<PAGE>

                                UNITED STATES 
                      SECURITIES AND EXCHANGE COMMISSION 
                            Washington, D.C. 20549

                                   FORM 10-K
    (Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    For the fiscal year ended    October 26, 1997
                                      OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
              For the transition period from _______ to ________
Commission file number  0-23420
                             QUALITY DINING, INC. 
            (Exact name of registrant as specified in its charter)

                Indiana                                35-1804902
    (State or other jurisdiction of      (I.R.S. Employer Identification No.)
    incorporation or organization)

           4220 Edison Lakes Parkway
              Mishawaka, Indiana                      46545
    (Address of principal executive offices)       (Zip Code)
                                (219) 271-4600
             (Registrant's telephone number, including area code)
 
          Securities registered pursuant to Section 12(b) of the Act:

                                     NONE

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

                        COMMON STOCK, WITHOUT PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]


                                  $36,799,774

Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at December 5, 1997
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").

                                  12,619,059

      Number of shares of Common Stock, without par value, outstanding at
                               January 19, 1998

                      DOCUMENT INCORPORATED BY REFERENCE

Portions of the following document have been incorporated by reference into this
Annual Report on Form 10-K

 IDENTITY OF DOCUMENT                              PART OF FORM 10-K INTO WHICH
                                                   DOCUMENT IS INCORPORATED
 Definitive Proxy Statement for the Annual Meeting
 of Shareholders to be held March 10, 1998         PART III
 
                                       1
<PAGE>
 
                             QUALITY DINING, INC.
                              Mishawaka, Indiana

              Annual Report to Securities and Exchange Commission

                               October 26, 1997

                                    PART I

ITEM 1.   BUSINESS.

General

     Quality Dining, Inc. (the "Company") operates four distinct restaurant
concepts. It owns the Grady's American Grill(R) and two Italian Dining concepts
and operates Burger King(R) restaurants and Chili's Grill & Bar(TM)
("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker
International, Inc. ("Brinker"), respectively. The Company operates its Italian
Dining restaurants under the tradenames of Spageddies Italian Kitchen(R)
("Spageddies"(R)) and Papa Vino's Italian Kitchen(TM) ("Papa Vino's"(TM)). As of
October 26, 1997, the Company operated 142 restaurants, including 40 Grady's
American Grill restaurants, five Spageddies, three Papa Vino's, 66 Burger King
restaurants and 28 Chili's.

     Since its founding in 1981, the Company has grown from a two-unit Burger
King franchisee to a multi-concept restaurant operator. The Company believes
that its affiliation with quality franchisors, the operation of well-positioned,
value-based concepts, a focus on total customer satisfaction and a hands-on
management style provide the basis for future operating success. In addition,
the Company's strategy of building a critical mass in targeted markets has
enabled it to better understand and respond to the needs of its customers and
markets, as well as to take advantage of certain operational efficiencies.
Management believes that, as a result of these factors, its restaurants appeal
to a broad range of customers and generate a high level of customer loyalty.

     On October 20, 1997, the Company divested its bagel-related businesses to
Mr. Nordahl L. Brue and Mr. Michael J. Dressell and their affiliates. The sale
included the stock of Bruegger's Corporation, which the Company acquired in June
of 1996, and all other bagel-related subsidiaries of the Company.

     On December 21, 1995, the Company acquired the Grady's American Grill
restaurant concept and 42 Grady's American Grill restaurants from Brinker (the
"Grady's Acquisition"), pursuant to an asset purchase agreement. In connection
with the Grady's Acquisition, the Company also purchased all of the outstanding
stock of Grady's, Inc., incorporated three new wholly-owned subsidiaries and
organized an indirect wholly-owned limited partnership.

     On October 28, 1995, the Company acquired from Brinker all rights to the
Spageddies concept in the United States. Brinker retained the international
rights to the Spageddies concept.

     On August 14, 1995, the Company acquired all of the capital stock and/or
assets of 11 corporations (the "SHONCO Companies") owned or controlled by
William R. Schonsheck. The SHONCO Companies operated eight Burger King
restaurants in the Detroit, Michigan market and held the right to construct four
additional restaurants pursuant to a target reservation agreement with Burger
King Corporation.

     On November 10, 1994, the Company acquired all of the outstanding stock of
Grayling Corporation, Grayling Management Corporation, Chili's of Mt. Laurel,
Inc. and Chili's of Christiana, Inc. (the "Grayling Companies"). The Grayling
Companies operated eight Chili's restaurants located in the greater
Philadelphia, Pennsylvania market.

     As a result of its acquisitions, the Company has grown significantly in
size and broadened the geographic area in which it operates. Any acquisition
involves inherent uncertainties, such as the effect on the acquired businesses
of

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<PAGE>
 
integration into a larger organization and the availability of management
resources to oversee the operations of the acquired business. The Company's
ability to integrate the operations of acquired concepts is essential to its
future success. There can be no assurance as to the Company's ability to
integrate new businesses nor as to its success in managing the significantly
larger operations resulting therefrom.

     In addition, the Company has recorded significant intangible assets in
connection with the acquisitions of Bruegger's Corporation, Grady's American
Grill, the SHONCO Companies and the Grayling Companies. Applicable accounting
standards require the Company to review long-lived assets (such as goodwill and
other intangible assets) for impairment whenever events or changes in
circumstances indicate that the carrying values of those assets may not be
recoverable. In the event that the Company determines that the carrying value of
such intangible assets is impaired, it would write-down such carrying value,
which would result in a charge to earnings. Any such charge could have a
material adverse effect on the Company's financial results.


Disposition of Bagel-Related Businesses

     On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The sale included the stock of Bruegger's Corporation and the
stock of all of the other bagel-related businesses. The total proceeds from the
sale were $45,164,000. The consideration included the issuance by Bruegger's
Corporation of a junior subordinated note in the amount of $10,000,000, which
was recorded as $6,000,000 due to a $4,000,000 reserve for legal
indemnification, the transfer of 4,310,740 shares of the Company's common stock
valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a
receivable for purchase price adjustment of $500,000, and $16,841,000 in cash.
The subordinated note has an annual interest rate of 12% and will mature in
seven years. Interest will be accrued and added to the principal amount of the
note for the first three years and will be paid in cash for the remaining life
of the note. The cash component of the proceeds included an adjustment for the
calculation of the net working capital deficit. The calculation used was
subject to final adjustment and is being disputed by Mssrs. Brue and Dressell.
The Company does not expect the ultimate resolution of this dispute to have a
material adverse effect on the Company's financial position or results of
operations. 

     During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 and a store closing charge of $15,513,000 as a
result of its decision to divest its bagel-related businesses. The consummation
of the sale of the bagel-related assets did not result in any additional gain or
loss.

     The Company is an Indiana corporation, which is the indirect successor to a
corporation that commenced operations in 1981. Prior to the consummation of the
Company's initial public offering on March 8, 1994 (the "Offering"), the
business of the Company was transacted by the Company and eight affiliated
corporations. As a result of a reorganization effected prior to the Offering,
the Company became a management holding company. The Company, as used herein,
means Quality Dining, Inc. and all of its subsidiaries.


Business Strategy

     The Company's fundamental business strategy is to maximize the cash flow of
its operations through proven operating management, reduce debt and
appropriately grow the Company's Burger King and Chili's Grill & Bar concepts in
a manner focusing on total customer satisfaction, while maximizing the value of
the Company for its shareholders. Management's operating philosophy, which is
shared by all of the Company's concepts, is comprised of the following key
elements:

     Value-Based Concepts. Value-based restaurant concepts are important to the
Company's business strategy. Accordingly, in each of its restaurants, the
Company seeks to provide customers with value, which is a product of high-
quality menu selections, reasonably priced food, prompt, courteous service and a
pleasant dining atmosphere.

     Focus on Customer Satisfaction. Through its comprehensive management
training programs and experienced management team, the Company seeks to ensure
that its employees provide customers with an enjoyable dining experience on a
consistent basis.

     Hands-On Management Style. Members of the Company's senior management are
actively involved in the operations of each of the Company's restaurant
concepts. This active management approach is a key factor in the Company's
efforts to control costs and maximize operating income.

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<PAGE>
 
     Quality Franchise Partners. The Company has historically sought franchisors
with established reputations for leadership in their various segments of the
restaurant industry who have proven integrity and share the Company's focus on
value, customer service and quality.

     Distinct Management Teams. Each of the Company's concepts is managed by a
dedicated, singularly focused management group. The Company strives to allocate
proper resources to each concept to ensure operational and financial success
within each distinct concept.

     Use of Technology. The Company actively tracks the performance of its
business utilizing computer and point-of-sale technology. In addition, the
Company's voice and data communications systems provide timely and accurate
tracking and reporting.


Expansion

     The Company intends to limit its expansion in fiscal 1998 and focus on
operations. The Company currently plans to open three Burger King restaurants in
fiscal 1998. During fiscal 1997, the Company added three new Burger King
restaurants, six new Chili's restaurants, two new Papa Vino's units in its
Italian Dining Division and one new Grady's American Grill restaurant. The
Company sold three under-performing Grady's American Grill restaurants in fiscal
1997. At the end of fiscal 1997, the Company operated 40 Grady's American Grill
restaurants, five Spageddies, three Papa Vino's, 66 Burger King restaurants and
28 Chili's restaurants.

     The Company has historically desired to own the real estate on which its
Grady's American Grill, Italian Dining, Burger King and Chili's restaurants are
located. During fiscal 1998, the Company generally intends to lease the land and
building for its planned development when possible in order to reduce capital
requirements related to development.

     The actual amount of the Company's total investment to open new restaurants
depends upon various factors, including prevailing real estate prices and lease
rates, raw material costs and construction labor costs in each market in which a
new restaurant is to be opened.

     The Company's ability to manage the diverse operations resulting from its
past growth will be essential to its ability to succeed. Prior to fiscal 1996,
the Company's business historically was focused primarily on the development and
operation of Burger King restaurants and Chili's restaurants. The Grady's
American Grill and Italian Dining concepts have varying degrees of name
recognition. Although the Company opened its first Spageddies in 1994, the
Company's Italian Dining concepts are not yet proven and are still in the
developmental stage. In addition, the Company's acquisitions of Grady's American
Grill and Spageddies have caused it to assume many functions performed by the
previous owners, requiring increased staffing and expenditures in the areas of
advertising and marketing, purchasing, management information systems and
others. Accordingly, the Company's development and operation of these restaurant
concepts are subject to a wider range of risks than those associated with the
development and operation of its Burger King and Chili's restaurants.

Grady's American Grill

     General. Grady's American Grill restaurants feature high-quality food in a
classic American style, served in a warm and inviting setting. Prior to the
Company's acquisition of the concept from Brinker on December 21, 1995, Brinker
owned and operated 39 of the 40 Grady's American Grill restaurants now owned and
operated by the Company.

     Menu. The Grady's American Grill menu features signature prime rib, high-
quality steaks, daily servings of fresh seafood, inviting salads, sandwiches,
soups and high quality desserts. Entrees emphasize on-premise scratch
preparation in a classic American style.

                                       4
<PAGE>
 
     Marketing. As the owner of the Grady's American Grill concept, the Company
has full responsibility for marketing and advertising. The Company expects to
focus advertising and marketing efforts in local print media, use of direct mail
programs and radio, with total expenditures estimated to range between 2% and 3%
of the sales for its Grady's American Grill restaurants.


Spageddies Italian Kitchen and Papa Vino's Italian Kitchen

     General. The Company operates two variations of its Italian Dining concept,
Spageddies and Papa Vino's. These Italian casual dining restaurants offer high-
quality food, generous portions and moderate prices, all enjoyed in a festive
and energized atmosphere. As of October 26, 1997, five Spageddies and three Papa
Vino's restaurants were operated by the Company.

     Menu. The restaurant menu includes an array of entrees, including
traditional Italian pasta, grilled meats and freshly prepared selections of
pizzas, soups, salads and sandwiches. The menu also includes specialty
appetizers, fresh baked bread and desserts, together with a full-service bar. A
fundamental component of these concepts is to provide customers with a wide
variety of high-quality, value-priced Italian-style food.

     Marketing. As the owner of these concepts, the Company has full
responsibility for marketing and advertising its Italian Dining restaurants. The
Company focuses its advertising and marketing efforts in local print media, use
of direct mail programs and radio, with total expenditures estimated to range
between 2% and 3% of the sales for these restaurants.


Burger King Restaurants

     General. Headquartered in Miami, Florida, Burger King Corporation is an
indirect wholly-owned subsidiary of Diageo, PLC. Burger King Corporation has
been franchising Burger King restaurants since 1954 and has since expanded to
locations throughout the world.

     Menu. Each Burger King restaurant offers a diverse menu containing a
variety of traditional and innovative food items, featuring the Whopper(R)
sandwich and other flame-broiled hamburgers and sandwiches, which are prepared
to order with the customer's choice of condiments. The menu also typically
includes breakfast entrees, french fries, onion rings, desserts and soft drinks.
The Burger King system philosophy is characterized by its "Have It Your Way"(R)
service, generous portions and competitive prices, resulting in high value to
its customers. Management believes these characteristics distinguish Burger King
restaurants from their competitors and provide a significant competitive
advantage.

     Marketing. As required by its franchise agreements, the Company contributes
4% of its restaurant sales to an advertising and marketing fund controlled by
Burger King Corporation. Burger King Corporation uses this fund primarily to
develop system-wide advertising, sales promotions and marketing materials and
concepts. In addition to its required contribution to the advertising and
marketing fund, the Company makes local advertising expenditures intended
specifically to benefit its own Burger King restaurants. Typically, the Company
spends its local advertising dollars on television and radio.


Chili's Grill & Bar

     General. The Chili's restaurant concept is owned by Brinker, a publicly-
held corporation headquartered in Dallas, Texas. Chili's restaurants are full-
service restaurants, featuring quick, efficient and friendly table service
designed to minimize customer waiting time and facilitate table turnover.
Service personnel are dressed casually in jeans or slacks, knit shirts and
aprons to reinforce the casual, informal environment.

     Menu. Chili's restaurants feature a casual atmosphere and a limited menu of
broadly appealing food items, including a variety of hamburgers, fajitas,
chicken and seafood entrees and sandwiches, barbecued ribs, salads, appetizers
and desserts, all of which are prepared fresh daily according to recipes
specified by Chili's. Emphasis is placed on serving substantial portions of
quality food at modest prices.

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     Marketing. Pursuant to its franchise agreements with Brinker, the Company
contributes 1/2% of sales from each restaurant to Brinker for advertising and
marketing to benefit all restaurants. The Company is also required to spend 2%
of sales from each restaurant on local advertising. The Company's advertising
expenditures typically exceed the levels required under its agreements with
Brinker and the Company spends substantially all of its advertising dollars on
television advertising. The Company also conducts promotional marketing efforts
targeted at its various local markets.

     The Chili's franchise agreements provide that Brinker may establish
advertising cooperatives ("Cooperatives") for geographic areas where one or more
restaurants are located. Any restaurants located in areas subject to a
Cooperative are required to contribute 3% of sales to the Cooperative in lieu of
contributing 1/2% of sales to Brinker. Each such restaurant is also required to
directly spend 1/2% of sales on local advertising. To date, no Cooperatives have
been established in any of the Company's markets.


Trademarks

     The Company owns the following registered trademarks: Grady's American
Grill(R), Spageddies Italian Kitchen(R), and Spageddies(R). Additionally, Papa
Vino's(TM) and Papa Vino's Italian Kitchen(TM) are trademarks of the Company.
The Company also owns a number of other trademarks and service marks which are
used in connection with its owned concepts. The Company believes its marks are
valuable and intends to maintain its marks and any related registrations. Burger
King(R) is a registered trademark of Burger King Corporation. Chili's(R) and
Chili's Grill & Bar(TM) are a registered trademark and trademark, respectively,
of Brinker.


Administrative Services

     From its headquarters in Mishawaka, Indiana, the Company provides
accounting, information technology, purchasing and procurement, human resources,
finance, marketing, advertising, menu development, budgeting and planning,
legal, site selection and development support services for each of its operating
subsidiaries.

     Management. The Company is managed by a team of senior managers who are
responsible for the establishment and implementation of a strategic plan. The
Company believes that its management team possesses the ability to manage the
diverse operations which have resulted from its historical and planned growth.

     Each of the Company's restaurant concepts is managed by an experienced
management team. The Company's Burger King business is managed by geographic
region, with a Director of Operations located in each specific market. Each
Director of Operations reports to the Senior Vice President, Burger King
Division who reports to the Chief Operating Officer of the Company's Burger King
Division. The Company's Chili's, Italian Dining and Grady's American Grill
concepts are each managed by a Director of Operations who reports to the Senior
Vice President - Full Service Dining Division.

     Site Selection. Site selection for new restaurants is made by the Company's
senior management under the direction of the Company's Chief Development
Officer, subject in the case of the Company's franchised restaurants to the
approval of its franchisors. Within a potential market area, the Company
evaluates high-traffic locations to determine profitable trading areas. Site-
specific factors considered by the Company include traffic generators, points of
distinction, visibility, ease of ingress and egress, proximity to direct
competition, access to utilities, local zoning regulations and various other
factors. In addition, in evaluating potential Chili's, Italian Dining and
Grady's American Grill sites, the Company considers applicable laws regulating
the sale of alcoholic beverages. The Company regularly reviews potential sites
for expansion. Once a potential site is selected, the Company utilizes
demographic and site selection data to assist in final site selection.

     Quality Control. The Company's senior management and restaurant management
staff are principally responsible for assuring compliance with the Company's and
its franchisors' operating procedures. The Company and its franchisors have
uniform operating standards and specifications relating to the quality,
preparation and selection of menu items, maintenance and cleanliness of the
premises and employee conduct. Compliance with these standards and
specifications is monitored by frequent on-site visits and inspections by the
Company's senior

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management. Additionally, the Company employs outside "shopper services" to
visit restaurants periodically to ensure that the restaurants are meeting the
Company's operating standards.

     Information Technology Systems. Financial controls are maintained through a
centralized accounting system, which allows the Company to track operating
performance on an ongoing basis. The Company has stand alone point-of-sale
registers installed in each of its restaurants. The point-of-sale systems are
linked directly to the Company's accounting system, thereby making information
available on a timely and detailed basis. This information enables the Company
to analyze customer purchasing habits, operating trends and promotional results.

     The Company's Chili's, Italian Dining and Grady's American Grill concepts
use fully automated reporting systems incorporating software provided by Brinker
and generate detailed financial information, which is provided to the Company's
executive offices on a daily basis.

     The Company relies to a large extent on computer technology to carry out
its day-to-day operations. Many software products in the marketplace are only
able to recognize a two digit year date and therefore will recognize a date
using "00" as the year 1900 instead of the year 2000. This problem could result
in significant transactional inaccuracies and could even cause the system to
stop operating. As the year 2000 approaches, the Company has begun to evaluate
its current computer systems in order to determine what modifications, if any,
are necessary to make its information systems and software capable of
recognizing and processing the year 2000. The Company anticipates that it will
substantially complete its evaluation during fiscal, 1998 and then begin to make
the necessary upgrades or replacements to its computer systems. Until its
assessment is complete, the Company is unable to estimate whether the costs
associated with the year 2000 issue will have a material effect on the Company's
business, financial position or results of operations.

