%.
Additionally, only 50% of the outstanding balance under the credit agreement was
subject to the higher fixed rate. The reduction in interest rates offset the
additional interest on the slightly higher outstanding balance.

The decrease in interest expense for 2002 to 2003 was a result of additional
declines in market interest rates, a reduction in the outstanding balance under
the Company's credit agreement and a further decline in the fixed rate portion
of the outstanding balance. At October 26, 2003, the outstanding balance under
the Company's credit agreement was reduced to $26.2 million, 45% of which was at
the higher fixed rate of 9.5%. The interest rate on the remaining 55% or $14.1
million had declined to 4.25%.

On August 21, 2003, the Company's Board of Directors authorized the repurchase
of up to 200,000 shares of the Company's common stock through August 21, 2004.
Through October 26, 2003, the Company had repurchased 70,000 shares at a cost of


                         MAX & ERMA'S RESTAURANTS INC.

                                       06

<PAGE>

$1,233,000. The shares were repurchased because the Company believes that the
market price of its common shares presented an attractive opportunity and
because the repurchase of shares increases the relative percentage ownership of
all remaining shareholders. The Company capitalized $382,000, $412,000 and
$418,000 of construction period interest during 2001, 2002 and 2003,
respectively.

INCOME TAXES
The Company's effective tax rate increased from 23% in 2001 to 27% in 2002. The
increase was due to the fact that as pre-tax income rises, the FICA tax on tips
credits has a lesser impact on the Company's effective tax rate. At the level of
pre-tax income reported in 2003, the FICA tax on tips credit offset all federal,
state and local income tax expense and resulted in no income tax expense for
2003.

LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio remained at .4 to 1 at both October 27, 2002
and October 26, 2003. Historically the Company has 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 2003, the Company expended approximately $19,055,000 for property
additions, $63,157,000 to reduce long-term obligations and $1,233,000 to
repurchase approximately 70,000 shares of its common stock. Funds for such
expenditures were provided primarily by $60,377,000 from proceeds of long-term
obligations, $12,323,000 from the sale of restaurant real estate, $1,000,000
from landlord construction allowance, $8,602,000 from operations, $312,000 from
the sale of stock and $790,000 from cash on hand. The Company routinely draws
down and repays its revolving credit line, the gross amounts of which are
included in the above numbers.

The Company intends to open four to five restaurants during fiscal 2004. At
October 26, 2003, the Company was contractually committed to the lease or
purchase of four new restaurants. At October 26, 2003, two restaurants were
under construction and the Company was in the process of obtaining approvals and
permits on the other two. Five additional sites had been approved and were in
some stage of negotiations. The estimated cost to complete the four sites that
the Company was contractually committed at October 26, 2003 was approximately
$7.5 million net of landlord construction allowances.

Funding for new restaurants is expected to be provided by cash flow from
operations, the sale-leaseback of real estate, landlord construction allowances
and the Company's revolving credit line. All of the Company's assets
collateralize borrowings under its revolving credit agreement. At October 26,
2003 the Company had approximately $5.0 million available under a sale-leaseback
commitment for two properties and $8.2 million available under its $15.0 million
revolving credit agreement.

During the second quarter of 2003, the Company amended its revolving credit
agreement. Under the amended agreement $20.6 million remains payable at the rate
of $600,000 quarterly for 12 quarters beginning May 1, 2003. The revolving
credit line portion was increased to $15.0 million and remains available on a
revolving basis through March 1, 2006. Both the term and revolving credit loans
have provisions for extension of maturity dates and conversion to fully
amortized term loans.

During the fourth quarter of 2003 the Company amended its revolving credit
agreement to provide for a second term loan in the amount of $6.0 million. Under
the agreement the loan proceeds are available to the Company through December
31, 2003. The loan is repayable at the rate of $125,000 per month, plus
interest, beginning December 31, 2003, through December 31, 2007. All other
terms of the credit agreement remained unchanged. At October 26, 2003, no
borrowings were outstanding under this facility. On October 27, 2003, the first
day of fiscal 2004, the Company used the loan proceeds to purchase $6.4 million
of previously leased equipment. The purchase of the equipment is projected to
reduce equipment rental expense by approximately $2.2 million and increase
depreciation and interest expense by approximately $1.1 million and $300,000,
respectively, in fiscal 2004.

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

The Company leases certain land, building and equipment under various operating
lease agreements. The initial lease terms range from five to thirty years and
expire between 2004 and 2025. In several cases, the Company is obligated to pay
additional rent based upon percentages of the restaurant's annual gross revenue.
The Company is also obligated to pay taxes, insurance, common area charges and
other expenses related to the leased properties.


                         MAX & ERMA'S RESTAURANTS INC.

                                       07

<PAGE>

At October 26, 2003 the Company was committed to the following significant
financial obligations:

<TABLE>
<CAPTION>
                       Operating        Capital       Long-Term    Construction
                          Leases         Leases            Debt     Commitments
Less than

<S>                 <C>             <C>            <C>             <C>
1 Year .........    $ 14,742,684    $   235,356    $  2,400,000    $  7,500,000
1-3 Years ......      27,760,922        226,820       7,870,214               -
3-5 Years ......      24,598,457        180,000      15,919,390               -
More than
5 Years ........     121,448,405        720,000               -               -
                    ------------    -----------    ------------    ------------
  Total ..........  $188,550,468    $ 1,362,176    $ 26,189,604    $  7,500,000
                    ============    ===========    ============    ============
</TABLE>



RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
FAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections was effective for fiscal year 2003.
The standard rescinds FASB Statements No. 4 and 64 that deal with issues
relating to the extinguishment of debt. The standard also rescinds FASB
Statement No. 44 that deals with intangible assets of motor carriers. The
standard modifies SFAS No. 13, Accounting for Leases, so that certain capital
lease modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, the standard identifies amendments that should have
been made to previously existing pronouncements and formally amends the
appropriate pronouncements. The adoption of SFAS No. 145 did not have a
significant effect on the Company's results of operations or its financial
position.

