<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 [FEE REQUIRED] 
     For the fiscal year ended    OCTOBER 27, 1996
                                       OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

              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)
           

   3820 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.   [X]

                                 $167,877,236

Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at December 9, 1996
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").

                                  16,909,609

     Number of shares of Common Stock, without par value, outstanding at
     January 14, 1997

                      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 26, 1997                                     PART III
 
<PAGE>
 
                             QUALITY DINING, INC.
                              Mishawaka, Indiana

              Annual Report to Securities and Exchange Commission
                               October 27, 1996

                                    PART I

ITEM 1.   BUSINESS.

GENERAL

  Quality Dining, Inc. (the "Company") is the owner, operator and franchisor of
Bruegger's(R) Bagel Bakery ("Bruegger's"), currently the largest chain of fresh
bagel bakeries in the United States. The Company also operates four other
distinct restaurant concepts. It owns the Grady's American Grill(R) and Italian
Dining concepts and develops 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 27, 1996, the Company operated and franchised 558 restaurants, including
425 retail bagel bakeries (100 Company-owned and 325 franchised), 42 Grady's
American Grill restaurants, five Spageddies, one Papa Vino's, 63 Burger King
restaurants and 22 Chili's. The Company's fundamental business strategy is to
combine the significant growth potential of Bruegger's with the Company's proven
operating skills and the strong cash flow of its other restaurant operations.

  Since its founding in 1981, the Company has grown from a two-unit Burger King
franchisee to a leading multi-unit restaurant operator with $237.6 million in
total revenues in the fiscal year ended October 27, 1996. The Company has
achieved this growth while remaining consistently profitable in each year of its
operation. Management attributes the Company's growth and financial success to
its affiliation with quality franchisors and franchisees, the operation of well-
positioned, value-based concepts, a focus on total customer satisfaction and a
hands-on management style. 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 June 7, 1996, the Company acquired Bruegger's Corporation, the owner,
operator and franchisor of Bruegger's Bagel Bakeries.  Pursuant to the terms of
the merger agreement, Bruegger's Corporation became a wholly-owned subsidiary of
Quality Dining, Inc.

  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.
<PAGE>
 
  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 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.

  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 objective is to continue to expand its business in a manner
focusing on total customer satisfaction, while maximizing the value of the
Company for its shareholders.  The primary objective is focused on the growth
and expansion of the Bruegger's brand through aggressive development and broad-
based marketing and sales initiatives. Management believes that the Company has
the expertise required to develop the Bruegger's brand and execute an aggressive
expansion plan.  Since 1981, the Company has grown from a two-unit Burger King
franchisee to a leading multi-concept restaurant operator with 558 owned and
franchised units at October 27, 1996.  Management attributes the Company's
growth and financial success to its operating philosophy, which is shared by all
of the Company's concepts and 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.

                                      -2-
<PAGE>
 
  Quality Franchise Partners.  The Company has historically sought franchisors
and franchisees 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 develop the Bruegger's brand through aggressive
expansion.   The Company's primary objective is to establish the Bruegger's
brand as a leading, recognized brand in the bagel industry.  At the end of
fiscal 1996, the Company operated and franchised 425 retail bagel bakeries
system-wide (100 Company-owned and 325 franchised).  The Company anticipates
opening 50 to 100 Company-owned bakeries in fiscal 1997.

  The Company's expansion strategy for Bruegger's is focused on opening bakeries
in new markets and enhancing market penetration in existing markets.  As of
December 31, 1996, the Company had executed development agreements pursuant to
which franchisees have paid, or committed to pay, franchise or development fees
with respect to 502 bakeries to be opened by the year 2002.  Such franchisees
must open an aggregate of 802 bakeries by the year 2002 to retain territorial
exclusivity.  As of December 31, 1996, 136 of these bakeries had been opened by
such franchisees. In connection with their commitments, the Company has granted
franchisees exclusive development rights to specific markets.

  The Company has incurred significant start-up costs associated with owning
Bruegger's Bagel Bakeries and establishing the infrastructure necessary to
manage the development of owned bakeries, to institutionalize procedures and
systems, and to organize and implement an active franchising program.  The
Company expects that these costs will continue to be significant as the Company
continues to implement its aggressive expansion plans for Bruegger's.  In
addition, mature Bruegger's units (those open two or more years) typically
realize higher sales volumes than new units. Management believes that the
aggressive development of Bruegger's will cause the average age of Bruegger's
units to decline, which may have an adverse effect on average per unit sales.