     Training. The Company maintains comprehensive training programs for all of
its restaurant management personnel. Special emphasis is placed on quality food
preparation, service standards and total customer satisfaction.

     The training program for the Company's Burger King restaurant managers
features an intensive hands-on training period followed by classroom instruction
and simulated restaurant management activities. Upon certification, new managers
work closely with experienced managers to solidify their skills and expertise.
The Company's existing restaurant managers regularly participate in the
Company's ongoing training efforts, including classroom programs, off-site
training and other training/development programs, which the Company's senior
concept management designs from time to time. The Company generally seeks to
promote from within to fill Burger King restaurant management positions.

     The Company requires all general and restaurant managers of its Chili's
restaurants to participate in Chili's system-wide, comprehensive training
program. The program teaches management trainees Chili's detailed food
preparation standards and procedures. The Company also participates in regional
and national training and development programs sponsored by Brinker. Managers of
the Company's Italian Dining and Grady's American Grill restaurants participate
in similar training programs conducted by the Company.

     Purchasing. Purchasing and procurement for the Company's Grady's American
Grill and Italian Dining concepts are managed by a dedicated Purchasing Manager
and are generally contracted with full-service distributors. Unit-level
purchasing decisions from an approved list of suppliers are made by each of the
Company's restaurant managers based on their assessment of the provisioning
needs of the particular location. Purchase orders and invoices are reviewed by
restaurant general managers and by concept management.

     The Company participates in system-wide purchasing and distribution
programs with respect to its Chili's and Burger King restaurants, which have
been effective in reducing store-level expenditures on food and paper packaging
commodities.


Franchise and Development Agreements

     Burger King. The Company and Burger King Corporation entered into a
development agreement on December 24, 1993 (the "Burger King Agreement"). The
Burger King Agreement reserves for the Company 25 specifically defined limited
geographic areas ("Areas") and grants the Company the exclusive right to select
and

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develop one Burger King restaurant in each of up to 18 of those Areas. The
Company paid a $90,000 fee for the exclusivity provided by the Burger King
Agreement. The Company's exclusive right in an Area expires with the opening by
the Company of a Burger King restaurant in that Area. As of October 26, 1997,
the Company had developed 12 Burger King restaurants under the Burger King
Agreement. In addition, during fiscal 1997, the Company opened two additional
Burger King restaurants under separate agreements with Burger King.

     To maintain its rights under the Burger King Agreement, the Company must
develop an additional three Burger King restaurants by December 31, 1998 and the
remaining three restaurants by December 31, 1999. Although the Company has the
right to develop 18 Burger King restaurants, the Company is not obligated to do
so and may terminate the Burger King Agreement since it had developed at least
10 Burger King restaurants prior to December 31, 1996.

     Under the Burger King Agreement, the Company is responsible for all costs
and expenses incurred in locating, acquiring and developing restaurant sites.
The Company must also satisfy Burger King Corporation's development criteria,
which include the specific site, the related purchase contract or lease
agreement and architectural and engineering plans for each of the Company's new
Burger King restaurants. Burger King Corporation may refuse to grant a franchise
for any proposed Burger King restaurant if the Company is not conducting the
operations of each of its Burger King restaurants in compliance with Burger King
Corporation's franchise requirements. Burger King Corporation may terminate the
Burger King Agreement if the Company defaults in the performance thereunder or
under any franchise agreement. Burger King Corporation periodically monitors the
operations of its franchised restaurants and notifies its franchisees of
failures to comply with franchise or development agreements that come to its
attention.

     Burger King Corporation's franchise agreements convey the right to use its
trade names, trademarks and service marks with respect to specific Burger King
restaurants. The franchise fee for a free-standing Burger King restaurant is
currently $40,000. In addition, each franchise agreement requires the Company to
pay a monthly royalty fee of 3 1/2% of sales and advertising fees of 4% of
sales.

     Burger King Corporation also provides general construction specifications,
designs, color schemes, signs and equipment, formulas for preparation of food
and beverage products, marketing concepts, inventory, operations and financial
control methods, management training, technical assistance and materials. Each
franchise agreement prohibits the Company from transferring a franchise without
the prior approval of Burger King Corporation.

     The Burger King Agreement and each franchise agreement prohibit the
Company, during the term of the agreements, from owning or operating any other
hamburger restaurant. For a period of one year following the termination of a
franchise agreement, the Company remains subject to such restriction within a
two-mile radius of the Burger King restaurant which was the subject of the
franchise agreement.

     Chili's. The Company has a development agreement with Brinker (the "Chili's
Agreement") to develop 37 Chili's restaurants in two regions encompassing
counties in Indiana, Michigan, Ohio, Kentucky, Delaware, New Jersey and
Pennsylvania. The Company paid development fees totaling $260,000 for the right
to develop the restaurants in the regions, and each franchise agreement requires
the Company to pay an initial franchise fee of $40,000, a monthly royalty fee of
4% of sales and advertising fees of 1/2% of sales. As of October 26, 1997, the
Company operated 28 Chili's.

                                       8
<PAGE>
 
     The Company currently is obligated to satisfy the following development
schedule, and is not permitted to develop more than 41 Chili's without specific
approval of the franchisor:

<TABLE>
<CAPTION>
 
                                     Minimum Cumulative Number of Restaurants
                                     ----------------------------------------
 
                                      Midwest     Philadelphia      Entire     
                                       Region        Region        Territory   
                                      -------     ------------     ---------   
<S>                                   <C>         <C>              <C> 
               December 31, 1996         10             10            20       
               December 31, 1997         11             12            23       
               December 31, 1998         12             13            25       
               December 31, 1999         13             14            29(1)    
               December 31, 2000         14             15            33(1)    
               December 31, 2001         15             16            37(1)    
</TABLE>

(1) Two of the restaurants to be opened in this year may be located in either
region at the Company's discretion.

     Failure to adhere to this schedule constitutes a default under the Chili's
Agreement. The Chili's Agreement prohibits Brinker or any other Chili's
franchisee from establishing a Chili's restaurant within a specified geographic
radius of the Company's Chili's restaurants. The term of the Chili's Agreement
expires when the Company has completed the development schedule. The Chili's
Agreement and the franchise agreements prohibit the Company, for the term of the
agreements, from owning or operating other restaurants which are similar to a
Chili's restaurant. The Chili's Agreement extends this prohibition, but only
within the Company's development territories, for a period of two years
following the termination of such agreement. In addition, each franchise
agreement prohibits the Company, for the term of the franchise agreement and for
a period of two years following its termination, from owning or operating such
other restaurants within a 10-mile radius of the Chili's restaurant which was
the subject of such agreement.

     Under the Chili's Agreement, the Company is responsible for all costs and
expenses incurred in locating, acquiring and developing restaurant sites. Each
proposed restaurant site, the related purchase contract or lease agreement and
the architectural and engineering plans for each of the Company's new Chili's
restaurants are subject to Brinker's approval. Brinker may refuse to grant a
franchise for any proposed Chili's restaurant if the Company is not conducting
the operations of each of its Chili's restaurants in compliance with the Chili's
restaurant franchise requirements. Brinker may terminate the Chili's Agreement
if the Company defaults in its performance thereunder or under any franchise
agreement. Brinker periodically monitors the operations of its franchised
restaurants and notifies the franchisees of any failure to comply with franchise
or development agreements that comes to its attention.

     The franchise agreements convey the right to use the franchisor's trade
names, trademarks and service marks with respect to specific restaurant units.
The franchisor also provides general construction specifications, designs, color
schemes, signs and equipment, formulas for preparation of food and beverage
products, marketing concepts, inventory, operations and financial control
methods, management training and technical assistance and materials. Each
franchise agreement prohibits the Company from transferring a franchise without
the prior approval of the franchisor.

     Risks and Requirements of Franchisee Status. Due to the nature of
franchising and the Company's agreements with its franchisors, the success of
the Company's Burger King and Chili's concepts is, in large part, dependent upon
the overall success of its franchisors, including the financial condition,
management and marketing success of its franchisors and the successful operation
of restaurants opened by other franchisees. Certain matters with respect to the
Company's franchised concepts must be coordinated with, and approved by, the
Company's franchisors. In particular, certain franchisors must approve the
opening by the Company of any new franchised restaurant, including franchises
opened within the Company's existing franchised territories, and the closing of
any of the Company's existing franchised restaurants. The Company's franchisors
also maintain discretion over the menu items that may be offered in the
Company's franchised restaurants.

                                       9
<PAGE>
 
Competition

     The restaurant industry is intensely competitive with respect to price,
service, location and food quality. The industry is mature and competition can
be expected to increase. There are many well-established competitors with
substantially greater financial and other resources than the Company, some of
which have been in existence for a substantially longer period than the Company
and may have substantially more units in the markets where the Company's
restaurants are, or may be, located. McDonald's and Wendy's restaurants are the
principal competitors to the Company's Burger King restaurants. The competitors
to the Company's Chili's and Italian Dining restaurants are other casual dining
concepts such as T.G.I. Friday's, Applebee's, Bennigan's, Olive Garden and Red
Lobster restaurants. The primary competitors to Grady's American Grill are
Houston's, J. Alexander's, Outback Steakhouse, Houlihan's, Cooker Bar & Grille,
and O'Charley's Restaurant & Lounge, as well as a large number of locally-owned,
independent restaurants. The Company believes that competition is likely to
become even more intense in the future.

     The Company and the restaurant industry in general are significantly
affected by factors such as changes in local, regional or national economic
conditions, changes in consumer tastes, weather conditions and various other
consumer concerns. In addition, factors such as increases in food, labor and
energy costs, the availability and cost of suitable restaurant sites,
fluctuating insurance rates, state and local regulations and the availability of
an adequate number of hourly-paid employees can also adversely affect the
restaurant industry.


Government Regulation

     Each of the Company's restaurants is subject to licensing and regulation by
a number of governmental authorities, which include alcoholic beverage control
in the case of the Chili's, Italian Dining and Grady's American Grill
restaurants, and health, safety and fire agencies in the state or municipality
in which the restaurant is located. Difficulties or failures in obtaining the
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area.

     Alcoholic beverage control regulations require each of the Company's
Chili's, Italian Dining and Grady's American Grill restaurants to apply to a
state authority and, in certain locations, county or municipal authorities for a
license or permit to sell alcoholic beverages on the premises and to provide
service for extended hours and on Sundays. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of the daily operations
of the Company's restaurants, including minimum age of patrons and employees,
hours of operation, advertising, wholesale purchasing, inventory control and
handling, storage and dispensing of alcoholic beverages. The loss of a liquor
license for a particular Grady's American Grill, Italian Dining or Chili's
restaurant would most likely result in the closing of the restaurant.

     The Company may be subject in certain states to "dramshop" statutes, which
generally provide a person injured by an intoxicated patron the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance and has never been named as a
defendant in a lawsuit involving "dramshop" liability.

     The Company's restaurant operations are also subject to federal and state
minimum wage laws governing such matters as working conditions, overtime and tip
credits. Significant numbers of the Company's food service and preparation
personnel are paid at rates related to the federal minimum wage and,
accordingly, further increases in the minimum wage could increase the Company's
labor costs.

     The Company is also subject to various local, state and federal laws
regulating the discharge of pollutants into the environment. The Company
believes that it conducts its operations in substantial compliance with
applicable environmental laws and regulations. In an effort to prevent and, if
necessary, to correct environmental problems, the Company conducts environmental
audits of a proposed restaurant site in order to determine whether there is any
evidence of contamination prior to purchasing or entering into a lease with
respect to such site. To date, the


                                      10
<PAGE>
 
Company's operations have not been materially adversely affected by the cost of
compliance with applicable environmental laws.


Employees

     As of October 26, 1997, the Company employed approximately 8,200 persons.
Of those employees, approximately 125 held management or administrative
positions, approximately 550 were involved in restaurant management, and the
remainder were engaged in the operation of the Company's restaurants. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its employee relations to be good.


ITEM 2.  PROPERTIES.

     As of October 26, 1997, 40 of the Company's Burger King restaurants were
leased from real estate partnerships owned by certain of the Company's founding
shareholders. In addition, the Company leased two of its Burger King restaurants
from William R. Schonsheck or entities controlled by him. See ITEM 13, "Certain
Relationships and Related Transactions." The Company also leased eight Burger
King restaurants directly from Burger King Corporation and eight restaurants
from unrelated third parties. All of the leases are triple net leases requiring
a base rent and an additional rent based upon sales to the extent the additional
rent exceeds the base rent. Except for the eight leases with Burger King
Corporation, all of the leases have renewal options. The eight leases with
Burger King Corporation are subject to the renewal of the franchise agreements
for those locations. The Company owned eight of its Burger King restaurants as
of October 26, 1997.

     As of October 26, 1997, the Company owned 11 of its Chili's restaurants and
five of its Italian Dining restaurants. The Company leased its other 17 Chili's
restaurants and three Italian Dining restaurant from unrelated parties.

     As of October 26, 1997, the Company leased 16 of its Grady's American Grill
restaurants from unrelated parties. The Company leased one Grady's American
Grill restaurant from a limited partnership of which a subsidiary of the Company
is the general partner. The Company's other 23 Grady's American Grill
restaurants were owned by the Company.

                                      11
<PAGE>
 
 
 
     The following table sets forth, as of October 26, 1997, the 20 states in
which the Company operated restaurants and the number of restaurants in each
state:

<TABLE>
<CAPTION>
                       Number of Company-Operated Restaurants    
                       --------------------------------------  
                                                                 Grady's     
                               Burger             Italian       American     
                                King    Chili's    Dining         Grill    Total
                               ------   -------   -------       --------   -----
<S>                    <C>              <C>       <C>           <C>        <C>  
          Alabama                                                      1       1
          Arkansas                                                     1       1
          Colorado                                                     3       3
          Delaware                            2                                2
          Florida                                                      6       6
          Georgia                                                      5       5
          Illinois                                                     1       1
          Indiana                  35         5         2                     42
          Louisiana                                                    1       1
          Michigan                 31         6         4              1      42
          Mississippi                                                  1       1
          New Jersey                          5                        1       6
          New Mexico                                                   1       1
          North Carolina                                               3       3
          Ohio                                3         2              1       6
          Oklahoma                                                     1       1
          Pennsylvania                        7                                7
          Tennessee                                                    5       5
          Texas                                                        7       7
          Virginia                                                     1       1
                               -------------------------------------------------
                                   66        28         8             40     142
                               ======   =======   =======       ========   =====
</TABLE>

     The Company leases approximately 53,000 square feet for its headquarters
facility in an office building located in Mishawaka, Indiana that was
constructed in 1997 and is leased from a limited liability company in which the
Company has a 50% interest. The term of the lease agreement is 15 years.
Approximately 4,500 square feet and 5,200 square feet of the Company's
headquarters building have been subleased to two tenants for terms of 7 and 10
years, respectively. The Company's former headquarters facility, a 9,700 square
foot office building which is leased from an affiliated partnership, has been
subleased to a local financial institution for a term extending through the
expiration of the Company's lease. The Company is responsible for leases
relating to office space in Burlington, Vermont which was utilized for regional
management of its Bruegger's concept, which was sold on October 20, 1997. The
Company is attempting to sublease this office. The Company also leases office
space in Dallas, Texas and Detroit, Michigan for management of its Grady's
American Grill and Burger King restaurants, respectively. See ITEM 13, "Certain
Relationships and Related Transactions."

ITEM 3. LEGAL PROCEEDINGS.

     On November 10, 1994, the Company acquired all of the outstanding stock of
Grayling Corporation, Grayling Management Corporation ("Grayling Management"),
Chili's of Mt. Laurel, Inc. ("Mt. Laurel") and Chili's of Christiana, Inc.
("Christiana"). Prior to entering into negotiations with the Company, Grayling
Corporation and its principal shareholder, T. Garrick Steele ("Steele"), had
entered into an agreement (the "Asset Agreement") to sell substantially all of
Grayling Corporation's assets to a third party, KK&G Enterprises, Inc. ("KK&G").
The Asset Agreement was terminated by Grayling Corporation and was not
consummated. On September 27, 1994, KK&G filed suit in the Court of Common
Pleas, Philadelphia County, Pennsylvania, against Grayling Corporation, Mt.
Laurel, Christiana and Steele seeking damages and specific performance of the
Asset Agreement. Steele is obligated to continue to defend the lawsuit and
indemnify the Company and Grayling Corporation against any loss or damages
resulting from the lawsuit. Management does not expect that the lawsuit will
have a material adverse effect on the Company's financial position or results of
operations. In making such assessment, management has considered the financial
ability of Steele to defend the lawsuit and indemnify the Company against any
loss or damages resulting from the lawsuit.

                                      12
<PAGE>
 
     BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former
indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond,
Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest")
commenced an action on January 30, 1997 filed in the United States District
Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality
Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an
investment banking firm retained by BruWest, alleging inter alia that the
Bruegger's Defendants breached commitments to provide financing to BruWest,
interfered with the plaintiffs' efforts to obtain financing from third parties,
violated existing franchise and development agreements between BruWest and
Bruegger's Franchise Corporation, violated certain provisions of the Minnesota
Franchise Act and breached duties and implied covenants of good faith and fair
dealing. The Bruegger's Defendants denied all allegations in the complaint.
Without admitting any liability or obligation to do so, on March 11, 1997,
Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan is
secured by certain assets of the plaintiffs and personal guarantees of Messrs.
LeMond and Snow. The loan provides for monthly interest payments commencing
April 11, 1997 at the rate of nine percent (9%) per annum and matured on
September 11, 1997. On March 14, 1997, the complaint was dismissed, without
prejudice. On May 22, 1997, BruWest refiled the complaint with additional
allegations challenging the enforceability of the loan documents and personal
guarantees. BruWest has ceased payment of royalties as required under its
franchise agreements and did not repay the loan at maturity.

     Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and
Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking,
LLC, commenced an action on July 9, 1997 filed in the United States District
Court, for the Eastern District of Missouri, Eastern Division, against
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael
Dressell, Daniel B. Fitzpatrick and John Firth, alleging that the plaintiffs
purchased their franchises based upon financial representations that have not
materialized, that they purchased preferred stock in Bruegger's Corporation
based upon false representations, that the defendants falsely represented their
intentions with respect to repurchasing bakeries from the plaintiffs, and that
the defendants violated implied covenants of good faith and fair dealing.
Quality Baking, LLC has ceased payment of royalties as required under its
franchise agreements for its four bakeries.

     D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises,
Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan
Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees,
commenced an action on July 16, 1997 filed in the United States District Court,
for the District of Maryland, against Bruegger's Corporation, Bruegger's
Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J.
Dressell and Nordahl L. Brue, alleging that the plaintiffs purchased their
franchises based upon financial representations that have not materialized, that
they purchased preferred stock in Bruegger's Corporation based upon false
representations, that Bruegger's Corporation falsely represented its intentions
with respect to purchasing bakeries from the plaintiffs or providing financing
to the plaintiffs, and that the defendants violated implied covenants of good
faith and fair dealing. PLB Enterprises, Inc. has ceased payment of royalties as
required under its franchise agreements for its two bakeries.