In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, was issued. SFAS No. 146 changes the timing of when
companies recognize costs associated with exit or disposal activities, so that
the costs would generally be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002, and could
result in the Company recognizing the costs of future exit or disposal
activities over a period of time as opposed to a single event.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation to provide alternative methods for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based compensation, amends the disclosure provisions of SFAS 123 and
amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. The transition guidance
and annual disclosure provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002. The Company has not elected to adopt the fair
value method for stock options. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to these consolidated financial statements.

SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances), many of which were previously classified as equity. SFAS No. 150
is effective for interim periods beginning after June 15, 2003. In its October
2003 meeting, the FASB decided to defer the effective date of certain provisions
of SFAS No. 150. Management does not expect the adoption of this accounting
pronouncement will have a material impact on the Company's consolidated
financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. FIN 45 is effective for guarantees issued or modified starting
January 1, 2003 and requires the additional disclosures for the periods ended
after December 15, 2002. The adoption of FIN 45 did not have a material impact
on the Company's financial condition or results of operations.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest equity to be consolidated by a company, if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after
December 15, 2003. The adoption of FIN 46 did not have a material impact on the
Company's consolidated financial statements.

                         MAX & ERMA'S RESTAURANTS INC.

                                       08

<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Operations and Financial Condition
discusses the Company's 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 management 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, management evaluates its estimates and judgments. We believe that
of our significant accounting policies, the following may involve a higher
degree of judgment and complexity.

DERIVATIVE INSTRUMENTS
The Company utilizes interest rate swap agreements to manage interest rate
exposure on floating-rate obligations. It does not use derivative instruments
unless there is an underlying exposure and, therefore, does 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 Sheets at fair value.

ASSET IMPAIRMENTS
The Company reviews each restaurant to ascertain whether property and equipment,
goodwill, 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 as determined from expected future discounted cash flows.

SAME-STORE SALES
The Company discloses certain information regarding the performance of certain
restaurants in operation at least 18 consecutive months in its management's
discussion and analysis. Management excludes restaurants from this calculation
that do not meet this definition. In addition, restaurants are excluded when
unusual events or circumstances outside the Company's 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
same-store sales impact of events that occurred during 2003 (Paragraph 3),
anticipated revenue growth from the opening of new restaurants (Paragraphs 6 and
24), anticipated increase in franchise fees and royalties (Paragraph 7),
anticipated opening of franchise restaurants (Paragraph 7), the expectation that
occupancy expense will decline in 2004 (Paragraphs 11 and 27), the belief that
the market price of the Company's common shares is an attractive investment
opportunity (Paragraph 20) and the estimated costs and sources of funds to
complete new restaurants (Paragraphs 24, 25 and 28).

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, the Company's ability to open or franchise new restaurants as
planned, changes in competition in markets where the Company operates
restaurants, the Company's 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 the Company's most recent Annual Report on Form 10-K and other
filings from time to time with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements.


                         MAX & ERMA'S RESTAURANTS INC.

                                       09
<PAGE>
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      October 26         October 27
                                                                                            2003               2002
<S>                                                                                  <C>                <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................................        $ 2,616,324        $ 3,406,702
Receivables:
  Trade and other ...........................................................            306,907            222,163
  Franchise .................................................................            265,601            231,204
                                                                                     -----------        -----------
    Total receivables .......................................................            572,508            453,367
Inventories .................................................................          1,161,927          1,096,228
Supplies ....................................................................            441,868            390,626
Prepaid expenses ............................................................            501,243            252,948
Deferred income taxes .......................................................            700,000             50,000
                                                                                     -----------        -----------
    TOTAL CURRENT ASSETS ....................................................          5,993,870          5,649,871

PROPERTY-AT COST:
Land and buildings ..........................................................         23,887,023         21,919,734
Leasehold improvements ......................................................         32,439,803         32,941,623
Equipment and fixtures ......................................................         25,513,223         23,412,392
Construction in progress ....................................................          1,045,525          1,843,001
                                                                                     -----------        -----------
  Total .....................................................................         82,885,574         80,116,750
Less accumulated depreciation and amortization ..............................         35,848,525         32,423,502
                                                                                     -----------        -----------
    PROPERTY-NET ............................................................         47,037,049         47,693,248

OTHER ASSETS:
Goodwill (less accumulated amortization, 2003 and 2002--$863,629) ...........             62,073             62,073
Deferred costs (less accumulated amortization, 2003--$142,372; 2002--$91,752)            533,060            410,939
Deferred income taxes .......................................................          6,156,000          6,134,000
Miscellaneous (less accumulated amortization, 2003 and 2002--$139,804) ......          1,960,043          2,021,299
                                                                                     -----------        -----------
    TOTAL OTHER ASSETS ......................................................          8,711,176          8,628,311
                                                                                     -----------        -----------

TOTAL .......................................................................        $61,742,095        $61,971,430
                                                                                     ===========        ===========
</TABLE>



See notes to consolidated financial statements.