  During fiscal 1996, the Company added 88 retail bagel bakeries through
internal development and acquisition. The Company also added one new unit in its
Italian Dining Division, four new Burger King restaurants, 42 Grady's American
Grill restaurants and four additional Chili's restaurants.

  In addition to the 100 Company-owned retail bagel bakeries, at the end of
fiscal 1996, the Company operated 42 Grady's American Grill restaurants, five
Spageddies, one Papa Vino's, 63 Burger King restaurants and 22 Chili's
restaurants.  During fiscal 1997, the Company estimates it will add one or two
additional Grady's American Grill restaurants, one or two Papa Vino's, three to
five Burger King restaurants and three to five Chili's restaurants.

  The Company generally desires to own the real estate on which its Grady's
American Grill, Italian Dining, Burger King and Chili's restaurants are located.
Since Bruegger's Bagel Bakeries are not typically free-standing facilities, the
Company generally will not purchase either the land or the building.

                                      -3-
<PAGE>
 
  The actual amount of the Company's total investment to open new restaurants
and bakeries 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 or bakery is to be opened.

  The Company's ability to manage the significantly larger and more diverse
operations resulting from its recent and anticipated growth will be essential to
its success.  The Company's business historically has focused primarily on the
development and operation of Burger King and Chili's restaurants.  The
Bruegger's, Grady's American Grill and Italian Dining concepts have varying
degrees of name recognition.  The retail bagel segment represents an emerging
quick-service restaurant concept, the long-term appeal and development potential
of which have not yet been fully established. Although the Company opened its
first Spageddies in 1994, the Company's Italian Dining concept is not yet proven
and is still in the developmental stage.  In addition, the Company's
acquisitions of Bruegger's, 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. Moreover, the Company is now a
franchisor of the Bruegger's concept, which is a new role for the Company.
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.  As a
result of the foregoing factors, there can be no assurance that the Company's
expansion plans can be achieved, that such expansion will not result in reduced
sales at existing Company restaurants located near newly opened restaurants,
that the perceived benefits of the acquisitions will be realized or that each of
the new restaurant concepts will be operated profitably.


BRUEGGER'S BAGEL BAKERIES

  General.  Bruegger's is currently the largest chain of fresh bagel bakeries in
the United States.  Bruegger's differentiates itself from its competitors by
providing customers with bagels baked in small batches on site throughout the
day using fresh, not frozen, dough.  In order to provide its customers with a
consistently high-quality product and to minimize transportation and production
costs, Bruegger's is vertically integrated.  Bruegger's units are served by
strategically located Company or franchisee-owned commissaries that produce
fresh dough and distribute other products to Bruegger's bakeries on a daily
basis.

  Menu.  Each Bruegger's operates from a standard menu designed by the Company.
A variety of bagel flavors are baked throughout the day in order to ensure the
customer a wide selection of fresh bagels.  Bruegger's  also offers a wide array
of deli-type sandwiches, cream cheeses, soups, desserts and coffee and other
beverages.  Bagels are prepared utilizing the traditional old world Eastern
European process of boiling and baking, which produces a bagel with a smooth
crusty exterior and a soft chewy center.

  Marketing.  The Company maintains a general advertising fund for national and
regional advertising.  Franchisees are generally required to spend 4% of sales
on advertising, one-half of which must be contributed to the general advertising
fund.  The fund collects these fees and disburses the funds for costs associated
with maintaining, administering and preparing advertising, marketing, public
relations and promotional programs for the Bruegger's concept.


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 all of the 42 Grady's American Grill restaurants now owned
and operated by the Company. In July 1996, the Company began implementing a
business plan emphasizing improved food quality and service that is expected to
improve operating performance.

                                      -4-
<PAGE>
 
  Menu.  The Grady's American Grill menu features signature prime rib, high-
quality steaks, daily servings of fresh seafood, inviting salads, sandwiches,
soups and legendary desserts.  Entrees emphasize on-premise scratch preparation
in a classic American style.