     All of the above pending franchise related litigation is in preliminary
stages and only limited discovery has occurred. In each of these cases, one or
more present or former officers and directors of the Company have been named as
party defendants and the Company is advancing defense costs on their behalf.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc.,
Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, the Agreement
and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition
Corporation and Lethe, LLC, and certain other related agreements entered into as
part of the disposition of the Company's bagel-related businesses, the Company
is responsible for 50% of the first $14 million of franchise related litigation
expenses, inclusive of attorney's fees, costs, expenses, settlements and
judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain
of its affiliates are obligated to indemnify the Company from all other
Franchise Damages. The Company is obligated to pay the first $3 million of its
share of Franchise Damages in cash. The remaining $4 million of the Company's
share of Franchise Damages is payable by crediting amounts owed to the Company
pursuant to the $10 million junior subordinated note issued to the Company by
Bruegger's Corporation. Based upon the currently available information, the
Company does not believe that these cases individually or in the aggregate will
have a material adverse affect on the Company's financial position and results
of operations. Such assessment is based upon the Company's belief that
Bruegger's Corporation has and will continue to have the ability to perform its
indemnity obligations.

                                      13
<PAGE>
 
     Rigel Corporation, a franchisee of Bruegger's Franchise Corporation
commenced an action on July 16, 1997 filed in the United States District Court
for the District of Nebraska, against Quality Dining, Inc. and Bruegger's
Corporation, alleging that the defendants have breached franchise and
development agreements and violated the Sherman Act. This action was settled in
December of 1997 for an amount that was not material.

     James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997. The
complaint names as defendants 12 individuals who are current or former directors
or officers of the Company. The complaint alleges that the individual defendants
as directors breached fiduciary duties to the Company by approving certain
transactions in 1997 involving loans to Bagel Acquisition Corporation that
allegedly benefited Daniel B. Fitzpatrick, the Company's Chairman, President and
Chief Executive Officer. The plaintiff also alleges that individual defendants
participated in a "conspiracy to waste, dissipate, and improperly use funds,
property and assets of Quality" for the benefit of Bagel Acquisition Corporation
and Mr. Fitzpatrick. The plaintiff alleges that the Company and its shareholders
have been damaged in an amount in excess of $28,000,000. The relief sought also
includes the appointment of a receiver, an accounting and attorney's fees. On
December 10, 1997, the defendants filed a motion to dismiss the complaint based
on plaintiff's failure before filing suit to make a "demand" upon the Company's
board of directors to address and respond to the allegations presented by the
complaint. As a shareholder derivative action, the claims purport to be brought
on behalf of the Company against the individual defendants and for the benefit
of the Company. However, in accordance with its articles of incorporation, the
Company has certain obligations to indemnify the individual defendants and the
Company is advancing defense costs on their behalf. The Company does not expect
that this lawsuit will have a material adverse effect on the Company's financial
position or results of operations.

     The Company is involved in various other legal proceedings incidental to
the conduct of its business. Management does not expect that any such
proceedings will have a material adverse effect on the Company's financial
position or results of operations.


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

     The Company did not submit any matters to a vote of security holders during
the fourth quarter of the 1997 fiscal year.

                                      14
<PAGE>
 
Executive Officers of the Company

<TABLE>
<CAPTION>
 
              Name                    Age                     Position
---------------------------------     ---       --------------------------------
 
<S>                                   <C>       <C>
                                       
Daniel B. Fitzpatrick                  40       Chairman of the Board, President
                                                and Chief Executive Officer

William W. Moreton                     38       Executive Vice President,
                                                Treasurer and Chief Financial
                                                Officer

John C. Firth                          40       Senior Vice President, General
                                                Counsel and Secretary
                                                 
 
James K. Fitzpatrick                   42       Senior Vice President, Chief
                                                Administrative Officer, Chief
                                                Development Officer and Director
                                                 
William R. Schonsheck                  47       Senior Vice President, Chief
                                                Operating Officer of Burger King
                                                Division and Director
                                                 
Gerald O. Fitzpatrick                  37       Senior Vice President, Burger
                                                King Division

Scott C. Smith                         42       Senior Vice President - Full
                                                Service Dining Division
 
David M. Findlay                       36       Senior Vice President - Finance
 
Marti'n L. Miranda                     34       Vice President, Controller and
                                                Assistant Secretary

Michael J. Wargo                       37       Vice President - Director of
                                                Human Resources
</TABLE>

     Daniel B. Fitzpatrick has served as President and Chief Executive Officer
and a Director of the Company since 1982. Prior to founding the Company, Mr.
Fitzpatrick worked for a franchisee of Burger King Corporation, rising to the
level of regional director of operations. He has over 24 years of experience in
the restaurant business. Mr. Fitzpatrick also serves as a director of 1st Source
Corporation, a multi-bank diversified financial services corporation based in
South Bend, Indiana.

     William W. Moreton has served as Executive Vice President, Treasurer and
Chief Financial Officer since April, 1997. Prior to joining the Company and
since October 1992, he was Executive Vice President, Chief Financial Officer,
Treasurer and Secretary of Houlihan's Restaurant Group, the owner of the
Houlihan's and Darryl's restaurant concepts. Mr. Moreton resigned from the
Company, effective February 13, 1998, but has agreed to act as a consultant to
the Company through the end of fiscal 1998.

     John C. Firth serves as Senior Vice President, General Counsel and
Secretary. Prior to joining the Company in June 1996, he was a partner with the
law firm of Sopko and Firth. Beginning in 1985, he represented the Company as
outside legal counsel with responsibility for the Company's legal affairs.

     James K. Fitzpatrick has served as Senior Vice President and Chief
Development Officer of the Company since August 1995 and as Chief Administrative
Officer since April, 1997. Prior to that, Mr. Fitzpatrick served as Vice
President or Senior Vice President of the Company in charge of the Company's
Fort Wayne, Indiana Burger King restaurant operations since 1984. Prior to
joining the Company, he served as a director of operations for a franchisee of
Burger King Corporation. He has 26 years of experience in the restaurant
business.

     William R. Schonsheck joined the Company in August 1995 as Senior Vice
President, Chief Operating Officer of the Burger King Division. Prior to joining
the Company, Mr. Schonsheck held various positions in the Burger


                                      15
<PAGE>
 
King system, most recently as a franchisee in Detroit, Michigan. Pursuant to an
employment agreement between the Company and Mr. Schonsheck, he is to serve as
the Chief Operating Officer of the Burger King Division. See ITEM 11, "Executive
Compensation." Mr. Schonsheck has over 29 years of experience in the Burger King
business.

     Gerald O. Fitzpatrick serves as a Senior Vice President in the Company's
Burger King Division. Mr. Fitzpatrick has served in various capacities in the
Company's Burger King operations since 1983. Prior to joining the Company, he
served as a district manager for a franchisee of Burger King Corporation. He has
over 18 years of experience in the restaurant business.

     Scott C. Smith joined the Company in May 1994 and has served as the
Company's Senior Vice President in charge of the Company's full service dining
operations since October 1996. Prior to that, Mr. Smith served as Vice President
or Senior Vice President of the Company in charge of the Company's Chili's and
Italian Dining operations. Prior to joining the Company in June of 1994 he
served as director of franchise operations for the Chili's and Spageddies
divisions of Brinker. He has 23 years of experience in the restaurant business.

     David M. Findlay has served as Senior Vice President - Finance since April
1997. He joined the Company in May 1995 as Vice President - Director of Planning
and Investor Relations and was promoted to Vice President and Treasurer in
October 1996. Prior to joining the Company, Mr. Findlay spent 10 years at The
Northern Trust Company of Chicago, Illinois, specializing in commercial lending
to large companies and financial institutions.

     Marti'n L. Miranda has served as Vice President, Controller and Assistant
Secretary since October 1996. He joined the Company in May 1994 as Controller.
Prior to joining the Company, he served in a similar capacity with NBD
Insurance, a wholly owned subsidiary of NBD Corporation. Mr. Miranda is a
certified public accountant.

     Michael J. Wargo has served as Vice President - Director of Human Resources
since September 1995. He joined the Company in January 1994 as Director of Human
Resources. He was previously employed by Valley American Bank & Trust Company as
director of training and development, and prior to that he was a human resources
officer at NBD Bank. Mr. Wargo has over 14 years of experience as a human
resources professional.

     The above information includes business experience during the past five
years for each of the Company's executive officers. Executive officers of the
Company serve at the discretion of the Board of Directors. Messrs. Daniel B.
Fitzpatrick, James K. Fitzpatrick and Gerald O. Fitzpatrick are brothers. There
is no family relationship between any other Directors or executive officers of
the Company.

     The success of the Company's business is dependent upon the services of
Daniel B. Fitzpatrick, President and Chief Executive Officer of the Company. The
Company maintains key man life insurance on the life of Mr. Fitzpatrick in the
principal amount of $3.0 million. The loss of the services of Mr. Fitzpatrick
would have a material adverse effect upon the Company.

     (Pursuant to General Instruction G(3) of Form 10-K, the foregoing
information is included as an unnumbered Item in Part I of this Annual Report in
lieu of being included in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders.)


                                    PART II

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

     The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market under the symbol QDIN. The prices set forth below reflect the high and
low sales quotations for the Company's Common Stock as reported by Nasdaq for
the calendar periods indicated. As of January 19, 1998, there were 405 holders
of record and approximately 7,000 beneficial owners.

                                      16
<PAGE>
 
<TABLE>
<CAPTION>
 
                      Calendar 1997            Calendar 1996
                    High         Low         High          Low
                   ------------------       -------------------
<S>                <C>        <C>           <C>         <C>
 
First Quarter      $19.875    $10.250       $31.250     $19.750
Second Quarter      12.750      4.563        39.500      26.500
Third Quarter        7.000      3.375        33.500      24.563
Fourth Quarter       5.563      3.250        28.625      16.750
</TABLE>

The Company does not pay cash dividends on its Common Stock. The Company
currently intends to retain its earnings to finance future development of its
businesses and does not anticipate paying cash dividends in the foreseeable
future. The Company's revolving credit agreement prohibits the payment of cash
dividends and other distributions. The agreement expires in April of 1999.

     No unregistered equity securities were sold by the Company during fiscal
1997.


                                      17
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.

Quality Dining, Inc.
<TABLE>
<CAPTION>
(In thousands, except unit and per share data)
--------------------------------------------------------------------------------------------------------------------------
                                                                          Fiscal Year Ended (1)
                                               October 26,    October 27,      October 29,     October 30,     October 31,
                                                      1997           1996             1995            1994            1993
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>              <C>              <C>             <C>
Statement of Operations Data(2):
Revenues:
Restaurant sales:
Grady's American Grill                           $  85,403       $ 85,101         $     -          $     -         $     -
Burger King                                         74,616         70,987           57,013          49,716          49,032
Bruegger's Bagel Bakery                             64,928         25,967            5,270             191               -
Chili's Grill & Bar                                 54,277         41,913           38,267          14,286           9,963
Italian Dining Division                             12,973          8,388            4,741             174               -
--------------------------------------------------------------------------------------------------------------------------
Total restaurant sales                             292,197        232,356          105,291          64,367          58,995
Franchise related revenue                           10,055          5,274                -               -               -
--------------------------------------------------------------------------------------------------------------------------
Total revenues                                     302,252        237,630          105,291          64,367          58,995
--------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Restaurant operating expenses:
     Food and beverage                              88,629         72,201           31,176          18,576          16,465
     Payroll and benefits                           87,905         66,176           27,191          16,190          14,830
     Depreciation and amortization                  17,691         11,635            5,109           2,610           2,376
     Other operating expenses                       74,691         52,452           24,057          15,351          15,065
--------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses:               268,916        202,464           87,533          52,727          48,736
General and administrative                          29,510         12,047            5,706           4,065           3,543
Amortization of intangibles                          3,112          2,537              682              83              83
Impairment of assets                               185,300              -                -               -               -
Store closing costs                                 15,513              -                -               -               -
Franchise operating partner expense                  2,066              -                -               -               -
Restructuring and integration costs                      -          9,938                -               -               -
Consulting fee                                           -              -                -               -             600
--------------------------------------------------------------------------------------------------------------------------
Total  operating expenses                          504,417        226,986           93,921          56,875          52,962
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (3)                       (202,165)        10,644           11,370           7,492           6,033
--------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense                                   (10,599)        (6,340)          (2,699)         (1,314)         (1,673)
Gain (loss) on sale of property and
     equipment                                         362              4              343             (59)              2
Interest income                                        221            206              127             155             165
Other income (expense), net                             32            154              (12)            (14)              -
--------------------------------------------------------------------------------------------------------------------------
Total other expense                                 (9,984)        (5,976)          (2,241)         (1,232)         (1,506)
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                 (212,149)         4,668            9,129           6,260           4,527
Income tax provision (benefit)                     (15,661)         1,998            3,240           2,332               -
--------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                $(196,488)      $  2,670         $  5,889         $ 3,928         $ 4,527
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                      $  (11.68)      $   0.23         $   0.85
------------------------------------------------------------------------------------------
Weighted average shares outstanding                 16,820         11,855            6,925
------------------------------------------------------------------------------------------
Pro forma income data (unaudited):
     Net income as reported                                                                        $ 3,928         $ 4,527
     Pro forma provision for income taxes (4)                                                          512           1,675
--------------------------------------------------------------------------------------------------------------------------
     Pro forma net income                                                                          $ 3,416         $ 2,852
--------------------------------------------------------------------------------------------------------------------------
     Pro forma net income per share                                                                $  0.59         $  0.64
--------------------------------------------------------------------------------------------------------------------------
     Pro forma weighted average number of
       common shares and common stock
       equivalent shares outstanding                                                                 5,801           4,438
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      18
<PAGE>
 
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                     Fiscal Year Ended (1)
                                            October 26,    October 27,    October 29,    October 30,    October 31,
                                                   1997           1996           1995           1994           1993
-------------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>            <C>            <C>
Restaurant Data:
Units open at end of period:
     Bruegger's Bagel Bakery Division:
        Company-owned                                 -            100             12              3              -
        Franchised                                    -            325              -              -              -
     Grady's American Grill                          40             42              -              -              -
     Italian Dining Division                          8              6              5              1              -
     Burger King                                     66             63             59             48             44
     Chili's Grill & Bar                             28             22             18              8              4
-------------------------------------------------------------------------------------------------------------------
                  Totals                            142            558             94             60             48
-------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
     Working capital (deficiency)              $ (8,239)       $ (3,383)     $  (1,826)      $ (1,894)       $  (888)
     Total assets                               215,973         388,014         99,247         43,273         24,946
     Long-term debt, capitalized
     lease and non-competition obligations      133,111          85,046         14,298          7,492         16,621
     Total stockholders' equity                  50,813         269,123         71,401         26,582          3,761
</TABLE>

(1) All fiscal years presented consisted of 52 weeks with the exception of the
    fiscal year ended October 31, 1993, which consisted of 53 weeks.

(2) The selected statement of operations data include the operations of
    Bruegger's Corporation from June 7, 1996 until October 19, 1997; the Grady's
    American Grill restaurants from December 21, 1995; SHONCO, Inc. and certain
    affiliated companies from August 14, 1995; and Grayling Corporation and
    certain affiliated companies from November 10, 1994. See Note 14 to the
    consolidated financial statements.

(3) Operating loss for fiscal year ended October 26, 1997 includes an impairment
    of asset charge of $185.0 million, store closing costs of $15.5 million and
    franchise operating partner expense of $2.1 million which all relate to the
    divestiture by the Company of its bagel-related companies. Operating income
    for the fiscal year ended October 27, 1996 includes restructuring and
    integration charges of $1.9 million associated with costs related to the
    acquisitions of the Grady's American Grill concept and restaurants and
    Spageddies Italian Kitchen concept and $8.0 million associated with costs
    related to the acquisition of Bruegger's Corporation.

(4) Reflects federal and state income taxes (assuming a 37% effective tax rate)
    as if the Company had been taxed as a C Corporation rather than an 
    S Corporation during these entire periods.

                                      19
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.

Quality Dining, Inc.

For an understanding of the significant factors that influenced the Company's
performance during the past three fiscal years, the following discussion should
be read in conjunction with the consolidated financial statements appearing
elsewhere in this Annual Report.

Results of Operations

The following table reflects the percentages that certain items of revenue and
expense bear to total revenues, except restaurant operating expenses, which are
expressed as a percentage of total restaurant sales. Fiscal 1996 includes
Bruegger's Corporation as of June 7, 1996. The Company sold Bruegger's
Corporation on October 20, 1997. During fiscal 1997 the Company had asset
impairment charges, store closing costs and franchise operating partner expenses
all relating to its bagel businesses.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                Fiscal Year Ended
                                                    October 26,    October 27,    October 29,
                                                           1997           1996           1995
----------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>
Revenues:
Restaurant sales:
     Grady's American Grill                                28.3%          35.8%             -%
     Burger King                                           24.7           29.9           54.2
     Bruegger's Bagel Bakery                               21.5           10.9            5.0
     Chili's Grill & Bar                                   18.0           17.7           36.3
     Italian Dining Division                                4.2            3.5            4.5
----------------------------------------------------------------------------------------------
Total restaurant sales                                     96.7           97.8          100.0
     Franchise related revenue                              3.3            2.2              -
----------------------------------------------------------------------------------------------
Total revenues                                            100.0          100.0          100.0
----------------------------------------------------------------------------------------------
Operating expenses:
     Restaurant operating expenses
      (as % of restaurant sales):
          Food and beverage                                30.3           31.1           29.6
          Payroll and benefits                             30.1           28.5           25.8
          Depreciation and amortization                     6.1            5.0            4.8
          Other operating expenses                         25.6           22.5           22.9
----------------------------------------------------------------------------------------------
Total restaurant operating expenses:                       92.1           87.1           83.1
     General and administrative                             9.8            5.1            5.4
     Amortization of intangibles                            1.0            1.1            0.7
     Restructuring and integration costs                      -            4.2              -
     Impairment of assets                                  61.3              -              -
     Store closing costs                                    5.1            1.1              -
     Franchise operating partner expense                    0.7            4.2              -
----------------------------------------------------------------------------------------------
Total operating expenses                                  166.9           95.5           89.2
----------------------------------------------------------------------------------------------
Operating income (loss)                                   (66.9)           4.5           10.8
----------------------------------------------------------------------------------------------
Other income (expense):
     Interest expense                                      (3.5)          (2.7)          (2.5)
     Gain (loss) on sale of property and equipment          0.1              -            0.3
     Interest income                                        0.1            0.1            0.1
     Other income                                             -            0.1              -
----------------------------------------------------------------------------------------------
Total other expense, net                                   (3.3)          (2.5)          (2.1)
----------------------------------------------------------------------------------------------
Income (loss) before income taxes                         (70.2)           2.0            8.7
Income tax provision/(benefit)                             (5.2)           0.9            3.1
----------------------------------------------------------------------------------------------
Net income (loss)                                         (65.0)%          1.1%           5.6%
----------------------------------------------------------------------------------------------
</TABLE>

                                      20
<PAGE>
 
Fiscal Year 1997 Compared to Fiscal Year 1996

     Total revenues reached $302,252,000 in fiscal 1997, an increase of 27.2%
compared to $237,630,000 reported in fiscal 1996. In addition to restaurant
sales, total revenues in fiscal 1997 included $10,055,000 of franchise related
revenues from the Company's retail bagel bakery operations versus $5,274,000 in
fiscal 1996. Franchise related revenues consist of royalties on franchised
restaurant sales, franchise and development fees, net commissary revenue,
interest income and other miscellaneous fees from franchised operations related
to the Bruegger's concept.