                         MAX & ERMA'S RESTAURANTS INC.

                                       10

<PAGE>

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       October 26           October 27
                                                                                             2003                 2002
                                                                                     ------------         ------------

<S>                                                                                  <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term obligations .................................        $  2,664,166         $  2,548,008
Accounts payable ............................................................           3,160,914            2,959,413
Construction payables .......................................................             979,851            1,637,420
Accrued liabilities:
  Payroll and related taxes .................................................           2,966,718            2,877,095
  Taxes, other than income taxes ............................................           1,688,250            1,622,281
  Interest ..................................................................             467,670              567,046
  Utilities .................................................................             762,379              656,005
  Other .....................................................................           1,026,618              884,272
                                                                                     ------------         ------------
    Total accrued liabilities ...............................................           6,911,635            6,606,699
                                                                                     ------------         ------------
    TOTAL CURRENT LIABILITIES ...............................................          13,716,566           13,751,540

LONG-TERM OBLIGATIONS-
  Less current maturities ...................................................          35,836,887           36,862,008

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock-$.10 par value; authorized 500,000 shares, none outstanding
  Common stock-$.10 par value; authorized 2003 and 2002-- 5,000,000 shares;
    issued and outstanding: 2003--2,449,601 shares; 2002--2,346,798 shares ..             244,960              234,680
  Accumulated other comprehensive income(loss) ..............................            (648,373)            (794,290)
  Retained earnings .........................................................          12,592,055           11,917,492
                                                                                     ------------         ------------
    TOTAL STOCKHOLDERS' EQUITY ..............................................          12,188,642           11,357,882
                                                                                     ------------         ------------

TOTAL .......................................................................        $ 61,742,095         $ 61,971,430
                                                                                     ============         ============
</TABLE>

See notes to consolidated financial statements.


                         MAX & ERMA'S RESTAURANTS INC.

                                       11
<PAGE>

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                               Y E A R   E N D E D

                                               October 26            October 27            October 28
                                          (52 weeks) 2003       (52 weeks) 2002       (52 weeks) 2001

<S>                                         <C>                   <C>                   <C>
REVENUES ...........................        $ 167,082,527         $ 151,991,152         $ 141,087,617
                                            -------------         -------------         -------------

OPERATING EXPENSES:
Cost of goods sold .................           41,313,643            37,268,754            35,871,497
Payroll and benefits ...............           55,199,447            49,112,987            45,625,890
Other operating expenses ...........           52,290,654            46,259,347            43,195,294
Administrative expenses ............           13,299,529            12,107,314            10,260,669
Preopening costs ...................              695,950               604,384               408,069
Impairment of fixed assets .........            1,069,949
                                            -------------         -------------         -------------
  TOTAL OPERATING EXPENSES .........          163,869,172           145,352,786           135,361,419
                                            -------------         -------------         -------------

OPERATING INCOME ...................            3,213,355             6,638,366             5,726,198

INTEREST EXPENSE ...................            1,680,435             2,082,461             2,619,098

MINORITY INTERESTS IN INCOME OF
  AFFILIATED PARTNERSHIPS ..........               38,503                57,756
                                            -------------         -------------         -------------

INCOME BEFORE INCOME TAXES .........            1,494,417             4,498,149             3,107,100
                                            -------------         -------------         -------------

INCOME TAXES:
State and local
  Current ..........................              168,000               450,000               351,000
  Deferred (credit) ................               (8,000)             (105,000)             (133,000)
Federal
  Current ..........................              540,000             1,498,000             1,085,000
  Deferred (credit) ................             (700,000)             (633,000)             (587,000)
                                            -------------         -------------         -------------
    TOTAL INCOME TAXES .............                                  1,210,000               716,000
                                            -------------         -------------         -------------

NET INCOME .........................        $   1,494,417         $   3,288,149         $   2,391,100
                                            -------------         -------------         -------------

NET INCOME PER SHARE:
Basic ..............................        $         .61         $        1.41         $        1.00
                                            =============         =============         =============
Diluted ............................        $         .56         $        1.27         $         .93
                                            =============         =============         =============

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ..............................            2,441,700             2,333,618             2,385,485
                                            =============         =============         =============
Diluted ............................            2,648,128             2,590,613             2,562,019
                                            =============         =============         =============
</TABLE>


See notes to consolidated financial statements.


                         MAX & ERMA'S RESTAURANTS INC.

                                       12
<PAGE>



                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                             Accumulated
                                                                                   Other
                                                Common Stock               Comprehensive          Retained
                                            Shares             Amount             Income           Earnings              Total
                                         ---------       ------------       ------------       ------------       ------------
<S>                                      <C>             <C>                <C>                <C>                <C>
BALANCE, OCTOBER 29, 2000                2,409,403       $    240,940                          $  7,928,612       $  8,169,552
Issuance of stock through
  option and bonus plans,
  including $44,802 related
  tax benefit                               80,764              8,077                               382,037            390,114
Shares repurchased                         (82,401)            (8,240)                             (787,102)          (795,342)
Comprehensive income:
  Change in fair value of
    interest rate protection
    agreement, net of income tax                                            $   (953,550)                             (953,550)
  Net income                                                                                      2,391,100          2,391,100
                                                                                                                  ------------
    Comprehensive income                                                                                             1,437,550
                                         ---------       ------------       ------------       ------------       ------------

BALANCE, OCTOBER 28, 2001                2,407,766            240,777           (953,550)         9,914,647          9,201,874
Issuance of stock through
  option and bonus plans,
  including $68,587 related
  tax benefit                               72,194              7,219                               483,221            490,440
Shares repurchased                        (133,162)           (13,316)                           (1,768,525)        (1,781,841)
Comprehensive income:
  Change in fair value of
    interest rate protection
    agreement, net of income tax                                                 159,260                               159,260
  Net income                                                                                      3,288,149          3,288,149
                                                                                                                  ------------
    Comprehensive income                                                                                             3,447,409
                                         ---------       ------------       ------------       ------------       ------------

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                                                 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
                                         =========       ============       ============       ============       ============
</TABLE>



See notes to consolidated financial statements.