  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 and radio, with
total expenditures estimated to range between 2% and 6% 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 low prices, all enjoyed in a festive and
energized atmosphere.  The Company believes its Italian Dining Division is well
positioned to take advantage of several growing trends, including the popularity
of casual dining, the consumer appeal of Italian foods and the increasing
consumer desire for value.  As of October 27, 1996, five Spageddies and one 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 pizza, 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.  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 and radio, with total expenditures
estimated to range between 2% and 4% of the sales for these restaurants.


BURGER KING RESTAURANTS

  General.  Headquartered in Miami, Florida, Burger King Corporation is an
indirect wholly-owned subsidiary of Grand Metropolitan PLC, London, England.
Burger King Corporation has been franchising Burger King restaurants since 1954
and has since expanded to locations in all 50 states, the District of Columbia,
and 57 foreign countries and international territories.  As of November 30,
1996, there were 8,807 Burger King restaurants in operation worldwide comprised
of 830 company-owned restaurants and 7,977 franchised restaurants.

  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.

                                      -5-
<PAGE>
 
CHILI'S GRILL & BAR

  General.  The Chili's restaurant concept is owned by Brinker, a publicly-held
corporation headquartered in Dallas, Texas.  As of December 31, 1996, there were
520 Chili's restaurants system-wide, comprised of 383 company-owned and 137
joint ventured or franchised restaurants.  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.

  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:  Bruegger's(R), 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,
franchising, site selection and development support services for each of its
operating subsidiaries.

  Management.  During the past two fiscal years, the Company has added
significant management resources to coordinate and direct the Company's
strategic growth.  The Company believes that these additions to its management
team have enhanced its ability to manage the larger and more diverse operations
resulting from its current and planned growth.

  Each of the Company's restaurant concepts is managed by an experienced
management team.  The Company's Bruegger's business is managed by the Chief
Executive Officer and Chief Operating Officer of Bruegger's Corporation through
a regional management structure.  The Company's Burger King business is also
managed by geographic region, 

                                      -6-
<PAGE>
 
with a Director of Operations located in each specific market. Each Director of
Operations reports to the Chief Operating Officer of the Company's Burger King
Division.  The Company's Chili's and Italian Dining concepts are each managed by
a Director of Operations who reports to the Senior Vice President - Full Service
Dining Division.  For the Company's Grady's American Grill concept, two regional
Directors report 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
and the Senior Vice President - Director of Development, 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 management.

  Information Technology Systems.  Financial controls are maintained through a
centralized, computerized, 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
technology is 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.  During fiscal 1996, the Company completed
the process of upgrading the financial reporting systems at its Burger King
restaurants and other components of its centralized computer system which will
allow the use of fully automated financial reporting for all of the Company's
restaurant concepts, including Bruegger's.  As a result of upgrades completed in
fiscal 1995 and fiscal 1996, and the acquisitions of Bruegger's and Grady's
American Grill in fiscal 1996, the Company has undergone a significant
modification of its financial reporting systems.  The Company anticipates that
ongoing modifications and upgrades will be required during fiscal 1997, the cost
of which the Company estimates will be approximately $1.5 to $2.5 million.

  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 Company requires that Bruegger's managers, franchise operators and bakers,
as well as commissary managers, participate in the Bruegger's training program,
although the Company permits certain of its franchisees to operate their own
training program instead.  The training program consists of five days of
operational basics and two weeks of supervised on-the-job training and focuses
on Bruegger's philosophies, policies and operating procedures.  The Company
offers the training program on an as-needed basis and requires that such
training be provided before a manager, operator or baker assumes such position.
In addition, each Bruegger's unit requires its bakers to complete a specialized
training program focused on ensuring the consistent execution of the baking
process.

  The training program for the Company's Burger King restaurant managers
features an intensive four-week, hands-on training period followed by two weeks
of classroom instruction and simulated restaurant management activities. 

                                      -7-
<PAGE>
 
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 at Burger King Corporation's regional and
national training centers and other training/development programs, which the
Company's senior 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, 13-week
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 Bruegger's, Grady's
American Grill and Italian Dining concepts are managed by dedicated personnel
within each concept.  The Company's purchasing and procurement departments
generally contract 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 senior management.