     Restaurant sales in fiscal 1997 increased 25.7% to $292,197,000, compared
to $232,356,000 in fiscal 1996. This increase was primarily attributable to
sales generated by restaurants opened during fiscal 1997 and restaurants open
for the first full year in fiscal 1997. These restaurants include: seven Burger
King restaurants; 10 Chili's Grill & Bar restaurants; three Italian Dining
restaurants; one Grady's American Grill (three Grady's American Grills were sold
during fiscal 1997) and 88 bagel bakeries. The Company divested its bagel-
related businesses on October 20, 1997 and therefore expects a significant
decrease in revenues in fiscal 1998. The Company experienced a significant
decline in average unit sales at its Grady's American Grill restaurants during
fiscal 1997. The Company has implemented marketing and menu initiatives intended
to stimulate sales at its Grady's American Grill restaurants. Due to the
competitive nature of the restaurant industry, there can be no assurances that
these initiatives will achieve the intended results.

     Total restaurant operating expenses were $268,916,000 in fiscal 1997,
compared to $202,464,000 in fiscal 1996. As a percentage of restaurant sales,
total restaurant operating expenses increased to 92.1% in fiscal 1997 from 87.1%
in fiscal 1996. The following factors influenced the operating margins:

     Food and beverage costs were $88,629,000, or 30.3% of total restaurant
sales in fiscal 1997, compared to $72,201,000 or 31.1 % of total restaurant
sales in fiscal 1996. The decrease was due primarily to operational
improvements, purchasing efficiencies and price increases which occurred during
the year. 

     Payroll and benefits were $87,905,000 in fiscal 1997, compared to
$66,176,000 in fiscal 1996. As a percentage of total restaurant sales, payroll
and benefits increased to 30.1% in fiscal 1997 from 28.5% in fiscal 1996.
Payroll expense increased as a result of the minimum wage increase, the
continued competition for qualified restaurant employees and the labor
inefficiencies typically associated with new unit development. The Company
expects to experience continued pressure to increase wages due to competition by
all retail businesses to attract qualified employees.

     Depreciation and amortization increased $6,056,000 to $17,691,000 in fiscal
1997. As a percentage of total restaurant sales, depreciation and amortization
increased to 6.1% in fiscal 1997 from 5.0% in fiscal 1996. The increase was
attributable to the increased costs associated with the new units the Company
developed and the lower than expected sales at the Company's Bruegger's Bagel
Bakery and Grady's American Grill units. In addition, pre-opening expenses as a
percentage of sales were substantially higher in fiscal 1997 due to significant
new unit openings.

     Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $74,691,000 in fiscal 1997 compared to
$52,452,000 in 1996. Other restaurant operating expenses as a percentage of
total restaurant sales increased in fiscal 1997 to 25.6% from 22.5% in fiscal
1996. This increase was primarily due to the Company's Bruegger's Bagel Bakery
and Grady's American Grill units having lower than expected sales which produced
higher costs as a percentage of sales, as well as increased promotional expenses
at these two concepts.

     General and administrative expenses, which include corporate and district
management costs, were $29,510,000 in fiscal 1997, compared to $12,047,000 in
fiscal 1996. As a percentage of total revenues, general and

                                      21

<PAGE>
 
administrative expenses increased to 9.8% in fiscal 1997 from 5.1% in fiscal
1996. The increases in fiscal 1997 were primarily due to costs associated with
the development of corporate infrastructure designed to support the anticipated
aggressive development of the Bruegger's brand. General and administrative costs
also increased due to significant professional services associated with the
successful efforts by the Company to divest itself of its bagel-related
businesses.

     In connection with the decision to discontinue Bruegger's development and
divest the Company's bagel-related businesses, a staff reduction plan was
implemented during the second quarter of fiscal 1997. The Company anticipates
that general and administrative expenses will be significantly lower in fiscal
1998 as a result of the sale of its bagel-related businesses.

     Amortization of intangibles was $3,112,000 in fiscal 1997, compared to
$2,537,000 in fiscal 1996. The increase was due to the amortization of
intangible assets related to the acquisitions of Bruegger's Corporation and
Grady's American Grill. The Company will experience a decrease in amortization
of intangibles in fiscal 1998 due to the elimination of Bruegger's-related
goodwill in connection with the Bruegger's asset impairment charge taken during
fiscal 1997.

     During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 as a result of the decision to divest its
bagel-related businesses. The non-cash impairment charge represented a reduction
of the carrying amounts of bagel-related assets to their estimated fair value.
The impairment charge included non-cash charges for the write-off of goodwill
and the write-down of notes receivable and property and equipment. On October
20, 1997 the Company sold the bagel-related businesses and no further charges
were recorded.

     The Company has decided not to build two Burger King restaurants which it
had acquired the development rights to as part of the SHONCO acquisition (see
Note 14). In conjunction with this decision the Company recorded a non-cash
impairment charge of $300,000 to write-off the capitalized development rights
associated with these two locations.

     The Company recorded a $2,066,000 charge for expenses related to the
Franchise Operating Partner Program during the second quarter of fiscal 1997.
These costs were primarily related to the professional services of financial
advisors involved in negotiating with potential equity investors for the
Franchise Operating Partner Program. The Franchise Operating Partner Program was
canceled due to the Company's decision to divest itself of its bagel-related
businesses.

     The Company recorded a $15,513,000 charge for closing under-performing
Bruegger's units and other Bruegger's units which were at various stages of
development when the decision was made to divest the bagel-related businesses.
The charge included amounts for terminating occupancy leases, write-offs of
fixed assets and pre-opening costs, restaurant management severance costs and
other store closing costs. Through fiscal 1997 the Company had incurred
$11,434,000 of these costs, of which $641,000 were cash payments and $10,793,000
were non-cash charges, primarily the write-down of assets. The remaining costs
are primarily associated with terminating occupancy leases which the Company
expects to be substantially complete by the end of fiscal 1998.

     The Company had an operating loss of $202,165,000 in fiscal 1997 compared
to operating income of $10,644,000 in fiscal 1996. The special charges noted
above were the primary reason for the decline in operating income.

     Total other expenses, as a percentage of total revenues, increased to 3.3%
in fiscal 1997 compared to 2.5% in fiscal 1996. This increase was primarily
attributable to higher interest costs arising from increased borrowings under
the Company's revolving credit facility to fund acquisitions and new restaurant
openings.

     An income tax benefit of $15,661,000 was recorded in fiscal 1997 compared
to an expense of $1,998,000 in fiscal 1996 due to the pre-tax loss in fiscal
1997, resulting primarily from the special charges noted above. The Company's
effective income tax rate in fiscal 1997 was 7.4% (benefit) compared to an
income tax rate of 42.8% in fiscal 1996, primarily due to the operating losses
experienced resulting in no federal income tax provision and a

                                      22

<PAGE>
 
nominal state income tax provision. The low income tax benefit rate is a result
of a significant portion of the $185,000,000 non-cash charge for asset
impairment being non-deductible for tax purposes.

     The Company has net operating loss carryforwards of approximately $43
million as well as FICA tip credits and alternative minimum tax credits of $1.7
million. The net operating loss and tip credits expire in 2012 while the
alternative minimum tax credits carryforward indefinitely. During the year, the
Company established a valuation reserve against its net operating loss carry
forwards of $10.2 million leaving a net deferred tax asset of $10.0 million. The
Company's assessment of its ability to realize the net deferred tax asset was
based on the weight of both positive and negative evidence, including the
taxable income of the non-bagel related concepts. Based on this assessment, the
Company's management believes it is more likely than not that the net deferred
tax benefit recorded will be realized. Such evidence will be reviewed
prospectively and should the Company's operating performance continue to
improve, the Company may recognize additional tax benefits related to its net
deferred tax asset position in the future.

     The net loss in fiscal 1997 was $196,488,000 or $11.68 per share compared
to net income of $2,670,000 or $0.23 per share in fiscal 1996. Strong revenue
growth in fiscal 1997 was more than offset by the special charges noted above.

Fiscal Year 1996 Compared to Fiscal Year 1995

     Total revenues reached $237,630,000 in fiscal 1996, an increase of 126%
compared to $105,291,000 reported in fiscal 1995. In addition to restaurant
sales, total revenues in fiscal 1996 included $5,274,000 of franchise related
revenues from the Company's retail bagel bakery operations. Franchise related
revenues consist of royalties on franchised restaurant sales, franchise and
development fees, net commissary revenue, interest income and other
miscellaneous fees from franchised operations related to the Bruegger's
concept.

     Restaurant sales in fiscal 1996 increased 121% to $232,356,000, compared to
$105,291,000 in fiscal 1995. This increase was primarily attributable to sales
generated by newly opened and acquired restaurants in fiscal 1996. New Company-
owned restaurants open at the conclusion of fiscal 1996 that were not open
during the full fiscal year 1995 include: 97 Bruegger's Bagel Bakeries, 68 of
which were acquired on June 7, 1996 in the acquisition of Bruegger's
Corporation; 42 Grady's American Grill restaurants, which were purchased on
December 21, 1995; 17 Burger King restaurants; 14 Chili's Grill & Bar
restaurants; four Spageddies Italian Kitchen restaurants; and one Papa Vino's
Italian Kitchen restaurant. (See Note 14 to the consolidated financial
statements for additional information regarding acquisitions.)

     Total restaurant operating expenses were $202,464,000 in fiscal 1996,
compared to $87,533,000 in fiscal 1995. As a percentage of restaurant sales,
total restaurant operating expenses increased from 83.1% in fiscal 1995 to 87.1%
in fiscal 1996 for the following reasons:

     Food and beverage costs amounted to $72,201,000, or 31.1% of total
restaurant sales in fiscal 1996, compared to $31,176,000 or 29.6% of total
restaurant sales in fiscal 1995. This increase was primarily attributable to
higher food costs associated with the Grady's American Grill restaurants, which
were acquired in the first quarter of fiscal 1996, compared to the food costs of
the Company's other concepts.

     Payroll and benefits were $66,176,000 in fiscal 1996, compared to prior-
year levels of $27,191,000. As a percentage of total restaurant sales, payroll
and benefits increased from 25.8% in fiscal 1995 to 28.5% in fiscal 1996,
primarily as a result of the Company operating an increased number of full
service and new Bruegger's restaurants. These units typically operate at higher
labor costs than the Company's more mature Bruegger's and Burger King
restaurants.

     Depreciation and amortization increased $6,526,000 to $11,635,000 in fiscal
1996. As a percentage of total restaurant sales, depreciation and amortization
increased to 5.0% in fiscal 1996 from 4.8% in fiscal 1995. These increases were
primarily attributable to higher costs of newly opened units and a substantial
number of acquired restaurants.

                                      23

<PAGE>
 
     Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $52,452,000 in fiscal 1996 compared to
$24,057,000 in 1995. Other restaurant operating expenses as a percentage of
total restaurant sales, however, declined in fiscal 1996 to 22.5% from 22.9% in
fiscal 1995. This decrease was primarily due to effective cost control at the
restaurant level and an increase in the mix of owned restaurants versus leased
properties resulting in lower rent expense as a percentage of total restaurant
sales.

     General and administrative expenses, which include corporate and district
management costs, were $12,047,000 in fiscal 1996, compared to $5,706,000 in
fiscal 1995. As a percentage of total revenues, general and administrative
expenses decreased to 5.1% in fiscal 1996 from 5.4% in fiscal 1995. This
decrease was primarily due to the beneficial leverage derived from increased
sales at the Company's new and acquired restaurants.

     Amortization of intangibles was $2,537,000 in fiscal 1996, compared to
$682,000 in fiscal 1995. The increase was due to the amortization of intangible
assets related to the acquisitions of Bruegger's Corporation and Grady's
American Grill.

     During fiscal 1996, the Company recorded special pre-tax charges for
restructuring and integration costs related to the acquisitions of Bruegger's
Corporation ($8,000,000), and the Grady's American Grill concept and restaurants
and the Spageddies Italian Kitchen concept ($1,9000,000). In connection with the
Bruegger's acquisition, the charge represents costs associated with combining
and integrating administrative functions and recruiting and relocating new
employees, franchise related costs, and legal and professional fees. The Company
also accrued an additional $6,000,000 as part of the cost of the acquisition for
facility closures, restaurant remodeling and relocation and severance packages
for personnel. At October 27, 1996, substantially all costs related to the
Grady's American Grill and Spageddies charge had been incurred.

     Operating income was $10,644,000 in fiscal 1996 compared to $11,370,000 in
fiscal 1995. The special charges noted above were the primary reason for the
decline in operating income.

     Total other expenses, as a percentage of total revenues, increased to 2.5%
in fiscal 1996 compared to 2.1% in fiscal 1995. This increase was primarily
attributable to higher interest costs arising from increased borrowings under
the Company's revolving credit facility to fund acquisitions and new restaurant
openings.

     Income taxes in fiscal 1996 decreased to $1,998,000 from $3,240,000 in
fiscal 1995 due to lower pre-tax income in fiscal 1996, resulting primarily from
the special charges noted above. The Company's effective income tax rate in
fiscal 1996 increased to 42.8% from 35.5% in fiscal 1995, primarily due to the
nondeductible goodwill amortization resulting from the Bruegger's acquisition.

     Net income in fiscal 1996 was $2,670,000 or $0.23 per share compared to
$5,889,000 or $.85 per share in fiscal 1995. In fiscal 1996, net income as a
percentage of total revenues decreased to 1.1%, compared to 5.6% in fiscal 1995.
Strong revenue growth in fiscal 1996 was more than offset by the special charges
noted above and increased costs associated with a change in restaurant mix to a
higher number of full service restaurants.

                                      24

<PAGE>



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

<TABLE> 
<CAPTION>

The following table summarizes the Company's principal sources and uses of cash:

(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Fiscal Year Ended            
                                                                                October 26,   October 27,   October 29, 
                                                                                       1997          1996          1995 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>           <C>           <C>         
Net cash provided by operations                                                 $     3,700   $    14,464   $    12,908 
Nonoperating sources of cash:                                                                                           
  Proceeds from sale of common stock, net                                              -           59,755        31,688 
  Borrowings of long-term debt                                                       62,500       218,285        37,721 
  Disposition of businesses, net of cash sold                                        15,720                             
Nonoperating uses of cash:                                                                                              
  Acquisitions of businesses, net of cash acquired                                     -          (77,168)      (23,472)
  Purchase of property and equipment                                                (32,080)      (41,135)      (25,357)
  Repayment of long-term debt                                                       (14,004)     (163,223)      (30,308)
  Advances to affiliates                                                            (26,515)      (10,025)            -  
</TABLE>

     In fiscal 1997 cash provided by operations decreased to $3,700,000 from
$14,464,000 in fiscal 1996 due to poor operational performance at the Company's
bagel-related restaurants, the significant increase in costs associated with the
development of corporate infrastructure designed to support the anticipated
aggressive development of the Bruegger's brand and increased interest expense
due to borrowings under the Company's credit facility. On October 20, 1997 the
Company sold the bagel-related businesses and implemented a staff reduction plan
which has eliminated a significant number of corporate positions.

     The Company's primary cash requirements in fiscal 1998 will be to finance
capital expenditures in connection with the opening of new restaurants,
remodeling of existing restaurants, maintenance expenditures and the reduction
of debt under the Company's revolving credit agreement. The Company's capital
expenditures budget is expected to range from $5,000,000 to $6,000,000 for
fiscal 1998. During fiscal 1998, the Company anticipates opening three Burger
King restaurants. The actual amount of the Company's cash requirements for
capital expenditures depends in part on the number of new restaurants opened and
the actual expense related to remodeling and maintenance of existing units.

     On October 9, 1997, the Company amended its revolving credit agreement with
Texas Commerce Bank, as agent for a group of seven banks, providing for
borrowings of up to $145,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread (8.72% at October 26, 1997). The revolving credit
agreement expires on April 26, 1999 and is supported by the pledge of the stock
of certain subsidiaries of the Company. As of October 26, 1997, there was
$127,106,000 outstanding under this revolving credit agreement. The revolving
credit agreement contains, among other provisions, certain restrictive covenants
including maintenance of certain prescribed debt and fixed charge coverage
ratios, minimum levels of tangible net worth, limitations on the incurrence of
additional indebtedness, limitations on consolidated capital expenditures and
restrictions on the payment of dividends (other than stock dividends) on, or the
purchase or redemption of, any shares of the Company's capital stock. In
addition, the revolving credit agreement contains a mandatory reduction in
borrowing availability to $140,000,000 by December 31, 1998. The Company has a
significant amount of debt subject to floating interest rates. Therefore, any
increase in interest rates would have an adverse effect on the Company.

     The Company anticipates that its cash flow from operations, together with
amounts available under its revolving credit agreement, will be sufficient to
fund its planned internal expansion and other internal operating cash
requirements through the end of fiscal 1998.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This new standard requires dual presentation of basic and diluted
earnings per share (EPS) on the statement of earnings for all entities with
complex capital

                                      25
<PAGE>
 
structures. Adoption of SFAS No. 128 is required for fiscal 1998. Early adoption
is not permitted. There will be no impact on the Company's financial condition
or results of operations due to the adoption of SFAS No. 128 and diluted EPS
(including the effects of common stock equivalents) is not anticipated to be
materially different than basic EPS.

IMPACT OF INFLATION

     Management does not believe that inflation has had a material effect on the
Company's operations during the past several years. Increases in labor, food,
and other operating costs could adversely affect the Company's operations. In
the past, however, the Company generally has been able to modify its operating
procedures or increase menu prices to substantially offset increases in its
operating costs.

     Many of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. Although the Company has been able to and will continue to attempt to pass
along increases in costs through food and beverage price increases, there can be
no assurance that all such increases can be reflected in its prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at the Company's restaurants.

IMPACT OF YEAR 2000

     The Company relies to a large extent on computer technology to carry out
its day-to-day operations. Many software products in the marketplace are only
able to recognize a two digit year date and therefore will recognize a date
using "00" as the year 1900 instead of the year 2000. This problem could result
in significant transactional inaccuracies and could even cause the system to
stop operating. As the year 2000 approaches, the Company has begun to evaluate
its current computer systems in order to determine what modifications, if any,
are necessary to make its information systems and software capable of
recognizing and processing the year 2000. The Company anticipates that it will
substantially complete its evaluation during fiscal 1998 and then begin to make
the necessary upgrades or replacements to its computer systems. Until its
assessment is complete, the Company is unable to estimate whether the costs
associated with year 2000 issue will have a material effect on the Company's
business, financial position or results of operations.