                         MAX & ERMA'S RESTAURANTS INC.

                                       13
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Y E A R   E N D E D

                                                                     October 26         October 27         October 28
                                                                (52 weeks) 2003    (52 weeks) 2002    (52 weeks) 2001

<S>                                                                <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                         $  1,494,417       $  3,288,149       $  2,391,100
                                                                   ------------       ------------       ------------
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization                                       6,364,044          5,658,987          5,404,865
  Deferred income tax credit                                           (708,000)          (738,000)          (720,000)
  Accretion of deferred sale/leaseback gain                            (126,267)          (126,267)          (126,267)
  Minority interests in income of Affiliated Partnership                 38,503             57,756
  Impairment of fixed assets                                          1,069,949
  Loss on disposition of assets                                         204,445            237,107            206,773
  Issuance of common stock as compensation
    through manager bonus plan                                                                                 54,662
  Changes in assets and liabilities:
    Receivables, inventories, supplies and prepaids                    (484,377)          (210,382)           428,983
    Other assets                                                       (196,151)            42,082           (127,494)
    Accounts payable, accrued and other liabilities                     945,511          1,698,632            381,334
                                                                   ------------       ------------       ------------
    Total Adjustments                                                 7,107,657          6,619,915          5,502,856
                                                                   ------------       ------------       ------------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                       8,602,074          9,908,064          7,893,956
                                                                   ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions                                                  (19,055,328)       (17,794,067)       (13,544,455)
Proceeds from lease incentives                                        1,000,000          1,488,506
Changes in other assets                                                 234,239           (222,637)          (110,420)
Proceeds from the sale of property                                   12,322,527          7,561,291          7,509,397
                                                                   ------------       ------------       ------------
      NET CASH USED IN INVESTING ACTIVITIES                          (5,498,562)        (8,966,907)        (6,145,478)
                                                                   ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under long-term obligations                      (63,157,061)       (56,930,032)       (57,319,322)
Proceeds from long-term obligations                                  60,376,756         58,550,801         55,677,805
Debt issue costs                                                       (153,465)           (88,291)           (38,285)
Proceeds from exercise of stock options                                 311,843            421,836            294,738
Distributions to minority interests in Affiliated Partnership           (38,503)           (57,756)
Cash paid for purchase of common stock                               (1,233,460)        (1,781,841)          (774,428)
                                                                   ------------       ------------       ------------
      NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES            (3,893,890)           114,717         (2,159,492)
                                                                   ------------       ------------       ------------

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                        (790,378)         1,055,874           (411,014)

CASH AND EQUIVALENTS AT BEGINNING OF YEAR                             3,406,702          2,350,828          2,761,842
                                                                   ------------       ------------       ------------

CASH AND EQUIVALENTS AT END OF YEAR                                $  2,616,324       $  3,406,702       $  2,350,828
                                                                   ============       ============       ============

SUPPLEMENTAL DISCLOSURES:
Cash paid for:
  Interest-net of $417,250 $412,096, and $381,713
    capitalized in 2003, 2002 and 2001                             $  1,744,530       $  2,168,555       $  2,789,665
  Income taxes                                                          887,015          1,976,537          1,098,628
Noncash activities:
  Property additions financed by construction payables                  979,851          1,637,420          1,122,995
</TABLE>

         See notes to consolidated financial statements.

                         MAX & ERMA'S RESTAURANTS INC.

                                       14
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED OCTOBER 26, 2003, OCTOBER 27, 2002 AND OCTOBER 28, 2001

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 26, 2003, there are 73 Max & Erma's restaurants in operation (67 at
October 27, 2002) (principally located in the Midwestern United States) and two
under construction in Detroit, Michigan and Virginia Beach, Virginia. 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 16 which are franchised to unrelated parties
(12 at October 27, 2002).

At October 26, 2003, the Company was contractually committed to the lease or
purchase of four new Max & Erma's restaurants. The estimated cost to complete
these restaurants is approximately $7,500,000, net of landlord construction
allowances.

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:

                                                                           Years
--------------------------------------------------------------------------------
Buildings ..........................................................   15 to 30
Leasehold improvements .............................................   10 to 15
Equipment and fixtures .............................................    3 to 15

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, goodwill 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. Due to high start-up costs and lower sales volumes
associated with new restaurants, the Company's policy is to delay its
determination of impairment losses for assets at restaurants opened for less
than three years. See Note 9 regarding provision for impairment of assets at
October 26, 2003.

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 $1,217,000, $834,000 and $508,000 in 2003, 2002 and 2001,
respectively.