  The purchasing needs of the Company's Bruegger's Bakeries are primarily
satisfied by the Company-owned commissaries.  Each commissary produces fresh
bagel dough daily and delivers it, along with Bruegger's branded cream cheese
and coffee and certain paper products, to the bakeries.  Other items required in
the operation of Bruegger's units are purchased by the bakery manager pursuant
to system-wide specifications.

  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

  Bruegger's.  As of October 27, 1996, the Company was a party to franchise and
development agreements with more than 35 franchisees, who were operating 325
franchised bakeries.  Generally, each franchisee has been awarded an exclusive
territory in which to operate.  As of December 31, 1996, the Company had
executed development agreements pursuant to which franchisees have paid, or
committed to pay, franchise or development fees with respect to 502 bakeries to
be opened by the year 2002.  Such franchisees must open an aggregate of 802
bakeries by the year 2002 to retain territorial exclusivity.  The Original
Franchisees (as defined below) are not obligated to build additional bakeries,
but have advised the Company that they intend to do so.  The Company believes
that its strategy of working with a limited number of capable franchisees is the
best strategy to permit rapid expansion and a high degree of system
responsiveness to market developments and Bruegger's-related developments.

  The Company has traditionally evaluated potential Bruegger's franchisees on
the basis of, among other things, their business background, restaurant
operating experience and financial resources.  In particular, the Company has
focused on whether the franchisee has experience in multi-unit operations, has
proven ability to execute an aggressive growth plan while maintaining the
highest standards of quality and has the capital resources to develop additional
bakeries.

  Expansion plans for the Bruegger's concept are dependent in part upon the
ability of the Company's existing Bruegger's franchisees to develop additional
bakeries.  Moreover, the Company will realize a portion of its revenues from
continuing royalty payments from its Bruegger's franchisees and such revenues
will be dependent upon the ability of its franchisees to operate and develop
their bakeries and to promote and deliver the Bruegger's concept and its
reputation for quality and value.  Although the Bruegger's franchisees have been
selected utilizing established criteria, 

                                      -8-
<PAGE>
 
there can be no assurance that such franchisees will have the business ability
or access to financial resources necessary to successfully develop or operate
bakeries in their franchise areas in a manner consistent with the Bruegger's
concept and standards.  Should its franchisees encounter business or operational
difficulties, the Company's revenues would be affected and it could negatively
impact the Bruegger's brand and the ability to sell new franchises if the
Company desires to do so.

  If the Company's Bruegger's franchisees are to continue their aggressive
development of Bruegger's Bagel Bakeries, they must secure significant
additional financing.  The Company is considering various alternative programs
to provide necessary financing to certain Bruegger's franchisees to enable them
to execute their development plans. Any such program will likely require the
Company to secure additional debt or equity funds.  Although the Company
believes that it will be able to implement such a program on terms acceptable to
the Company and such franchisees, there can be no assurance thereof.  In the
absence of an acceptable program, the continued development of new bakeries by
the Company's Bruegger's franchisees could be adversely affected.

  During fiscal 1996, a company owned by a Director and officer of the Company
acquired a number of Bruegger's Bagel Bakeries from independent franchisees.
The Company anticipates that these bakeries will be sold to other unrelated
franchisees of Bruegger's in fiscal 1997.

  The Company enters into development agreements with each of its franchisees
pursuant to which it grants each franchisee the exclusive right to develop a
minimum number of bakeries within a specified territory.  Under the current form
of development agreement, a franchisee pays a development fee upon the execution
of the development agreement in an amount based on the development schedule
pursuant to the agreement.  Under the current form of franchise agreement, a
franchisee also will pay an initial franchise fee of $35,000 upon the execution
of each franchise agreement for each bakery opened.  The Company intends to use
the current form of development and franchise agreements with each franchisee
after November 1996; provided, however, that franchisees with existing
development agreements which provide for an earlier form of franchise agreement
will continue to execute such earlier form.  Prior to the adoption of the
current form of development and franchise agreements, each franchisee paid
franchise fees that ranged from $0 to $25,000 depending upon a number of
factors, such as whether it had subscribed to purchase shares of Bruegger's
Corporation preferred stock and whether it exceeded its development schedule.
As a result of the Company's acquisition of Bruegger's Corporation, no shares of
Bruegger's Corporation preferred stock remain outstanding and no subscriptions
to purchase such shares remain in effect.