     This report contains certain forward-looking statements, including
statements about the Company's development plans, that involve a number of risks
and uncertainties. Among the factors that could cause actual results to differ
materially are the following: the availability and cost of suitable locations
for new restaurants; the availability of capital to the Company; the ability of
the Company to develop and operate its restaurants; the hiring, training and
retention of skilled corporate and restaurant management and other restaurant
personnel; the integration and assimilation of acquired concepts; the overall
success of the Company's franchisors; the ability to obtain the necessary
government approvals and third-party consents; the ability of the Company to
modify or redesign its computer systems to work properly in the year 2000; and
changes in governmental regulations, including increases in the minimum wage.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

                                      26
<PAGE>
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Quality Dining, Inc.
Consolidated Balance Sheets

<TABLE>
<CAPTION>
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------
                                                                                  October 26,     October 27,
                                                                                         1997            1996
-------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>
Assets                                                                                            
Current assets:                                                                                   
  Cash and cash equivalents                                                       $     7,500     $       444
  Accounts receivable                                                                   3,265           4,518
  Accounts and note receivable, related  parties                                            -          11,651
  Notes receivable                                                                          -           3,585
  Inventories                                                                           1,912           3,082
  Deferred income taxes                                                                 5,191               -
  Other current assets                                                                  5,942           3,438
-------------------------------------------------------------------------------------------------------------
Total current assets                                                                   23,810          26,718
-------------------------------------------------------------------------------------------------------------
Property and equipment, net                                                           144,363         177,044
-------------------------------------------------------------------------------------------------------------
Other assets:                                                                                     
  Deferred income taxes                                                                 4,809           1,996
  Trademarks, net                                                                      12,651          13,082
  Franchise fees and development fees, net                                              9,732          10,406
  Goodwill, net                                                                         9,135         152,195
  Notes receivable, less allowance                                                      6,000               -
  Pre-opening costs and non-competition agreements, net                                   888           2,463
  Liquor licenses, net                                                                  3,217           2,876
  Other                                                                                 1,368           1,234
-------------------------------------------------------------------------------------------------------------
Total other assets                                                                     47,800         184,252
-------------------------------------------------------------------------------------------------------------
Total assets                                                                      $   215,973     $   388,014
-------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity                                                              
Current liabilities:                                                                              
  Current portion of capitalized lease and non-competition obligations,                           
    principally to related parties                                                $       464     $       451
  Accounts payable                                                                      8,648           8,231
  Accounts payable, related parties                                                         -             300
  Accrued liabilities                                                                  22,937          21,119
-------------------------------------------------------------------------------------------------------------
Total current liabilities                                                              32,049          30,101
Long-term debt                                                                        127,106          78,610
Capitalized lease principally to related  parties, less current portion                 6,005           6,436
Deferred income taxes                                                                       -           3,744
-------------------------------------------------------------------------------------------------------------
Total liabilities                                                                     165,160         118,891
-------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 10, 11 and 13)                                               
Stockholders' equity:                                                                             
  Preferred stock, without par value: 5,000,000 shares authorized; none issued                    
  Common stock, without par value: 50,000,000 shares authorized;                                  
    12,619,059 and 16,929,035 shares issued, respectively                                  28              28
  Additional paid-in capital                                                          236,420         258,242
  Retained earnings (deficit)                                                        (185,385)         11,103
-------------------------------------------------------------------------------------------------------------
                                                                                       51,063         269,373
  Less treasury stock, at cost, 20,000 shares                                             250             250
-------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                             50,813         269,123
-------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                        $   215,973     $   388,014
-------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      27
<PAGE>
 
Quality Dining, Inc.
Consolidated Statements of  Operations
<TABLE>
<CAPTION>
(In thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------------    
                                                                                                    Fiscal Year Ended
                                                                                      October 26,      October 27,   October 29,  
                                                                                             1997             1996          1995  
--------------------------------------------------------------------------------------------------------------------------------
Revenues:
Restaurant sales:
<S>                                                                                   <C>              <C>           <C>
  Grady's American Grill                                                              $    85,403      $    85,101    $        -
  Burger King                                                                              74,616           70,987        57,013
  Bruegger's Bagel Bakery                                                                  64,928           25,967         5,270
  Chili's Grill & Bar                                                                      54,277           41,913        38,267
  Italian Dining Division                                                                  12,973            8,388         4,741
--------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales                                                                    292,197          232,356       105,291 
  Franchise related revenue                                                                10,055            5,274             -
--------------------------------------------------------------------------------------------------------------------------------
Total revenues                                                                            302,252          237,630       105,291
--------------------------------------------------------------------------------------------------------------------------------
Operating expenses:                                                                                                            
  Restaurant operating expenses:    
     Food and beverage                                                                     88,629           72,201        31,176
     Payroll and benefits                                                                  87,905           66,176        27,191
     Depreciation and amortization                                                         17,691           11,635         5,109 
     Other operating expenses                                                              74,691           52,452        24,057 
--------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses:                                                      268,916          202,464        87,533
  General and administrative                                                               29,510           12,047         5,706
  Amortization of intangibles                                                               3,112            2,537           682
  Impairment of assets                                                                    185,300                -             -
  Store closing costs                                                                      15,513                -             -
  Franchise operating partner expense                                                       2,066                -             -
  Restructuring and integration costs                                                           -            9,938             - 
--------------------------------------------------------------------------------------------------------------------------------
Total operating expenses                                                                  504,417          226,986        93,921
--------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                                  (202,165)          10,644        11,370
--------------------------------------------------------------------------------------------------------------------------------
Other income (expense):                                                                                                        
     Interest expense                                                                     (10,599)          (6,340)       (2,699)
     Gain on sale of property and equipment                                                   362                4           343
     Interest income                                                                          221              206           127
     Other income (expense), net                                                               32              154           (12)
--------------------------------------------------------------------------------------------------------------------------------
Total other expense                                                                        (9,984)          (5,976)       (2,241)
--------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                                        (212,149)           4,668         9,129
Income tax provision/ (benefit)                                                           (15,661)           1,998         3,240
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                                     $  (196,488)     $     2,670    $    5,889
--------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share                                                           $    (11.68)     $      0.23    $     0.85
--------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding                                                        16,820           11,855         6,925
--------------------------------------------------------------------------------------------------------------------------------
 </TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                      28
<PAGE>
 

Quality Dining, Inc.
Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
(Dollars and shares in thousands)
------------------------------------------------------------------------------------------------------------------------------
                                        Shares                              Additional      Retained                    Stock-
                                        Common     Preferred     Common        Paid-in      Earnings     Treasury     holders'
                                         Stock         Stock      Stock        Capital     (Deficit)        Stock       Equity
------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>           <C>        <C>            <C>           <C>          <C> 
Balance, October 30, 1994                6,471     $       -     $   28     $   24,010     $   2,544     $      -     $ 26,582
  Net income, fiscal 1995                                  -          -              -         5,889            -        5,889
  Issuance of common stock in           
   acquisitions:                       
    Grayling                               286             -          -          3,350             -            -        3,350
    SHONCO                                 317             -          -          4,000             -            -        4,000
  Proceeds from sale of common                                                            
   stock, net of offering expenses       1,771             -          -         31,688             -            -       31,688
  Exercise of stock options                 12             -          -            129             -            -          129
  Tax benefit arising from the                                                            
   exercise of stock options                               -          -             13             -            -           13 
  Treasury stock acquired                                  -          -              -             -         (250)        (250)
------------------------------------------------------------------------------------------------------------------------------
Balance, October 29, 1995                8,857             -         28         63,190         8,433         (250)      71,401
  Net income, fiscal 1996                                  -          -              -         2,670            -        2,670
  Bruegger's acquisition:                                                                 
    Issuance of common stock             5,127             -          -        123,051             -            -      123,051
    Issuance of preferred stock                       11,780          -              -             -            -       11,780
    Exchange of preferred stock                                                           
     for common stock                      286       (10,115)         -         10,115             -            -            -
  Redemption of preferred stock                       (1,665)         -              -             -            -       (1,665)
  Proceeds from sale of common                                                            
   stock, net of offering expenses       2,542             -          -         59,755             -            -       59,755
  Exercise of stock options                117             -          -          1,228             -            -        1,228
  Tax benefit arising from the                                                                                                     
   exercise of stock options                               -          -            903             -            -          903 
------------------------------------------------------------------------------------------------------------------------------
Balance, October 27, 1996               16,929             -         28        258,242        11,103         (250)     269,123
  Net loss, fiscal 1997                                    -          -              -      (196,488)           -     (196,488)
  Exercise of stock options                  1             -          -              1             -            -            1
Bruegger's Disposition:
  Redemption of shares                  (4,311)                                                           (21,823)     (21,823)
  Retirement of common stock                                                   (21,823)                    21,823            -
------------------------------------------------------------------------------------------------------------------------------
Balance, October 26, 1997               12,619     $       -     $   28     $  236,420     $(185,385)    $   (250)    $ 50,813
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of the consolidated financial
statements.

                                      29
<PAGE>
 
Quality Dining, Inc.
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------
                                                                        Fiscal Year Ended
                                                             October 26,   October 27,   October 29,
                                                                1997           1996          1995
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                           <C>            <C>           <C>
     Net income (loss)                                         $(196,488)    $   2,670     $   5,889
     Adjustments to reconcile net income (loss)
     to net cash provided by
       operating activities:
         Depreciation and amortization of
         property and equipment                                   16,094         9,836         4,008
         Amortization of other assets                              7,187         5,192         1,991
         Asset impairment charge                                 185,300             -             -
         Store closing reserve                                    15,513             -             -
         Gain on sale of property and equipment                     (362)           (4)         (343)
         Deferred income taxes                                   (11,748)           42           413
         Changes in operating  assets and
          liabilities, excluding effects of
          acquisitions and dispositions:
            Accounts receivable                                       65        (4,609)         (243)
            Inventories                                               16          (796)         (182)
            Other current assets                                  (4,024)       (1,319)         (707)
            Accounts payable                                        (432)          603         1,012
            Accrued liabilities                                   (7,421)        2,849         1,070
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities                          3,700        14,464        12,908
----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
     Acquisitions of businesses, net of cash acquired                  -       (77,168)      (23,472)
     Disposition of businesses, net of cash sold                  15,720             -             -
     Proceeds from sales of property and equipment                 2,073             4           598
     Purchase of property and equipment                          (32,080)      (41,135)      (25,357)
     Purchase of redeemable preferred stock                            -             -          (375)
     Advances to affiliates                                      (26,515)      (10,025)            -
     Payment of other assets                                      (3,319)       (3,960)       (1,799)
     Other, net                                                     (198)       (1,147)         (101)
----------------------------------------------------------------------------------------------------
Net cash used for investing activities                           (44,319)     (133,431)      (50,506)
----------------------------------------------------------------------------------------------------
Cash flow from financing activities:
     Proceeds from sale of common stock, net                           -        59,755        31,688
     Proceeds from exercise of stock options                           1         1,228           129
     Borrowings of long-term debt                                 62,500       218,285        37,721
     Repayment of long-term debt                                 (14,004)     (163,223)      (30,308)
     Repayment of capitalized lease and
       non-competition obligations                                  (435)         (358)         (196)
     Payment of redeemable preferred stock
       subscription payable                                            -          (250)         (250)
     Loan financing fees                                            (387)            -             -
     Redemption of preferred stock                                     -        (1,665)            -
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities                         47,675       113,772        38,784
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents               7,056        (5,195)        1,186
Cash and cash equivalents, beginning of year                         444         5,639         4,453
----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                         $   7,500     $     444     $  $5,639
----------------------------------------------------------------------------------------------------
</TABLE>

                                       30
<PAGE>
 
<TABLE>
<S>                                                                      <C>           <C>           <C>
Supplemental disclosures of cash flow information:
  Cash paid for interest, net of amounts capitalized                     $ 8,367       $ 6,131       $ 2,687    
  Cash paid for income taxes                                                 757         2,850         2,665   
Noncash investing and financing activities:                                                                       
  Common stock received in disposition                                    21,823             -             -    
  Acquisition of redeemable preferred stock                                    -             -           500    
  Property and equipment purchased and related liability                                                     
    included in accounts payable                                             136         2,075         1,288    
  Common stock issued in acquisitions                                          -       123,051         7,350
  Preferred stock issued in acquisitions                                       -        11,780             - 
  Long-term debt assumed in acquisitions                                       -        16,135             - 
  Treasury stock acquired in disposition of restaurants                        -             -           250
  Non-competition agreement                                                    -             -           510 
  Note receivable acquired in disposition of restaurants, net              6,000         3,500             -
</TABLE>               
                                                                             
The accompanying notes are an integral part of the consolidated financial
statements.            

                                      31
                       
<PAGE>
 
Quality Dining, Inc.
Notes to Consolidated Financial Statements

{1} NATURE OF BUSINESS, DISPOSITION OF BUSINESS AND PUBLIC OFFERINGS

Nature of Business - Quality Dining, Inc. and its subsidiaries (the "Company")
develop and operate both quick service and full service restaurants in 20
states. The Company owns and operates 40 Grady's American Grill restaurants,
five restaurants under the tradename of Spageddies Italian Kitchen and three
restaurants under the tradename Papa Vino's Italian Kitchen. The Company also
operates, as a franchisee, 66 Burger King restaurants and 28 Chili's Grill & Bar
restaurants.

Disposition of Bagel-Related Businesses - On October 20, 1997, the Company sold
its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and
an entity controlled by them and their affiliates. The sale included the stock
of Bruegger's Corporation and the stock of all of the other bagel-related
businesses. The total proceeds from the sale were $45,164,000. The consideration
included the issuance by Bruegger's Corporation of a junior subordinated note in
the amount of $10,000,000, which was recorded as $6,000,000 due to a $4,000,000
reserve for legal indemnification, the transfer of 4,310,740 shares of the
Company's common stock valued at $21,823,000, owned by Messrs. Brue and
Dressell, which were retired, a receivable for purchase price adjustment of
$500,000, and $16,841,000 in cash. The subordinated note has an annual interest
rate of 12% and will mature in seven years. Interest will be accrued and added
to the principal amount of the note for the first three years and is required to
be paid in cash for the remaining life of the note. The cash component of the 
proceeds included an adjustment for the calculation of the net working capital 
deficit.  The calculation used was subject to final adjustment and is being 
disputed by Mssrs. Brue and Dressell. The Company does not expect the ultimate
resolution of this dispute to have a material adverse effect on the Company's
financial position or results of operations.

During the second quarter of fiscal 1997, the Company recorded a non-cash
impairment charge of $185,000,000 and a store closing charge of $15,513,000 as a
result of its decision to divest the bagel related businesses (see Note 12). The
consummation of the sale of the bagel-related businesses did not result in any
additional gain or loss.

Public Offerings - On October 16, 1995, the Company completed a public offering
consisting of 1,771,288 shares of its common stock at $19.25 per share. Net of
underwriting fees and offering expenses, proceeds to the Company aggregated
$31,688,000. On July 31, 1996, the Company completed a public offering
consisting of 2,541,595 shares of its common stock at $25.00 per share. Net of
underwriting fees and offering expenses, proceeds to the Company aggregated
$59,775,000.

{2} SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year - The Company maintains its accounts on a 52/53 week fiscal year
ending the last Sunday in October. The fiscal years ended October 26, 1997
(fiscal 1997), October 27, 1996 (fiscal 1996) and October 29, 1995 (fiscal 1995)
each contained 52 weeks.

Basis of Presentation - The accompanying consolidated financial statements
include the accounts of Quality Dining, Inc. and its wholly-owned subsidiaries.
As of May 11, 1997, the Company also consolidated its controlled affiliate,
Bagel Acquisition Corporation, into its consolidated financial statements and
recorded Bagel Acquisition Corporation's revenues and expenses from May 11, 1997
to October 19, 1997. All significant intercompany balances and transactions have
been eliminated. Investments in unconsolidated affiliates are accounted for
using the equity method.

Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Inventories - Inventories consist primarily of restaurant food and supplies and
are stated at the lower of cost or market. Cost is determined using the first-
in, first-out method.

Property and Equipment - Property and equipment, including capitalized leased
properties, are stated at cost. Depreciation and amortization are being recorded
on the straight-line method over the estimated useful lives of the related
assets. Leasehold

                                      32
<PAGE>
 
improvements are amortized over the shorter of the estimated useful life or the
lease term of the related asset. The general ranges of original depreciable
lives are as follows:

<TABLE>
<CAPTION>
                                                    Years
                                                    -----  
<S>                                                 <C>
          Capitalized Lease Property                17-20
          Buildings and Leasehold Improvements      15-31 1/2
          Furniture and Equipment                   3-7
</TABLE>

Upon the sale or disposition of property and equipment, the asset cost and
related accumulated depreciation is removed from the accounts and any resulting
gain or loss is included in income. Normal repairs and maintenance costs are
expensed as incurred.

Impairment of Long-Lived Assets - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets," as of the beginning of its 1997 fiscal year. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain intangibles and goodwill related to those assets. The Company recorded a
$185,000,000 non-cash impairment charge in fiscal 1997 in connection with its
decision to sell its bagel-related businesses (see Note 12). The Company has
decided not to build two Burger King restaurants which it had acquired the
development rights to as part of the SHONCO acquisition (see Note 14). In
conjunction with this decision the Company recorded a non-cash impairment charge
of $300,000 to write-off the capitalized development rights associated with
these two locations.

Goodwill and Trademarks - Goodwill arising from the excess of the purchase price
over the acquired tangible and intangible net assets acquired in acquisitions
and trademarks are being amortized on a straight-line basis, principally over 40
years. Accumulated amortization of goodwill as of October 26, 1997 and October
27, 1996 was $1,628,000 and $2,456,000, respectively. Accumulated amortization
of trademarks as of October 26, 1997 and October 27, 1996 was $612,000 and
$281,000, respectively. The Company wrote-off all of the goodwill related to its
bagel businesses as part of the $185,000,000 non-cash impairment charge recorded
during fiscal 1997 (See Note 12).

Franchise Fees and Development Fees - The Company's Burger King and Chili's
franchise agreements require the payment of a franchise fee for each restaurant
opened. Franchise fees are deferred and amortized on the straight-line method
over the lives of the respective franchise agreements. Development fees paid to
the respective franchisors are deferred and expensed in the period the related
restaurants are opened. The excess of the purchase price over the acquired
tangible and intangible assets acquired in the SHONCO acquisition has been
allocated to franchise rights (see Note 14). The franchise agreements generally
provide for a term of 20 years with renewal options upon expiration. Franchise
fees are being amortized on a straight-line basis, principally over 20 years.
Accumulated amortization of franchise fees and development costs as of October
26, 1997 and October 27, 1996 was $2,230,000 and $1,703,000, respectively.

Franchise Related Revenue Recognition - Franchise related revenue includes
royalties, franchise fees, development fees, net commissary revenue, interest
income and other miscellaneous fees related to the Company's bagel business
which was divested on October 20, 1997. Franchisees were required to pay monthly
royalties, generally 4% to 5% of restaurant sales, which the Company recognized
as earned. Each franchisee also paid an initial franchise fee for each bakery
opened. Development fees, which resulted from area development agreements with
franchisees, were deferred and recognized as revenue when all material
conditions had been substantially completed by the Company, which generally
occurred when the bakeries under the related area development agreements were
opened. There were no deferred development fees at October 26, 1997. At October
27, 1996 there were $770,000 in deferred development fees. Net commissary
revenue resulted from products sold to franchisees from Company-owned
commissaries. Interest income resulted from the Company's notes receivable from
franchisees.