ADVERTISING--The Company expenses the costs of advertising (including production
costs) the first time the advertising takes place. Advertising expense was
$3,214,000, $2,863,000 and $2,970,000 for fiscal 2003, 2002 and 2001,
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 PER SHARE--Basic income 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. The chart below presents a reconciliation between basic and diluted
weighted average shares outstanding:

<TABLE>
<CAPTION>
                                                          2003        2002        2001
                                                     ---------   ---------   ---------
<S>                                                  <C>         <C>         <C>
Basic weighted average
   shares outstanding .............................  2,441,700   2,333,618   2,385,485
Dilutive effect
   of stock options ...............................    206,428     256,995     176,534
                                                     ---------   ---------   ---------
Basic weighted average shares outstanding .........  2,648,128   2,590,613   2,562,019
                                                     =========   =========   =========
</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 encouraged,
but not required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are

                         MAX & ERMA'S RESTAURANTS INC.

                                       15
<PAGE>

also 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 and earnings per share as if the Company had applied the new
method of accounting. The Company applies APB No. 25 in accounting for its
stock-based compensation plans. Had compensation cost been determined on the
basis of fair value pursuant to SFAS No. 123 for options granted in fiscal 1996
through 2003, net income and earnings per share would have been as follows:


<TABLE>
<CAPTION>
                                                    2003            2002            2001
                                              ----------      ----------      ----------
<S>                                           <C>             <C>             <C>
Net income:
    As reported ............................  $1,494,417      $3,288,149      $2,391,100
    Pro forma ..............................  $  280,991      $3,177,305      $2,089,228
    Basic earnings per share: ..............
     As reported ...........................  $     0.61      $     1.41      $     1.00
     Pro forma .............................  $     0.12      $     1.36      $     0.88
 Diluted earnings per share:
    As reported ............................  $     0.56      $     1.27      $     0.93
    Pro forma ..............................  $     0.11      $     1.23      $     0.82
</TABLE>

The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 4.52 %, 5.53%, and 4.80% for 2003, 2002 and
2001, respectively; an expected life of the options of five to ten years; no
expected dividend yield and a volatility factor of 28%, 37% and 25% in 2003,
2002 and 2001, respectively. The weighted average per share fair value of the
options granted in 2003, 2002 and 2001 was $7.04, $7.24 and $4.91, respectively.

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
2003, 2002 and 2001 each contained 52 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--SFAS No. 145, Rescission of FASB
Statements No 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections was effective for fiscal year 2003. The standard rescinds Financial
Accounting Standards Board ("FASB") Statements No. 4 and 64 that deal with
issues relating to the extinguishment of debt. The standard also rescinds FASB
Statement No. 44 that deals with intangible assets of motor carriers. The
standard modifies SFAS No. 13, Accounting for Leases, so that certain capital
lease modifications must be accounted for by lessees as sale-leaseback
transactions. Additionally, SFAS No. 145 the standard identifies amendments that
should have been made to previously existing pronouncements and formally amends
the appropriate pronouncements. The adoption of SFAS No. 145 did not have a
significant effect on the Company's results of operations or its financial
position.

In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, was issued. SFAS No. 146 changes the timing of when
companies recognize costs associated with exit or disposal activities, so that
the costs would generally be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002, and could
result in the Company recognizing the costs of future exit or disposal
activities over a period of time as opposed to a single event.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. SFAS No. 148 amends FASB Statement No.
123, Accounting for Stock-Based Compensation to provide alternative methods for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based compensation, amends the disclosure provisions of SFAS No. 123
and amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002. The Company has not elected to
adopt the fair value method for stock options. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002 and
are included in the notes to these consolidated financial statements.

SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances), many of which were previously classified as equity. SFAS No. 150
is effective for interim periods beginning after June 15, 2003. In its October
2003 meeting, the FASB decided to defer the effective date of certain provisions
of SFAS No. 150. Management does not expect the adoption of this accounting
pronouncement will have a material impact on the Company's consolidated
financial statements.

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 is effective for guarantees issued or
modified starting January 1, 2003 and requires the additional disclosures for
the periods ended after December 15, 2002. The adoption of FIN 45 did not have a
material impact on the Company's financial condition or results of operations.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
requires a variable interest entity to be consolidated by a company, if that
compa-

                         MAX & ERMA'S RESTAURANTS INC.

                                       16
<PAGE>

ny is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period beginning after
December 15, 2003. The adoption of FIN 46 did not have a material impact on the
Company's consolidated financial statements.

2. OWNERSHIP OF RESTAURANT BY AFFILIATED PARTNERSHIP
One of the restaurants 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
2003, 2002 and 2001, the Company's share of the remaining partnership's profits
and losses was approximately 60%. At October 26, 2003 no amounts were due to
Affiliated Partners.

3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:

<TABLE>
<CAPTION>
                                                   OCTOBER 26,     OCTOBER 27,
                                                          2003            2002
--------------------------------------------------------------------------------
<S>                                               <C>             <C>
Debt:
  Revolving credit agreement ...................  $  6,789,604    $  7,025,257
  Amended term loan ............................    19,400,000      21,800,000
  Capital leases ...............................       885,964       1,030,616
                                                  ------------    ------------
    Total debt .................................    27,075,568      29,855,873
Deferred gain on sale/leaseback (Note 4) .......     1,766,387       1,892,655
Deferred lease incentives (Note 1) .............     2,394,318       1,473,764
Accrued rent (Note 4) ..........................     5,772,588       4,647,921
Interest rate protection agreement .............       997,497       1,221,984
Deferred compensation plan .....................       494,695         317,819
                                                  ------------    ------------
   TOTAL LONG-TERM OBLIGATIONS .................    38,501,053      39,410,016
Less current maturities of debt ................    (2,664,166)     (2,548,008)
                                                  ------------    ------------
   TOTAL LONG-TERM OBLIGATIONS -
   LESS CURRENT MATURITIES .....................  $ 35,836,887    $ 36,862,008
                                                  ============    ============
</TABLE>