Advertising - The Company had maintained an advertising fund for national and
regional advertising for the Bruegger's Bagel Bakery ("Bruegger's") concept. The
advertising fund collected fees paid by Company-owned and franchised bakeries,
and disbursed funds relating to costs associated with maintaining, administering
and preparing advertising, marketing, public relations and promotional programs
for the Bruegger's concept. Contributions to the fund were based on a specified
percentage of sales, generally 2%. Such contributions were recorded as earned
and were reflected as a reduction of advertising expenses. The Company incurs
advertising expense related to its concepts under franchise

                                      33
<PAGE>
 
agreements (see Note 5) or through local advertising. Advertising costs are
expensed at the time the related advertising first takes place. Advertising
costs were $7,381,000, $4,620,000 and $2,911,000 for fiscal years 1997, 1996 and
1995, respectively.

Pre-Opening Costs - Direct costs incurred in connection with opening new
restaurants are deferred and amortized on a straight-line basis over a 12-month
period following the opening of a restaurant. Amortization of pre-opening costs
aggregated $2,953,000, $1,848,000 and $1,007,000 for fiscal years 1997, 1996 and
1995, respectively.

Liquor Licenses - Costs incurred in securing liquor licenses for the Company's
restaurants and the fair value of liquor licenses acquired in acquisitions are
capitalized and amortized on a straight-line basis, principally over 20 years.
Accumulated amortization of liquor licenses as of October 26, 1997 and October
27, 1996 was $431,000 and $270,000, respectively.

Computer Software Costs - Costs of purchased and internally developed computer
software are capitalized and amortized over a five-year period using the
straight-line method. As of October 26, 1997 and October 27, 1996, capitalized
computer software costs, net of related accumulated amortization, aggregated
$1,323,000 and $1,708,000, respectively. Amortization of computer software costs
was $411,000 and $197,000 for fiscal years 1997 and 1996, respectively.
Amortization of computer software costs in fiscal 1995 was not significant.

Capitalized Interest - Interest costs capitalized during the construction period
of new restaurants were $125,000 and $234,000 for fiscal years 1997 and 1996,
respectively.

Stock-Based Compensation - The Company has adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." The Statement
encourages rather than requires companies to adopt a new method that accounts
for stock based compensation awards based on their estimated fair value at the
date they are granted. Companies are permitted, however, to continue accounting
for stock compensation awards under APB Opinion No. 25 which requires
compensation cost to be recognized based on the excess, if any, between the
quoted market price of the stock at the date of the grant and the amount an
employee must pay to acquire the stock. The Company has elected to continue to
apply APB Opinion No. 25 and has disclosed the pro forma net income (loss) and
earnings (loss) per share, determined as if the new method had been applied, in
Note 9.

Concentrations of Credit Risk - Financial instruments, which potentially subject
the Company to credit risk, consist primarily of cash and cash equivalents and a
note receivable (see Note 14). Substantially all of the Company's cash and cash
equivalents at October 26, 1997 were concentrated with a bank located in
Michigan City, Indiana.

Cash and Cash Equivalents - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.

Income Taxes - The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.  SFAS 109 requires the establishment of 
a valuation reserve against any deferred tax assets if the realization of such 
assets is not deemed likely.

Recently Issued Accounting Standards - In February 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." This new standard requires dual
presentation of basic and diluted earnings per share (EPS) on the statement of
earnings for all entities with complex capital structures. Adoption of SFAS No.
128 is required for fiscal 1998. Early adoption is not permitted. There will be
no impact on the Company's financial condition or results of operations due to
the adoption of SFAS No. 128 and diluted EPS (including the effects of common
stock equivalents) is not anticipated to be materially different from basic EPS.

Reclassifications - Certain information in the consolidated financial statements
for fiscal 1996 has been reclassified to conform with the current reporting
format. The reclassifications had no effect on total assets, liabilities and
stockholders' equity or net income as previously reported.


                                      34
<PAGE>
 
{3}  OTHER CURRENT ASSETS AND ACCRUED LIABILITIES

Other current assets and accrued liabilities consist of the following:
<TABLE>  
<CAPTION> 
--------------------------------------------------------------------------------------------------
(Dollars in thousands)                                                  October 26,   October 27,
                                                                               1997          1996
--------------------------------------------------------------------------------------------------
<S>     <C>                                                             <C>           <C>
Other current assets:
     Deposits                                                               $ 1,270       $ 1,499
     Refundable income taxes                                                  4,495         1,300
     Prepaid expenses and other                                                 177           639
--------------------------------------------------------------------------------------------------
                                                                            $ 5,942       $ 3,438
--------------------------------------------------------------------------------------------------
Accrued liabilities:
     Accrued salaries, wages and severance                                  $ 3,944       $ 3,489
     Accrued advertising and royalties                                        1,376           756
     Accrued property taxes                                                     759         1,505
     Accrued sales taxes                                                        752         1,225
     Accrued disposition costs                                                4,378             -
     Accrued store closing costs                                              4,079             -
     Accrued insurance costs                                                  2,236           208
     Accrued restructuring and integration costs                                  -         8,984
     Deferred development fees                                                    -           770
     Other accrued liabilities                                                5,413         4,182
--------------------------------------------------------------------------------------------------
                                                                            $22,937       $21,119
--------------------------------------------------------------------------------------------------
</TABLE>


{4}  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>
 
--------------------------------------------------------------------------------------------------
                                                                        October 26,   October 27,
(Dollars in thousands)                                                         1997          1996
--------------------------------------------------------------------------------------------------
<S>                                                                     <C>           <C>
Land                                                                       $ 38,071      $ 36,979
Capitalized lease property                                                    7,644         7,644
Buildings and leasehold improvements                                         75,040        86,604
Furniture and equipment                                                      58,304        66,152
Construction in progress                                                        379         6,019 
--------------------------------------------------------------------------------------------------
                                                                            179,438       203,398
--------------------------------------------------------------------------------------------------
Less, accumulated depreciation and capitalized lease amortization            35,075        26,354
--------------------------------------------------------------------------------------------------                     
Property and equipment, net                                                $144,363      $177,044
--------------------------------------------------------------------------------------------------
</TABLE>

{5}  FRANCHISE AND DEVELOPMENT RIGHTS

     The Company has entered into franchise agreements with two franchisors for
the operation of two of its restaurant concepts, Burger King and Chili's. The
franchise agreements provide the franchisors with significant rights regarding
the business and operations of the Company's franchised restaurants. The
franchise agreements with Burger King Corporation require the Company to pay
royalty and advertising fees equal to 3.5% and 4.0% of Burger King restaurant
sales, respectively. The franchise agreements with Brinker International, Inc.
("Brinker") covering the Company's Chili's restaurant concept require the
Company to pay royalty and advertising fees equal to 4.0% and 0.5% of Chili's
restaurant sales, respectively.

     The Company has entered into development agreements to develop additional
restaurants in each of the two concepts. Each of the development agreements
requires the Company to pay a development fee. In addition, the development
agreements contain certain requirements regarding the number of units to be
opened in the future. Each restaurant opened will be subject to a separate
franchise agreement, which requires the payment of an initial franchise fee
(currently $40,000) for each such restaurant. Should the Company fail to comply
with the required development schedules or with the requirements of the
agreements for restaurants within


                                      35
<PAGE>
 
areas covered by the development agreements, the franchisors have the right to
terminate the Company's development agreements and the exclusivity provided by
the development agreements.
 
(6)  RETIREMENT PLANS

     The Company maintains a discretionary, noncontributory profit sharing plan
for its eligible employees. Plan contributions are determined by the Company's
Board of Directors.

     All employees are also eligible to participate in a 401(k) plan after one
year of service in which the employee has worked a minimum of 1,000 hours. The
Company matches a portion of the employee's contribution to the plan and
provides investment choices for the employee.

     The Company's contributions under both plans aggregated $99,000, $100,000
and $70,000 for fiscal years 1997, 1996 and 1995, respectively.

(7)  INCOME TAXES

The provision (benefit) for income taxes for the fiscal years ended October 26,
1997, October 27, 1996 and October 29, 1995 is summarized as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                  Fiscal Year Ended
                                      October 26,    October 27,    October 29,
(Dollars in thousands)                       1997           1996           1995
-------------------------------------------------------------------------------
<S>  <C>                              <C>            <C>            <C>
Current:
     Federal                              $(4,243)        $1,736         $2,320
     State                                    330            220            507
-------------------------------------------------------------------------------
                                           (3,913)         1,956          2,827
-------------------------------------------------------------------------------
Deferred:
     Provision for the period             (11,748)            42            413
-------------------------------------------------------------------------------
     Total                               $(15,661)        $1,998         $3,240
-------------------------------------------------------------------------------
</TABLE>

The components of the deferred tax asset and liability are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                     October 26,    October 27,
(Dollars in thousands)                                      1997           1996
--------------------------------------------------------------------------------
<S>  <C>                                             <C>            <C>
Deferred tax asset:
     Bruegger's net operating loss carryforwards               -         $3,553
     Net operating loss carryforwards                   $ 17,741              -
     Restructuring and integration costs                   4,601          1,584
     FICA tip credit minimum tax credit                    1,720            215
     Stock appreciation rights                                 -            549
     Accrued liabilities                                     778            700
     Capitalized lease obligations                           712            679
     Other                                                    26             55
--------------------------------------------------------------------------------
     Deferred tax asset                                   25,578          7,335
     Less: Valuation allowance                           (10,239)        (4,077)
--------------------------------------------------------------------------------
                                                          15,339         $3,258
--------------------------------------------------------------------------------
Deferred tax liability
     Property and equipment                               (2,967)        (2,617)
     Franchise fees                                       (1,630)        (1,463)
     Pre-opening expense                                    (188)          (698)
     Other                                                  (554)          (228)
--------------------------------------------------------------------------------
     Deferred tax liability                               (5,339)        (5,006)
--------------------------------------------------------------------------------
     Net Deferred tax asset (liability)                 $ 10,000        $(1,748)
--------------------------------------------------------------------------------
</TABLE>

                                      36

<PAGE>
 
The Company has net operating loss carryforwards of approximately $43 million as
well as FICA tip credits and alternative minimum tax credits of $1.7 million.
The net operating loss and tip credits expire in 2012 while the alternative
minimum tax credits carryforward indefinitely.

     During the year, the Company established a valuation reserve against its
net operating loss carryforwards of $10.2 million leaving a net deferred tax
asset of $10.0 million. The Company's assessment of its ability to realize the
net deferred tax asset was based on the weight of both positive and negative
evidence, including the taxable income of the non-bagel related concepts. Based
on this assessment, the Company's management believes it is more likely than not
that the net deferred tax benefit recorded will be realized. Such evidence will
be reviewed prospectively and should the Company's operating performance
continue to improve, the Company may recognize additional tax benefits related
to its net deferred tax asset position in the future. Effective with the
acquisition of Bruegger's Corporation on June 7, 1996, the Company established a
valuation allowance against Bruegger's Corporation's deferred tax assets in the
amount of $4.8 million. Subsequent to the acquisition date, the Company reduced
the valuation allowance by $680,000 with a corresponding reduction in goodwill.
With the sale of Bruegger's Corporation this allowance has been eliminated.

<TABLE>
<CAPTION>

Differences between the effective income tax rate and the U.S. statutory tax rate were as follows:
---------------------------------------------------------------------------------------------------------------------
                                                                                     Fiscal Year Ended
                                                                         October 26,      October 27,      October 29,
(Percent of pretax income)                                                      1997             1996             1995
----------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>              <C>
Statutory tax rate                                                            (34.0)%           34.0%            34.0%
State income taxes, net of federal income tax benefit                           0.1              3.1              3.6
FICA tax credit                                                                (0.2)            (5.9)            (1.6)
Write off and amortization of goodwill                                         22.3             10.5                -
Change in valuation allowance                                                   4.8                -                -
Other, net                                                                     (0.4)             1.1              (.5)
---------------------------------------------------------------------------------------------------------------------
Effective tax rate                                                             (7.4)%           42.8%            35.5%
---------------------------------------------------------------------------------------------------------------------
</TABLE>


{8} LONG-TERM DEBT AND CREDIT AGREEMENTS

     On October 9, 1997, the Company amended its revolving credit agreement with
Texas Commerce Bank, as agent for a group of seven banks, providing for
borrowings of up to $145,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread (8.72% on October 26, 1997 and 6.9375% at October
27, 1996). The revolving credit agreement is supported by the pledge of the
stock of certain subsidiaries of the Company and expires on April 26, 1999, at
which time all amounts are due. As of October 26, 1997 and October 27, 1996,
there was $127,106,000 and $78,610,000 respectively outstanding under this
revolving credit agreement.

     The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and fixed
charge coverage ratios, minimum levels of tangible net worth, limitations on the
incurrence of additional indebtedness, limitations on consolidated capital
expenditures and restrictions on the payment of dividends (other than stock
dividends) on, or the purchase or redemption of, any shares of the Company's
capital stock. In addition, the revolving credit agreement contains a mandatory
reduction in borrowing availability to $140,000,000 by December 31, 1998. At
October 26, 1997, the fair value of the amount outstanding under the Revolving
Credit Agreement approximated the carrying amount.


{9}  STOCK OPTION PLANS

     The Company has three stock option plans: the 1993 Stock Option and
Incentive Plan, the 1997 Stock Option and Incentive Plan and the Outside
Directors Stock Option Plan.

     On March 26, 1997 the Company's shareholders approved the 1997 Stock Option
and Incentive Plan and therefore no awards for additional shares of the
Company's common stock will be made under the 1993 Stock Option and Incentive
Plan (although the terms of options previously granted pursuant to the 1993
Stock Option and Incentive Plan may still be modified). Under the 1997 Stock
Option and Incentive Plan, shares of restricted stock and options to purchase
shares of the Company's common stock


                                      37
<PAGE>
 
may be granted to officers and other employees. An aggregate of 1,100,000 shares
of common stock has been reserved for issuance under the 1997 Stock Option and
Incentive Plan.

     Under the Outside Directors Stock Option Plan, 40,000 shares of common
stock have been reserved for the issuance of nonqualified stock options to be
granted to non-employee directors of the Company.  On May 1, 1994 and on each
May 1 thereafter, each then non-employee director of the Company will receive an
option to purchase 2,000 shares of common stock at an exercise price equal to
the fair market value of the Company's common stock on the date of grant.  Each
option has a term of 10 years and becomes exercisable six months after the date
of grant.

     The Company accounts for all of its plans in accordance with APB Opinion
No. 25 which requires compensation cost to be recognized based on the excess, if
any, between the quoted market price of the stock at the date of grant and the
amount an employee must pay to acquire the stock.  Under this method, no
compensation cost has been recognized for stock option awards.

     Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value method as prescribed by SFAS 123 (see Note
2), the Company's net earnings (loss) and net earnings (loss) per share would
have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)                               October 26,       October 27,
                                                                              1997              1996
----------------------------------------------------------------------------------------------------
<S>                                                                     <C>                  <C>
Net earnings (loss), as reported                                         $(196,488)           $2,670
Net earnings (loss), pro forma                                           $(197,410)           $2,188
Net earnings (loss) per common share, as reported                        $  (11.68)           $ 0.23
Net earnings (loss) per common share, pro forma                          $  (11.74)           $ 0.18
----------------------------------------------------------------------------------------------------
</TABLE>

     The weighted average fair value at the date of grant for options granted
during  fiscal 1997 and 1996 was $6.80 and $11.38 per share, respectively,
which, for the purposes of this  disclosure, is assumed to be amortized over the
respective vesting period of the grants.  The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following  weighted average assumptions used for grants in fiscal 1997
and 1996: dividend yield of 0% for both years;  expected volatility of 40.1% and
34.7%, respectively;  risk-free interest rate of 6.5% and 6.3%, respectively;
and expected lives of 4.39 and 4.24 years, respectively.

     Activity with respect to the Company's stock option plans for fiscal years
1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                                      Number of Shares           Price Range
------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                <C>
Outstanding, October 30, 1994                                                  102,670          $ .10-11.50
  Granted                                                                      173,950        12.125 - 21.25
  Canceled                                                                      (6,640)          .10-12.125
  Exercised                                                                    (11,070)          .10-12.125
------------------------------------------------------------------------------------------------------------
Outstanding, October 29, 1995                                                  258,910           .10-21.25
  Granted                                                                      598,184          10.45-32.875
  Canceled                                                                     (35,450)          .10-24.50
  Exercised                                                                   (118,527)          .10-12.125
------------------------------------------------------------------------------------------------------------
Outstanding, October 27, 1996                                                  703,117           .10-3.875
  Granted                                                                      300,795          5.125-22.375
  Canceled                                                                    (237,512)         .10-31.375
  Exercised                                                                       (610)         .10-12.125
------------------------------------------------------------------------------------------------------------
Outstanding, October 26, 1997                                                  765,790         $.10-32.875
------------------------------------------------------------------------------------------------------------
Exercisable, October 26, 1997                                                  274,760
--------------------------------------------------------------------------------------
Available for future grants at October 26, 1997                                965,640
--------------------------------------------------------------------------------------
</TABLE>

                                      38
<PAGE>
 
     The following table summarizes information relating to fixed-priced stock
options outstanding for all plans as of October 26, 1997.

<TABLE>
<CAPTION>
                                            Options Outstanding                                   Options Exercisable
                              -------------------------------------------------         -------------------------------------
                                             Weighted  
                                             Average             Weighted                                      Weighted
                              Number         Remaining           Average                      Number           Average
Range of Exercise Price       Outstanding    Contractual Life    Exercise Price               Exercisable      Exercise Price
-----------------------------------------------------------------------------------------------------------------------------
<S>                              <C>              <C>                 <C>                        <C>              <C>
     $.10 - $12.00                126,235          7.92 years            $ 9.87                    66,375              $11.10
    $12.01 - $20.00               318,635          8.60 years            $15.47                    83,785              $14.35
    $20.01 - $32.875              320,920          8.57 years            $28.77                   124,600              $27.96
</TABLE>
                                                                                
{10} LEASES

     The Company leases its office facilities and a substantial portion of the
land and buildings used in the operation of its restaurants. The restaurant
leases generally provide for a noncancelable term of five to 20 years and
provide for additional renewal terms at the Company's option.  Most restaurant
leases contain provisions for percentage rentals on sales above specified
minimums.  Rental expense incurred under these percentage rental provisions
aggregated  $1,003,000, $1,088,000 and $686,000 for fiscal years 1997, 1996 and
1995, respectively.