The Company's credit agreement with a bank, as amended on April 30, 2002,
permitted it to borrow on a term loan with an original principal amount of
$23,000,000 ("Amended Term Loan"). Amounts outstanding under the Amended Term
Loan are payable in quarterly installments of $600,000 plus interest through May
1, 2006. If the Company elects to extend the loan the quarterly payments will
continue. If it does not extend its term loan, the remaining balance will be
payable over a period of five years, as defined in the agreement. In addition,
the Company has available a revolving commitment ("Revolving Credit Agreement")
of $15,000,000 ($12,800,000 at October 27, 2002). In the fourth quarter of 2003,
the Company amended its revolving credit agreement to provide for a second term
loan of $6,000,000, available through December 31, 2003 (see Note 4). The loan
provides for monthly payments of $125,000, plus interest, beginning December 31,
2003 through December 31, 2007. There were no borrowings on the second term loan
at October 26, 2003 (see Note 4). 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 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 (4.25% and 5.00% rate at October 26, 2003 and October 27, 2002,
respectively). The agreement required the Company to enter into a $20,000,000
interest rate protection agreement. 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.
Covenants of the credit agreement require the Company to maintain certain
financial ratios.

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 amortizes over the life of the
contract (remaining balance of approximately $12,143,000 at October 26, 2003).
The Company pays the bank a quarterly fixed rate of 6.48% and receives a
quarterly variable rate payment based on the LIBOR rate, capped at 7%. The
agreement is designated as a cash flow hedge. Hedging effectiveness is assessed
periodically by comparing the fair market value of the agreement to agreements
with terms similar to the lending facility. The effective portion of periodic
gains and losses of the contract are deferred in other comprehensive income
until the transactions are recognized. Any portion of the contract that is
ineffective is recognized in earnings immediately. The protection agreement had
a total fair value of approximately $997,000 at October 26, 2003 which is
reflected as a long-term liability and accumulated other comprehensive income
(net of taxes of $349,000, totaling $648,000). For the years ended October 26,
2003 and October 27, 2002, the ineffective portion of the protection agreement
was not material to the Company's consolidated financial statements. The Company
estimates approximately $188,000 of net derivative losses will be reclassified
to interest expense in 2004. As the interest rate protection agreement is with a
major bank, the Company does not expect to be subject to credit risk exposures.

Future maturities of long-term debt obligations at October 26, 2003 are as
follows (see Note 4 for maturities of other long-term obligations):

<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
--------------------------------------------------------------------------------
<S>                                                               <C>
2004 ..........................................................   $ 2,400,000
2005 ..........................................................     3,078,960
2006 ..........................................................     4,791,254
2007 ..........................................................     5,824,588
2008 ..........................................................     5,824,588
Thereafter ....................................................     4,270,214
                                                                  -----------
  TOTAL .......................................................   $26,189,604
                                                                  ===========
</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 thirty years and expire between 2004 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 1 7 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.

                         MAX & ERMA'S RESTAURANTS INC.

                                       17
<PAGE>

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.

The following is a summary of property under capital leases included in the
accompanying consolidated balance sheets:

<TABLE>
<CAPTION>
                                               OCTOBER 26,          OCTOBER 27,
                                                      2003                 2002
--------------------------------------------------------------------------------
<S>                                            <C>                  <C>
ASSET DESCRIPTION
Buildings ............................         $ 1,045,000          $ 1,045,000
Equipment and fixtures ...............             585,111              621,812
                                               -----------          -----------
   TOTAL .............................           1,630,111            1,666,812
Less accumulated amortization ........          (1,368,004)          (1,282,174)
                                               -----------          -----------
   NET ...............................         $   262,107          $   384,638
                                               ===========          ===========
</TABLE>

Future minimum lease payments under the capital leases and the present value of
such payments at October 26, 2003 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
--------------------------------------------------------------------------------
<S>                                                                <C>
2004 .............................................................   $ 235,356
2005 .............................................................     118,092
2006 .............................................................     108,728
2007 .............................................................      90,000
2008 .............................................................      90,000
Thereafter .......................................................     720,000
                                                                    ----------
    TOTAL MINIMUM LEASE PAYMENTS .................................   1,362,176
Less amount representing interest ................................    (476,212)
                                                                    ----------
Present value of minimum lease payments ..........................     885,964
Less current maturities ..........................................    (159,079)
                                                                    ----------
    TOTAL OBLIGATIONS UNDER CAPITAL LEASES-
    LESS CURRENT MATURITIES ......................................  $  726,885
                                                                    ==========
</TABLE>

At October 26, 2003, the future minimum rental commitments under noncancellable
operating leases with an initial term in excess of one year are as follows:

<TABLE>
<CAPTION>
YEAR ENDING IN OCTOBER
--------------------------------------------------------------------------------
<S>                                                              <C>
2004                                                             $  14,742,684
2005                                                                14,225,090
2006                                                                13,535,832
2007                                                                12,847,123
2008                                                                11,751,334
Thereafter                                                         121,448,405
                                                                 -------------
  TOTAL                                                          $ 188,550,468
                                                                 =============
</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 fifteen years.

Subsequent to October 26, 2003, the Company used the loan proceeds of its
second term loan to purchase $6,400,000 of previously leased equipment.

In 2003, 2002 and 2001, 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 trans- actions 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>
                                     2003             2002             2001
--------------------------------------------------------------------------------
<S>                           <C>              <C>              <C>
Minimum rent ..............   $16,392,102      $14,077,701      $12,427,997
Contingent rent based on
    percentage of gross
    revenue ..............        166,109          103,571           78,640
                              -----------      -----------      -----------
TOTAL ....................    $16,558,211      $14,181,272      $12,506,637
                              ===========      ===========      ===========
</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
$70,000 per year over the last three years.

5. INCOME TAXES
The Company's effective tax rate varies from the statutory Federal income tax
rate as a result of the following factors:

<TABLE>
<CAPTION>
                                               2003          2002          2001
-------------------------------------------------------------------------------
<S>                                     <C>           <C>           <C>
Provision (benefit)
  at statutory rate ..................  $   508,000   $ 1,529,000   $ 1,056,000
State income taxes-
  net of Federal benefit .............      110,000       226,000       156,000
Jobs related tax credit ..............      (51,000)      (28,000)      (65,000)
FICA tax credit ......................     (637,000)     (518,000)     (464,000)
Other-net ............................       70,000         1,000        33,000
                                        -----------   -----------   -----------
  TOTAL PROVISION ....................  $         -   $ 1,210,000   $   716,000
                                        ===========   ===========   ===========
Effective income tax rate ............            -          26.9%         23.0%
                                        ===========   ===========   ===========
</TABLE>

The tax effects of significant items comprising the Company's net deferred tax
asset at October 26, 2003 and October 27, 2002 are as follows:

<TABLE>
<CAPTION>
                                                  OCTOBER 26,       OCTOBER 27,
                                                         2003              2002
--------------------------------------------------------------------------------
<S>                                               <C>               <C>
DEFERRED TAX ASSETS (LIABILITIES)
Accrued Rent ...............................      $ 2,607,000       $ 2,026,000
Depreciation ...............................        1,681,000         2,281,000
Deferred gain ..............................          890,000           918,000
Officers' benefits .........................          559,000           473,000
Interest rate swap .........................          349,000           428,000
FICA tax credit ............................          727,000
Partnerships ...............................           98,000            84,000
Other ......................................          101,000            80,000
                                                  -----------       -----------
  TOTAL DEFERRED TAX ASSETS ................        7,012,000         6,290,000
                                                  -----------       -----------
Prepaid insurance and other ................         (156,000)         (106,000)
                                                  -----------       -----------
  TOTAL DEFERRED TAX LIABILITIES ...........         (156,000)         (106,000)
                                                  -----------       -----------
NET DEFERRED TAX ASSET .....................      $ 6,856,000       $ 6,184,000
                                                  ===========       ===========
</TABLE>

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 com-

                         MAX & ERMA'S RESTAURANTS INC.

                                       18
<PAGE>

bined voting stock of the Company, the exercise price of the option must be at
least 110% of the fair market value. At October 26, 2003, 5,000 shares under
option were exercisable and 75,000 shares were reserved for future grants under
the 2002 Plan.

Also in effect at October 26, 2003 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 26, 2003, 98,200 shares under option were exercisable
and 7,550 shares were reserved for future grants under the 1992 Stock Option
Plan. Under the 1996 Stock Option Plan, 105,500 shares under option were
exercisable and 10,500 shares were reserved for future grants at October 26,
2003.

During fiscal years 1996 through 2001, the Company provided for the payment of
bonuses in cash and/or common stock pursuant to the 1996 Employee Incentive
Stock Purchase and Manager Bonus Plan (the "1996 Bonus Plan"). Early in fiscal
2001, the Company terminated this plan. During fiscal 2001, 6,523 shares were
issued under the 1996 Bonus Plan, at a weighted average fair value of $8.38.
During 2001 the Company recognized compensation expense of $54,662 related to
the granting of shares under these Plans at less than fair market value at the
date of grant.
The following summarizes the stock option transactions:

<TABLE>
<CAPTION>
                                                                      WEIGHTED
                                                                       AVERAGE
                                                            NUMBER OF EXERCISE
                                                              OPTIONS    PRICE
--------------------------------------------------------------------------------
<S>                                                          <C>        <C>
Balance, October 29, 2000 .................................   700,100   $ 7.28
Granted ...................................................    53,000    10.30
Exercised .................................................  (134,800)   (6.98)
Cancelled .................................................    (7,500)   (7.16)
                                                             ---------  -------

Balance, October 28, 2001 .................................   610,800     7.61
Granted ...................................................    11,000    13.07
Exercised .................................................   (88,100)   (7.39)
Cancelled .................................................   (11,500)   (7.49)
                                                             ---------  -------

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
                                                             --------   -------
</TABLE>

The following summarizes information regarding stock options outstanding at
October 26, 2003:

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                   -------------------              -------------------
                       Number                                                Number      Weighted
                   Outstanding at   Weighted Average       Weighted      Exercisable at   Average
Range of Exercise    October 26,       Remaining       Average Exercise    October 26,   Exercise
     Prices             2003        Contractual Life        Price             2003         Price
-----------------  --------------   ----------------   ----------------- --------------  --------
<S>                    <C>               <C>                <C>               <C>        <C>
 $5.94-$8.69           150,700           1.7                 $7.26            150,700     $7.26
    $10.30              53,000           8.0                $10.30             53,000    $10.30
$13.75-$15.20          175,000           8.9                $14.23              5,000    $13.75
</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 2003, 2002, and 2001, 133,540, 15,906, and 59,824 shares,
respectively, were tendered for the exercise of 258,000, 26,350, and
89,000 options, respectively. During fiscal 2003, 2002, and 2001, the
Company repurchased 69,882, 17,210, and 21,663 shares, respectively,
of common stock at the fair market value from certain officers at a
cost of $1,228,644, $229,140 and $216,422, 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 four
percent 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 $495,000 at October 26, 2003.