As of October 26, 1997, future minimum lease payments related to these leases
were as follows:
<TABLE>  
<CAPTION> 
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------
Fiscal Year                                                               Capital        Operating          Total
                                                                           Leases           Leases
-------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>              <C>
1998                                                                      $ 1,081          $ 8,202          $ 9,283
1999                                                                        1,081            8,012            9,093
2000                                                                        1,081            7,601            8,682
2001                                                                        1,081            7,398            8,479
2002                                                                        1,081            7,232            8,313
2003 and thereafter                                                         6,732           37,566           44,298
-------------------------------------------------------------------------------------------------------------------
                                                                           12,137          $76,011          $88,148
                                                                                 ----------------------------------
 
Less: Amount representing interest                                          5,857
---------------------------------------------------------------------------------
Present value of  future minimum lease payments of which
     $275 is included in current liabilities at October 26, 1997          $ 6,280
---------------------------------------------------------------------------------
</TABLE>

     Rent expense, including percentage rentals based on sales, was $14,500,000,
$9,900,000  and $5,100,000 for fiscal years 1997, 1996 and 1995, respectively.


{11} COMMITMENTS AND CONTINGENCIES

     The Company is self-insured for the portion of its employee health care
costs not covered by insurance.  The Company is liable for medical claims up to
$100,000 per eligible employee annually, and aggregate annual claims up to
approximately $2,500,000.  The aggregate annual deductible is determined by the
number of eligible covered employees during the year and the coverage they
elect.

                                       39
<PAGE>
 
     The Company is self-insured with respect to any worker's compensation
claims not covered by insurance. The Company maintains a $250,000 annual
deductible per occurrence and is liable for aggregate annual claims up to
$1,000,000.

     On November 10, 1994, the Company acquired all of the outstanding stock of
Grayling Corporation, Grayling Management Corporation ("Grayling Management"),
Chili's of Mt. Laurel, Inc. ("Mt. Laurel") and Chili's of Christiana, Inc.
("Christiana"). Prior to entering into negotiations with the Company, Grayling
Corporation and its principal shareholder, T. Garrick Steele ("Steele"), had
entered into an agreement (the "Asset Agreement") to sell substantially all of
Grayling Corporation's assets to a third party, KK&G Enterprises, Inc. ("KK&G").
The Asset Agreement was terminated by Grayling Corporation and was not
consummated. On September 27, 1994, KK&G filed suit in the Court of Common
Pleas, Philadelphia County, Pennsylvania, against Grayling Corporation, Mt.
Laurel, Christiana and Steele seeking damages and specific performance of the
Asset Agreement. Steele is obligated to continue to defend the lawsuit and
indemnify the Company and Grayling Corporation against any loss or damages
resulting from the lawsuit. Management does not expect that the lawsuit will
have a material adverse effect on the Company's financial position or results of
operations. In making such assessment, management has considered the financial
ability of Steele to defend the lawsuit and indemnify the Company against any
loss or damages resulting from the lawsuit.

     BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former
indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond,
Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest")
commenced an action on January 30, 1997 filed in the United States District
Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality
Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an
investment banking firm retained by BruWest, alleging inter alia that the
Bruegger's Defendants breached commitments to provide financing to BruWest,
interfered with the plaintiffs' efforts to obtain financing from third parties,
violated existing franchise and development agreements between BruWest and
Bruegger's Franchise Corporation, violated certain provisions of the Minnesota
Franchise Act and breached duties and implied covenants of good faith and fair
dealing. The Bruegger's Defendants denied all allegations in the complaint.
Without admitting any liability or obligation to do so, on March 11, 1997,
Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan is
secured by certain assets of the plaintiffs and personal guarantees of Messrs.
LeMond and Snow. The loan provides for monthly interest payments commencing
April 11, 1997 at the rate of nine percent (9%) per annum and matured on
September 11, 1997. On March 14, 1997, the complaint was dismissed, without
prejudice. On May 22, 1997, BruWest refiled the complaint with additional
allegations challenging the enforceability of the loan documents and personal
guarantees. BruWest has ceased payment of royalties as required under its
franchise agreements and did not repay the loan at maturity.

     Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and
Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking,
LLC, commenced an action on July 9, 1997 filed in the United States District
Court, for the Eastern District of Missouri, Eastern Division, against
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael
Dressell, Daniel B. Fitzpatrick and John Firth, alleging that the plaintiffs
purchased their franchises based upon financial representations that have not
materialized, that they purchased preferred stock in Bruegger's Corporation
based upon false representations, that the defendants falsely represented their
intentions with respect to repurchasing bakeries from the plaintiffs, and that
the defendants violated implied covenants of good faith and fair dealing.
Quality Baking, LLC has ceased payment of royalties as required under its
franchise agreements for its four bakeries.

     D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises,
Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan
Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees,
commenced an action on July 16, 1997 filed in the United States District Court,
for the District of Maryland, against Bruegger's Corporation, Bruegger's
Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J.
Dressell and Nordahl L. Brue, alleging that the plaintiffs purchased their
franchises based upon financial representations that have not materialized, that
they purchased preferred stock in Bruegger's Corporation based upon false
representations, that Bruegger's Corporation falsely represented its intentions
with respect to purchasing bakeries from the plaintiffs or providing financing
to the plaintiffs, and that the defendants violated implied covenants of good
faith and fair dealing. PLB Enterprises, Inc. has ceased payment of royalties as
required under its franchise agreements for its two bakeries.

     All of the above pending franchise related litigation is in preliminary
stages and only limited discovery has occurred. In each of these cases, one or
more present or former officers and directors of the Company have been named as
party defendants and the Company is advancing defense costs on their behalf.
Pursuant to the Share Exchange Agreement by and among Quality Dining, Inc.,
Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, the Agreement
and Plan of Merger by and among Quality Dining, Inc., Bagel Disposition
Corporation and Lethe, LLC, and certain other related agreements entered into as
part of the disposition of the Company's bagel-related businesses, the Company
is responsible for 50% of the first $14 million of franchise related litigation
expenses, inclusive of attorney's fees, costs, expenses, settlements and
judgments (collectively "Franchise Damages"). Bruegger's Corporation and certain
of its affiliates are obligated to indemnify the Company from all other
Franchise Damages. The Company is obligated to pay the first $3 million of its
share of Franchise Damages in cash. The remaining $4 million of the Company's
share of Franchise Damages is payable by crediting amounts owed to the Company
pursuant to the $10 million junior subordinated note issued to the Company by
Bruegger's Corporation. Based upon the currently available information, the
Company does not believe that these

                                      40
<PAGE>
 
cases individually or in the aggregate will have a material adverse affect on
the Company's financial position and results of operations. Such assessment is
based upon the Company's belief that Bruegger's Corporation has and will
continue to have the ability to perform its indemnity obligations.

     Rigel Corporation, a franchisee of Bruegger's Franchise Corporation
commenced an action on July 16, 1997 filed in the United States District Court
for the District of Nebraska, against Quality Dining, Inc. and Bruegger's
Corporation, alleging that the defendants have breached franchise and
development agreements and violated the Sherman Act. This action was settled in
December of 1997 for an amount that was not material.

     James T. Bies filed a shareholder derivative action in United States
District Court for the Southern District of Michigan on October 14, 1997. The
complaint names as defendants 12 individuals who are current or former directors
or officers of the Company. The complaint alleges that the individual defendants
as directors breached fiduciary duties to the Company by approving certain
transactions in 1997 involving loans to Bagel Acquisition Corporation that
allegedly benefited Daniel Fitzpatrick, the Company's Chairman, President and
Chief Executive Officer. The plaintiff also alleges that individual defendants
participated in a "conspiracy to waste, dissipate, and improperly use funds,
property and assets of Quality" for the benefit of Bagel Acquisition Corporation
and Mr. Fitzpatrick. The plaintiff alleges that the Company and its shareholders
have been damaged in an amount in excess of $28,000,000. The relief sought also
includes the appointment of a receiver, an accounting and attorney's fees. On
December 10, 1997, the defendants filed a motion to dismiss the complaint based
on plaintiff's failure before filing suit to make a "demand" upon the Company's
board of directors to address and respond to the allegations presented by the
complaint. As a shareholder derivative action, the claims purport to be brought
on behalf of the Company against the individual defendants and for the benefit
of the Company. However, in accordance with its articles of incorporation, the
Company has certain obligations to indemnify the individual defendants and the
Company is advancing defense costs on their behalf. The Company does not expect
that this lawsuit will have a material adverse effect on the Company's financial
position or results of operations.

     The Company is involved in various other legal proceedings incidental to
the conduct of its business. Management does not expect that any such
proceedings will have a material adverse effect on the Company's financial
position or results of operations.

     During fiscal 1997 the Company guaranteed $4.2 million of debt between
Texas Commerce Bank and a franchisee of Bruegger's Corporation.

     At October 26, 1997, the Company had commitments aggregating $308,000 for
the construction of restaurants.


{12} IMPAIRMENT OF LONG-LIVED ASSETS

     On May 10, 1997, the Company's Board of Directors committed the Company to
a plan of action to divest the Bruegger's bagel-related businesses. During the
second quarter of fiscal 1997 the Company recorded a non-cash impairment charge
of $185,000,000 and a store closing charge of $15,513,000 as a result of this
decision. The non-cash impairment charge represents a reduction of the carrying
amounts of bagel-related assets to their estimated fair values. The impairment
charge includes non-cash charges for the write-off of goodwill and the write-
down of notes receivable and property and equipment. During the second quarter
of fiscal 1997 the Company received non-binding offers to purchase its bagel-
related assets and used these offers, less estimated costs to sell, to determine
the current fair value of the bagel-related assets. On October 20, 1997 the
Company sold all its bagel-related assets and no further charges were incurred
(see Note 14).

     The store closing charge represents the estimated costs associated with
closing under-performing Bruegger's units and other Bruegger's units which were
at various stages of development when the decision was made to divest the
Bruegger's bagel-related businesses. The charge includes amounts for terminating
leases, the write-off of fixed assets and pre-opening costs, restaurant
management severance costs and other store closing costs. During the third
quarter of fiscal 1997 the Company closed a total of 22 Bruegger's units in
eight markets. As of October 26, 1997, $11,434,000 in costs related to these
activities had been incurred, of which $641,000 were cash payments and
$10,793,000 were non-cash charges, primarily for the write-down of fixed assets.
The remaining costs are primarily associated with terminating occupancy leases
which the Company expects to be substantially complete by the end of fiscal
1998. The Company believes that the remaining reserve is adequate to cover all
future expenses relating to the closed stores.

                                      41
<PAGE>
 
{13} RELATED PARTY TRANSACTIONS

The Company leases its former headquarters facility and a substantial number of
its Burger King restaurants from entities that are substantially owned by
certain directors, officers and stockholders of the Company. Amounts paid for
leases with these related entities are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                                       Fiscal Year Ended
                                                           October 26,    October 27,    October 29,
(Dollars in thousands)                                            1997           1996           1995
----------------------------------------------------------------------------------------------------
Operating leases:
<S>                                                       <C>            <C>            <C>           
         Base rentals                                           $2,542         $2,542         $2,451
         Percentage rentals                                        364            350            365
----------------------------------------------------------------------------------------------------
                                                                 2,906          2,892          2,816
----------------------------------------------------------------------------------------------------
Capitalized leases:
         Interest                                                  793            821            913
         Reduction of lease obligations                            232            204            188
         Percentage rentals                                        212            200            160
----------------------------------------------------------------------------------------------------
                                                                 1,237          1,225          1,261
----------------------------------------------------------------------------------------------------
         Total                                                  $4,143         $4,117         $4,077
----------------------------------------------------------------------------------------------------
</TABLE>
                                                                               
     In October 1996, the Company entered into an agreement with a related party
to terminate a lease for office space located in Vermont. Under the agreement a
payment of $900,000 was made in fiscal 1997. The estimated cost for the
termination of this lease was accrued as part of the cost of the purchase of
Bruegger's Corporation at the time of its acquisition (see Note 14).

     Affiliated real estate partnerships and two other entities related through
common ownership pay management fees to the Company as reimbursement for
administrative services provided. Total management fees for fiscal 1997, 1996
and 1995 were $14,000, $15,000 and $16,000, respectively.

     During the fiscal years 1997, 1996 and 1995, the Company made payments to
companies owned by certain directors, stockholders and officers of the Company
of $327,000, $399,000 and $325,000, respectively, for air transportation
services and $11,720,000 in fiscal 1995 to a related party construction company
to construct and renovate certain of the Company's restaurants. As of November
1, 1995, the Company acquired all of the capital stock of this related-party
construction company.

     During fiscal 1996 and fiscal 1997, the Company loaned a total of
$38,000,000 to Bagel Acquisition Corporation, a company owned by a director and
officer of the Company, which used the funds to acquire a number of Bruegger's
Bagel Bakeries from independent franchisees. Interest income recognized by the
Company on this note in fiscal 1997 and fiscal 1996 was $1,317,000 and $119,000
respectively. The interest income from the note was included as part of
franchise related revenue on the Consolidated Statement of Operations. In
connection with the Company's decision to divest its bagel-related businesses,
the Company began consolidating the assets and liabilities of Bagel Acquisition
Corporation as of May 11, 1997 and Bagel Acquisition Corporation became a wholly
owned subsidiary on August 21, 1997, when the Company exercised its option to
acquire the stock of Bagel Acquisition Corporation for $1,000. The note
receivable from Bagel Acquisition Corporation was eliminated as part of the
consolidation. As of May 11, 1997, the Company consolidated Bagel Acquisition
Corporation into its consolidated financial statements and recorded Bagel
Acquisition Corporation's revenues and expenses from May 11, 1997 to October 19,
1997.

     The Company and its Bruegger's concept transact certain business activities
with Bagel Acquisition Corporation and certain other entities whose principal
shareholders were directors and/or officers of the Company. A summary of these
transactions for the fiscal years 1997 and 1996 included: purchases of cream
cheese $1,784,000 and $2,009,000 respectively; sales of bagels and related
products $4,054,000 and $2,000,000 respectively; royalties earned $4,485,000 and
$1,751,000 respectively; marketing fees earned $2,016,000 and $764,000
respectively; installation of point-of-sale registers $100,000 and $410,000
respectively; management, accounting, legal and computer support services
$677,000 and $534,000 respectively; and transaction fees $200,000 and $210,000
respectively.

     At October 26, 1997 and October 27, 1996, amounts owed by the Company to
related companies were zero and $300,000, respectively. At October 26, 1997 and
October 27, 1996, amounts receivable from related parties aggregated zero and
$11,651,000, respectively.


{14} ACQUISITIONS AND DISPOSITIONS

     On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The sale included the stock of Bruegger's Corporation and the
stock of all of the other

                                      42
<PAGE>
 
bagel-related businesses. The total proceeds from the sale were $45,164,000. The
consideration included the issuance by Bruegger's Corporation of a junior
subordinated note in the amount of $10,000,000, which was recorded as $6,000,000
due to a $4,000,000 reserve for legal indemnification, the transfer of 4,310,740
shares of the Company's common stock valued at $21,823,000, owned by Messrs.
Brue and Dressell, which was retired, a receivable for purchase price adjustment
of $500,000, and $16,841,000 in cash. The subordinated note has an annual
interest rate of 12% and will mature in seven years. Interest will be accrued
and added to the principal amount of the note for the first three years and will
be paid in cash for the remaining life of the note. The cash component of the
proceeds included an adjustment for the calculation of the net working capital
deficit. The calculation used was subject to final adjustment and is being
disputed by Messrs. Brue and Dressell. The Company does not expect the ultimate
resolution of this dispute to have a material adverse effect on the Company's
financial position or results of operations.

     Prior to the transaction, Messrs. Brue and Dressell were directors of the
Company and owned approximately 25% of the Company's common stock. In connection
with the sale of the bagel-related businesses, Mr. Nordahl L. Brue, Mr. Michael
J. Dressell and Mr. David T. Austin resigned from the Company's Board of
Directors.

     On July 15, 1996, the Company acquired all the assets, including
trademarks, of Moe's Broadway Bagel, Inc., operator of three Moe's Broadway
Bagel restaurants ("Moe's"), for $3,600,000 in cash. In a concurrent
transaction, the Company sold the operating assets of Moe's to a third party in
exchange for a promissory note in the amount of $3,500,000 and entered into
development and franchise agreements for which the Company collects franchise
related revenues. On August 21, 1997 the company exercised its right to purchase
Moe's Broadway Bagel for $1,000 and forgiveness of the note. Moe's Broadway
Bagel was subsequently sold on October 20, 1997 with the other bagel-related
assets.

     On June 7, 1996, the Company acquired all of the issued and outstanding
shares of common stock of Bruegger's Corporation. Pursuant to the terms of the
acquisition and related merger agreement, Bruegger's Corporation became a wholly
owned subsidiary of the Company. The purchase price consisted of the issuance of
5,127,121 shares of the Company's common stock, valued at $123,051,000, and
direct acquisition and estimated post-merger integration costs aggregating
$6,900,000. The Company also issued 117,800 shares of its Series A Convertible
Cumulative Preferred Stock, without par value (the "Quality Dining Preferred
Stock") in exchange for a like number of issued and outstanding shares
(exclusive of those shares held by the Company, which were canceled) of
Bruegger's Corporation Class A Cumulative Convertible Preferred Stock, $100 par
value per share. Subsequent to the acquisition, 101,150 shares of the Quality
Dining Preferred Stock were converted into an aggregate of 285,531 shares of the
Company's common stock. The excess of the purchase price over the acquired
tangible and intangible net assets of $143,863,000 was allocated to goodwill.

     In connection with the acquisition, the Company recorded a special pre-tax
charge of $8,000,000 for combining and integrating administrative functions,
recruiting and relocating new employees, franchise related costs, and legal and
professional fees. This charge was in addition to the $6,000,000 recorded as
part of the cost of the acquisition for facility closures, restaurant remodeling
and relocation and severance packages for Bruegger's personnel. As of October
26, 1997, all costs related to these activities had been incurred.

     On December 21, 1995, the Company acquired 42 Grady's American Grill
restaurants and all rights to the Grady's American Grill concept from Brinker
International, Inc. The purchase price aggregated $75,367,000 consisting of
$74,367,000 in cash and the incurrence of $1,000,000 of liabilities and direct
acquisition costs. The cash portion of the purchase price was funded through
borrowings under the Company's revolving credit facility. The excess of the
purchase price over the acquired tangible and intangible net assets of
$13,163,000 has been allocated to trademarks and is being amortized on a
straight-line basis over 40 years.

     The acquisitions of Bruegger's Corporation and Grady's American Grill were
both accounted for using the purchase method and the operating results have been
included in the Company's consolidated financial statements since their
respective acquisition dates.

     In connection with the acquisitions of Grady's American Grill and the
rights to the Spageddies restaurant concept in the United States, which was
finalized on October 28, 1995, the Company recorded a special pre-tax charge of
$1,900,000 during the first quarter of fiscal 1996. The charge reflected the
estimated costs for integration of computer systems, employee transition costs,
recruitment and relocation costs, and legal and professional fees. At October
27, 1996, all costs related to these activities had been incurred.

     On August 14, 1995, the Company acquired all of the issued and outstanding
common stock of SHONCO, Inc. and three affiliated companies and certain
operating assets of three other affiliated companies. SHONCO, Inc. and its
affiliated companies (collectively, "SHONCO") owned and operated eight Burger
King restaurants in the Detroit, Michigan metropolitan area, and had the right
to develop four additional Burger King restaurants in that metropolitan area
under target reservation agreements acquired by the Company. The purchase price
of SHONCO aggregated $9,563,000 and consisted of $5,053,000 in cash (including
$450,000 paid in fiscal 1996), the issuance of 316,832 shares of the Company's
common stock, valued at $4,000,000, and the incurrence of a $510,000 liability
under a non-competition agreement (discounted at 8.5%). The acquisition was
accounted for using the purchase method and the operating results of SHONCO have
been included in the Company's consolidated financial statements since the date
of the acquisition. A deferred tax liability of $1,350,000 was established at
the time of the acquisition for the income tax effect of differences between the
book and tax bases of certain of the assets acquired. The excess of the purchase
price over the acquired tangible and intangible net assets of $7,666,000 has
been allocated to franchise fees and is being amortized on a straight-line basis
over 20 years.

                                      43
<PAGE>
 
     On November 10, 1994, the Company acquired all of the outstanding capital
stock of Grayling Corporation and certain affiliated companies (collectively,
"Grayling"), and certain real estate and improvements from an affiliate of the
principal Grayling stockholder. Grayling operated eight Chili's restaurants in
the greater Philadelphia, Pennsylvania area. The purchase price for Grayling
aggregated $19,700,000 consisting of $16,350,000 in cash and the issuance of
286,080 shares of the Company's common stock valued at $3,350,000. The Company
also paid $2,567,000 in cash for the real estate and improvements related to a
Chili's restaurant under construction held by an affiliate of the principal
Grayling stockholder. The cash portion of the purchase price was funded through
borrowings under the Company's revolving credit facility.

     The acquisition was accounted for using the purchase method and the
operating results of Grayling have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the acquired tangible and intangible net assets of $10,619,000 has
been allocated to goodwill and is being amortized on a straight-line basis over
20 years.

The following unaudited pro forma results for the fiscal years ended October 27,
1996 and October 29, 1995 were developed assuming Bruegger's, Grady's American
Grill and SHONCO had been acquired as of the beginning of the periods presented.
Grayling has been included in the Company's historical financial results since
its acquisition date of November 10, 1994. For both years, the unaudited pro
forma results reflect certain adjustments, including interest expense,
depreciation of property and equipment and amortization of intangible assets.

                                      44
<PAGE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------- 
                                                                                        Fiscal Year Ended
                                                                                October 27,             October 29,
(Dollars in thousands, except per share data)                                          1996                    1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                     <C>
                                                                                 (Unaudited)
Total revenues                                                                     $269,555                $229,586
Pro forma net income (loss)                                                          (5,776)                  2,001
Pro forma net income (loss) per share                                                  (.39)                    .16
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     The unaudited pro forma results shown above are not necessarily indicative
of the consolidated results that would have occurred had the acquisitions taken
place at the beginning of the respective periods, nor are they necessarily
indicative of results that may occur in the future.

     Effective July 10, 1995, the Company sold two of its Burger King
restaurants located in the Detroit, Michigan metropolitan area to the former
senior vice president of the Company responsible for the Detroit market of the
Company's Burger King restaurant division. The sales price for the two Burger
King restaurants aggregated $850,000 consisting of $600,000 in cash and the
assignment to the Company of 20,000 shares of the Company's common stock, valued
at $250,000.  The Company recognized a pre-tax gain of $350,000 in connection
with this sale during fiscal 1995.




{15} SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
 
 
                                                                               Year ended October 26, 1997
                                                             -------------------------------------------------------------
                                                                  First        Second (1)          Third          Fourth
                                                                 Quarter        Quarter           Quarter         Quarter
                                                             -------------------------------------------------------------
<S>                                                             <C>           <C>                <C>              <C>
Total revenues                                                   $86,520       $  71,098          $73,331          $71,303
Operating income (loss)                                            5,283        (206,842)          (1,499)             893
Income (loss) before income taxes                                  3,104        (208,958)          (3,931)          (2,364)
Net income (loss)                                                $ 1,630       $(201,741)         $(3,971)         $ 7,594
                                                                 =======       =========          =======          =======
Net income (loss) per share                                      $  0.10       $  (11.93)         $ (0.23)         $  0.46
                                                                 =======       =========          =======          =======
Weighted average shares of common stock outstanding               16,909          16,910           16,910           16,551
</TABLE>
                                                                                
(1)  During the second quarter of fiscal 1997 the Company recorded an asset
     impairment charge of $185,000,000, store closing costs of $15,513,000 and
     franchise operating partner expense of $2,066,000.

<TABLE>
<CAPTION>
                                                                                 Year ended October 27, 1996
                                                           ------------------------------------------------------------
                                                               First           Second           Third            Fourth
                                                              Quarter          Quarter          Quarter          Quarter
<S>                                                         <C>               <C>              <C>              <C>
Total revenues                                               $53,645           $55,402          $63,588          $64,995
Operating income (loss)                                        2,506             4,911           (2,490)           5,717
Income (loss) before income taxes                              1,086             3,284           (4,289)           4,587
Net income (loss)                                             $  688            $2,086          $(2,924)         $ 2,820
                                                              ======            ======          =======          =======
Net income (loss) per share                                   $ 0.08            $ 0.24          $ (0.23)         $  0.17
                                                              ======            ======          =======          =======
Weighted average shares of common stock outstanding            8,837             8,839           12,825           16,898
</TABLE> 

                                      45
<PAGE>
 
Quality Dining, Inc.
Report of Independent Accountants
---------------------------------

To the Stockholders and Board of Directors 
of Quality Dining, Inc.:

We have audited the accompanying consolidated balance sheets of Quality Dining,
Inc. and subsidiaries (the "Company") as of October 26, 1997 and October 27,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the fifty-two week periods ended October 26, 1997,
October 27, 1996 and October 29, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quality Dining,
Inc. and subsidiaries as of October 26, 1997 and October 27, 1996, and the
consolidated results of their operations and their cash flows for the fifty-two
week periods ended October 26, 1997, October 27, 1996 and October 29, 1995, in
conformity with generally accepted accounting principles.

 


 
                             COOPERS & LYBRAND L.L.P.

Chicago, Illinois
January 6, 1998





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

     There have been no changes in or disagreements with the Company's
independent accountants on accounting or financial disclosures.

                                      46
<PAGE>
 
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this Item concerning the Directors and nominees
for Director of the Company and concerning disclosure of delinquent filers is
incorporated herein by reference to the Company's definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders, to be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company's last
fiscal year. Information concerning the executive officers of the Company is
included under the caption "Executive Officers of the Company" at the end of
Part I of this Annual Report. Such information is incorporated herein by
reference, in accordance with General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K.


ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this Item concerning remuneration of the
Company's officers and Directors and information concerning material
transactions involving such officers and Directors is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.

                                      47
<PAGE>
 
                                 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a) 1. Financial Statements:

            The following consolidated financial statements of the Company and
         its subsidiaries are set forth in Part II, Item 8.

            Consolidated Balance Sheets as of October 26, 1997 and October 27,
            1996

            Consolidated Statements of Operations for the fiscal years ended
            October 26, 1997, October 27, 1996 and October 29, 1995

            Consolidated Statements of Stockholders' Equity for the fiscal years
            ended October 26, 1997, October 27, 1996 and October 29, 1995

            Consolidated Statements of Cash Flows for the fiscal years ended
            October 26, 1997, October 27, 1996 and October 29, 1995

            Notes to Consolidated Financial Statements

            Report of Independent Accountants

         2. Financial Statement Schedules:

            None

         3. Exhibits:

            A list of exhibits required to be filed as part of this report is
         set forth in the Index to Exhibits, which immediately precedes such
         exhibits, and is incorporated herein by reference.

     (b) Reports on Form 8-K

         None.

                                      48
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              Quality Dining, Inc.


                              By: /s/ Daniel B. Fitzpatrick
                                  -------------------------
                                  Daniel B. Fitzpatrick
                                  President and Chief Executive Officer
Date:  January 26, 1998

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
            Signature                                   Title                                 Date
            ---------                                   -----                                 ----
<S>                                <C>                                                  <C>
   /s/ Daniel B. Fitzpatrick       Chairman of the Board, President, Chief Executive    January 26, 1998
---------------------------------  Officer and Director (Principal Executive Officer)
Daniel B. Fitzpatrick

   /s/ William W. Moreton          Executive Vice President, Treasurer and Chief        January 26, 1998
---------------------------------  Financial Officer (Principal Financial Officer)
William W. Moreton

   /s/ Marti'n L. Miranda          Vice President, Controller and Assistant Secretary   January 26, 1998
---------------------------------  (Principal Accounting Officer)
Marti'n L. Miranda

   /s/ James K. Fitzpatrick        Senior Vice President, Chief Administrative          January 22, 1998
---------------------------------  Officer, Chief Development Officer and Director
James K. Fitzpatrick

   /s/ William R. Schonsheck       Senior Vice President, Chief Operating Officer of    January 22, 1998
---------------------------------  Burger King Division and Director
William R. Schonsheck

   /s/ Arthur J. Decio             Director                                             January 22, 1998
---------------------------------
Arthur J. Decio

   /s/ Ezra H. Friedlander         Director                                             January 22, 1998
---------------------------------
Ezra H. Friedlander

   /s/ Steven M. Lewis             Director                                             January 22, 1998
---------------------------------
Steven M. Lewis

   /s/ Christopher J. Murphy, III  Director                                             January 22, 1998
---------------------------------
Christopher J. Murphy, III
</TABLE>

                                       49
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                                                      Page No.
 Exhibit                                                                                                              In This
   No.                                                     Description                                                 Filing
   ---                                                     -----------                                                 ------
<S>             <C>                                                                                                   <C>
   2            (1)  Share Exchange and Reorganization Agreement by and among the Registrant and Burger
                     Services, Inc., Bravokilo, Inc., Bendan Restaurant, Inc., Burger Management of
                     Muskegon, Inc., Burger Management of Fort Wayne, Inc., Best Bagels, Inc., Full Service
                     Dining, Inc., Southwest Dining, Inc., Daniel B. Fitzpatrick, Gerald O. Fitzpatrick,
                     James K. Fitzpatrick, John D. Fitzpatrick, Ezra H. Friedlander, Benjamin Schulman and
                     Michael G. Sosinski dated as of December 17, 1993....................................

   2-B          (2)  Stock Purchase Agreement among the Registrant, Grayling Corporation, T. Garrick
                     Steele, Joseph E. Olin, Andrew P. Murphy, Anita L. Wood, Thomas Miller and Steve
                     Hunter dated as of September 27, 1994 ...............................................

   2-C          (3)  Acquisition Agreement by and among the  Registrant, Bravokilo, Inc., William R.
                     Schonsheck, SHONCO, Inc., SHONCO II, Inc., SHONCO III, Inc., SHONCO IV, Inc., SHONCO
                     V, Inc., SHONCO VI, Inc., SHONCO Six, Inc., SHONCO Seven Management, Inc., SHONCO X,
                     Inc., SHONCO XI, Inc., and SHONCO XII, Inc., dated as of July 13, 1995...............

   2-D          (6)  Asset Purchase Agreement, as amended, dated as of October 30, 1995 by and between the
                     Registrant and Brinker International, Inc. ..........................................

   2-E          (7)  Agreement and Plan of Merger, dated as of February 21, 1996, among the Registrant,
                     BAC, Inc., and Bruegger's Corporation ...............................................

   2-F         (14)  Share Exchange Agreement, by and among Quality Dining, Inc., Bruegger's Corporation,
                     Nordahl L. Brue and Michael J. Dressell, dated as of September 3, 1997...............

   2-G         (15)  Agreement and Plan of Merger, by and among Quality Dining, Inc., Bagel Disposition
                     Corporation and Lethe, LLC, dated as of September 3, 1997............................

   3-A         (10)  (i) Restated Articles of Incorporation of Registrant ................................

               (10)  (ii)  Amendment to Registrant's Restated Articles of Incorporation establishing the
                     Series A Convertible Cumulative Preferred Stock of the Registrant....................

               (10)  (iii)  Amendment to Registrant's Restated Articles of Incorporation establishing the
                     Series B Participating Cumulative Preferred Stock of the Registrant..................

   3-B         (10)  By-Laws of the Registrant, as amended to date .......................................

   4            (8)  Amended and Restated Revolving Credit Agreement, dated as of April 26, 1996,
                     between the Registrant and GAGHC, Inc., as borrowers, and Texas Commerce Bank
                     National Association, as agent, NBD Bank, N.A., LaSalle National Bank,
                     NationsBank, N.A. (South), Sun Trust Bank, Central Florida, N.A., The Northern
                     Trust Company and Key Bank .........................................................
</TABLE> 
                                       50
<PAGE>
 
<TABLE>
<S>     <C>   <C>
4-A     (11)  First Amendment, dated as of November 7, 1996, to Amended and Restated Revolving
              Credit Agreement, dated as of April 26, 1996, between the Registrant, GAGHC,
              Inc., and BF Holding, Inc., as borrowers, and Texas Commerce Bank National
              Association, as agent, NBD Bank, N.A., LaSalle National Bank, NationsBank, N.A.
              (South), Sun Trust Bank, Central Florida, N.A., The Northern Trust Company Key
              Bank.............................................................................

4-B     (12)  Second Amendment dated as of October 9, 1997, to Amended and Restated Revolving
              Credit Agreement, dated as of April 26, 1996, between the Registrant, GAGHC,
              Inc., and BF Holding, Inc., as borrowers, and Texas Commerce Bank National
              Association, as agent, NBD Bank, N.A., LaSalle National Bank, NationsBank, N.A.
              (South), Sun Trust Bank, Central Florida, N.A., The Northern Trust Company Key
              Bank.............................................................................

10-A     (1)  Form of Burger King Franchise Agreement .........................................

10-B     (1)  Form of Chili's Franchise Agreement .............................................

10-C    (13)  Rights Agreement, dated as of March 27, 1997, by and between Quality Dining, Inc.
              and KeyCorp Shareholder Services, Inc., with exhibits ...........................

10-E     (1)  (i) Target Reservation Agreement between Burger King Corporation and the
              Registrant dated December 24, 1993; (ii) Side Letter Agreement to Target
              Reservation Agreement dated December 21, 1993 ...................................

10-F     (1)  Development Agreement between Chili's, Inc. and the Registrant dated June 27,
              1990.............................................................................

10-H          *1997 Stock Option and Incentive Plan of the Registrant..........................

10-I     (9)  * 1993 Stock Option and Incentive Plan, as amended of the Registrant.............

10-J     (1)  *Outside Directors Stock Option Plan of the Registrant...........................

10-K     (1)  Lease Agreement between B.K. Main Street Properties and the Registrant dated
              January 1, 1994 .................................................................

10-L          Schedule of Related Party Leases.................................................

10-M     (1)  Form of Related Party Lease......................................................

10-N          *  Letter Agreement between the Registrant and John C. Firth dated May 29, 1996..

10-O          *  Letter Agreements between the Registrant and William W. Moreton, dated March
                 10, 1997, April 29, 1997 and September 2, 1997................................

10-P          *  Letter Agreement between the Registrant and Patrick J. Barry dated
                 August 30, 1996...............................................................

10-T     (4)  First Amendment dated May 2, 1995 to Development Agreement between Chili's,
              Inc. and the Registrant dated June 27, 1990 .....................................

10-V     (4)  *Employment Agreement between the Registrant and William R. Schonsheck
</TABLE>
                                       51
<PAGE>
 
<TABLE>
<S>             <C>
              dated August 14, 1995.......................................................

10-W     (4)  Non-Competition Agreement between the Registrant and William R. Schonsheck
              dated August 14, 1995 ......................................................

10-X     (4)  Lease Agreement for Farmington Hills #509 between the Registrant and
              William R. Schonsheck dated August 14, 1995.................................

10-Y     (4)  Lease Agreement for Belleville #4814 between the Registrant and William R.
              Schonsheck dated August 14, 1995............................................

10-Z     (4)  Purchase and Sale Agreement between the Registrant and John D. Fitzpatrick
              dated July 10, 1995.........................................................

10-AA    (4)  Target Reservation Agreement between Burger King Corporation and the
              Registrant dated September 15, 1995.........................................

10-AB    (5)  Stock Purchase Agreement between Ezra H. Friedlander, Daniel B. Fitzpatrick
              and James K. Fitzpatrick, as shareholders of Tri-State Construction Co.,
              Inc. and the Registrant dated as of November 1, 1995 .......................

10-AD   (11)  Priority Charter Agreement between the Registrant and Burger Management of
              South Bend #3 Inc., dated September 1, 1994.................................

10-AE   (11)  * Resignation Agreement between the Registrant and Michael G. Sosinski,
                dated as of October 25, 1996..............................................

10-AF   (11)  Lease Agreement between the Registrant and Six Edison Lakes, L.L.C. dated
              September 19, 1996..........................................................

21            Subsidiaries of the Registrant..............................................

23            Written consent of Coopers & Lybrand L.L.P..................................

27            Financial Data Schedule.....................................................
</TABLE>

*    The indicated exhibit is a management contract, compensatory plan or
     arrangement required to be filed by Item 601 of Regulation S-K.

(1)  The copy of this exhibit filed as the same exhibit number to the Company's
     Registration Statement on Form S-1 (Registration No. 33-73826) is
     incorporated herein by reference.

(2)  The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 8-K dated November 23, 1994 is incorporated herein by
     reference.

(3)  The copy of this exhibit filed as Exhibit 2 to the Company's Report on Form
     8-K dated August 28, 1995 is incorporated herein by reference.

(4)  The copy of this exhibit filed as the same exhibit number to the Company's
     Registration Statement on Form S-1 (Registration No. 33-96806) is
     incorporated herein by reference.

                                       52
<PAGE>
 
(5)  The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 10-K for the year ended October 29, 1995 is incorporated
     herein by reference.

(6)  The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 8-K dated January 5, 1996 is incorporated herein by
     reference.

(7)  The copy of this exhibit filed as the same exhibit number to the Company's
     Registration Statement on Form S-4 (Registration No. 333-2050) is
     incorporated herein by reference.

(8)  The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 8-K dated May 1, 1996 is incorporated herein by reference.

(9)  The copy of this exhibit filed as the same exhibit number to the Company's
     Quarterly Report on Form 10-Q for the quarterly period ended May 12, 1996
     is incorporated herein by reference.

(10) The copy of this exhibit filed as the same exhibit number to the Company's
     Registration Statement on Form 8-A filed on April 1, 1997 is incorporated
     herein by reference.

(11) The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 10-K for the year ended October 27, 1996 is incorporated
     herein by reference.

(12) The copy of this exhibit filed as Exhibit 3 to the Company's Report on Form
     8-K dated November 4, 1997 is incorporated herein by reference.

(13) The copy of this exhibit filed as Exhibit 10-AO to the Company's
     Registration Statement on Form 8-A filed on April 1, 1997 is incorporated
     herein by reference.

(14) The copy of this exhibit filed as exhibit number 1 to Amendment No. 5 of
     Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P.
     Schonberg and David T. Austin, dated September 4, 1997, is incorporated
     herein by reference.

(15) The copy of this exhibit filed as exhibit number 2 to Amendment No. 5 of
     Schedule 13D filed by Nordahl L. Brue, Michael J. Dressell, Steven P.
     Schonberg and David T. Austin, dated September 4, 1997, is incorporated
     herein by reference.

                                      53