Total expense for these plans for 2003, 2002 and 2001 was approximately
$245,000, $254,000 and $186,000, 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 26, 2003 and October 27, 2002 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 26, 2003 and October 27,
2002. 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 is based on
quoted market values offered for the same or similar agreements.

9. IMPAIRMENT OF FIXED ASSETS
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 (see Note 1). In performing its review, the
Company considers 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. Accordingly, the Company recorded the impairment charge in the
fourth quarter, upon expiration of the 36 month periods.

                         MAX & ERMA'S RESTAURANTS INC.

                                       19
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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 26, 2003 and
October 27, 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended October 26, 2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Max & Erma's Restaurants, Inc. and
subsidiary at October 26, 2003 and October 27, 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
October 26, 2003, in conformity with accounting principles generally accepted in
the United States of America.



Deloitte & Touche LLP


Columbus, Ohio
December 22, 2003


                       MAX & ERMA'S OFFICERS AND DIRECTORS

WILLIAM E. ARTHUR, Director, Partner, Porter, Wright, Morris & Arthur TODD B.
BARNUM, Chairman of the Board, Chief Executive Officer, President and Director
ROGER D. BLACKWELL, Director, Professor of Marketing, The Ohio State University
BONNIE J. BRANNIGAN, Vice President of Marketing and Planning STEVE CATANESE,
Regional Vice President of Operations MARK F. EMERSON, Chief Operating Officer,
Emeritus LARRY B. FOURNIER, Vice President of Development THOMAS R. GREEN,
Director, Chief Executive Officer, Lancaster Pollard & Company GREGORY L.
HEYWOOD, Regional Vice President of Operations CHRISTOPHER S. HOLGATE, Vice
President of Real Estate JAMES E. HOWENSTEIN, Vice President of Operations
ROBERT A. LINDEMAN, Vice President of Franchising MICHAEL D. MURPHY, Director,
Private Investor WILLIAM C. NIEGSCH, JR., Executive Vice President, Chief
Financial Officer, Treasurer, Secretary and Director ROBERT A. ROTHMAN,
Director, Managing Partner, Amusement Investment Company


                         MAX & ERMA'S RESTAURANTS INC.

                                       20
<PAGE>

                       SELECTED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                  Income                            Diluted
                                        Total (Loss) Before            Net   Earnings (Loss)           Stock Price
(Thousands, except per share data)   Revenues  Income Taxes  Income (Loss)         Per Share        High           Low

<S>                                  <C>           <C>            <C>              <C>          <C>           <C>
2003
First Quarter .................      $ 49,208      $  1,236       $    908         $    .34     $  17.93      $  13.00
Second Quarter ................        38,801           807            650              .25        15.74         13.20
Third Quarter .................        39,590           686            620              .24        16.51         14.47
Fourth Quarter ................        39,484        (1,235)          (684)            (.27)       18.19         16.00
                                     --------      --------       --------         --------     --------      --------
  YEAR ........................      $167,083      $  1,494       $  1,494         $    .56     $  18.19      $  13.00
                                     ========      ========       ========         ========     ========      ========

2002
First Quarter .................      $ 44,495      $  1,111       $    819         $    .31     $  15.06      $  10.50
Second Quarter ................        35,785         1,217            864              .34        15.11         13.00
Third Quarter .................        35,712         1,229            881              .34        15.69         13.27
Fourth Quarter ................        35,999           941            724              .28        14.85         11.62
                                     --------      --------       --------         --------     --------      --------
  YEAR ........................      $151,991      $  4,498       $  3,288         $   1.27     $  15.69      $  10.50
                                     ========      ========       ========         ========     ========      ========
</TABLE>

The Company's common stock trades on the NASDAQ National Market under the symbol
MAXE.
At November 30, 2002 there were 687 stockholders of record of the Company's
common stock.
The closing price for the Company's common stock at October 26, 2003 was $17.75.

                            SHAREHOLDER INFORMATION


QUARTERLY CALENDAR:
Max & Erma's operates on a fiscal year ending on the last Sunday in October.
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 2004                  Quarter-End Dates
        ----------------------------------------------
<S>                                  <C>
        1st quarter                  February 15, 2004
        2nd quarter                  May 19, 2004
        3rd quarter                  August 1, 2004
        4th quarter                  October 31, 2004
</TABLE>

DIVIDENDS:
The Company paid no cash dividends in fiscal 2001, 2002 or 2003. 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
Columbus, Ohio

AUDITORS:
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 dividends or stock certificates.

ANNUAL SHAREHOLDERS MEETING:
April 9, 2004, 9:30 a.m.
Max & Erma's Corporate Office
4849 Evanswood Drive
Columbus, Ohio 43229

10-K REPORT:
Stockholders may obtain, without cost, a copy of Form 10-K for the Company's
fiscal year ended October 26, 2003, by writing to:
William C. Niegsch, Jr.
Max & Erma's Restaurants, Inc.
P.O. Box 297830
4849 Evanswood Drive
Columbus, Ohio 43229