  The Company's Bruegger's franchise agreements generally provide for a term of
20 years and payment of a royalty fee of 5% of  sales.  In addition, the Company
generally has required the franchisee to spend 4% of sales on advertising, 2% of
which must be contributed to a general advertising fund that is used to promote
the Bruegger's concept on a national and regional level and the remaining 2% of
which must be spent on local store marketing.  The current form of franchise
agreement requires the franchisees to spend 2% of sales on local store marketing
and make a contribution of 4% of sales to the general advertising fund which the
Company may increase by  1/4% per year (to a maximum of 8%).

  The Company has the right to terminate any franchise agreement for a variety
of reasons, including a franchisee's failure to make payments when due or
failure to adhere to Bruegger's policies and standards.  Many state franchise
laws limit the ability of a franchisor to terminate or refuse to renew a
franchise agreement.

  The Company furnishes each franchisee with assistance in selecting sites and
developing bakeries.  Each franchisee is responsible for selecting the location
of its bakeries, but it must obtain the Company's approval of each location
based on the accessibility and visibility of the site and targeted demographic
factors, including population density, income, age and traffic.

  Two Directors of the Company and the brother of one of such Directors are the
principal shareholders of certain franchisees (the "Original Franchisees") that
operate certain Bruegger's Bagel Bakeries.  As of October 27, 1996, the 

                                      -9-
<PAGE>
 
Original Franchisees owned and operated 152 franchised bakeries in New England,
Iowa, Minnesota, New York, North Carolina and Pennsylvania.  Prior to 1993, all
Bruegger's bakeries were operated by the Original Franchisees.

  The Original Franchisees have been awarded exclusive territories, but are not
obligated to develop a minimum number of bakeries.  The franchise agreements
with the Original Franchisees differ from the standard Bruegger's franchise
agreements in that the Original Franchisees are not required to pay initial
franchise or development fees and pay franchise royalties of 4% of sales.

  All franchisees are required to operate their bakeries in compliance with
Bruegger's policies, standards and specifications, including matters such as
menu items, ingredients, materials, supplies, services, fixtures, furnishings,
decor and signs.  Each franchisee must serve items from an approved menu, but
has the full discretion to determine the prices to be charged to its customers.

  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 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 27, 1996,
the Company had developed 16 Burger King restaurants under the Burger King
Agreement.

  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.

  To maintain its rights under the Burger King Agreement, by December 31, 1999,
the Company must have developed a total of 18 Burger King restaurants under such
agreement, which includes the 16 Burger King restaurants already developed under
the Burger King Agreement as of October 27, 1996.  Although the Company has the
right to develop 18 Burger King restaurants, the Company also has the right  to
terminate the Burger King Agreement since it had developed at least 10 Burger
King restaurants prior to December 31, 1996.  In addition, the Company has the
right to develop four additional Burger King restaurants pursuant to a target
reservation agreement acquired by the Company in the purchase of the SHONCO
Companies.

  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.

  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.  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 

                                      -10-
<PAGE>
 
materials.  Each franchise agreement prohibits the Company from transferring a
franchise without the prior approval of Burger King Corporation.

  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 27, 1996, the
Company operated 22 Chili's.

  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.

                                      -11-
<PAGE>
 
  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.


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.  The Company's Bruegger's concept competes
against local and regional bagel shops, regional and national deli and lunch
restaurants, supermarkets and convenience stores.  The Company also faces
competition from regional and national bagel chains, including Einstein/Noah
Bagel Corp., Manhattan Bagel Company, Inc., Chesapeake Bagels, New York Bagel
Enterprises, Inc. and Dunkin' Donuts.  McDonald's, Wendy's, Hardee's and "double
drive-thru" 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, 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.

                                      -12-
<PAGE>
 
  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.

  Because of its franchise operations for Bruegger's, the Company is subject to
the Trade Regulation Rule of the Federal Trade Commission titled "Disclosure
Requirements and Prohibitions Concerning Franchising and Business Opportunity
Ventures" and state and local laws and regulations that govern the offer, sale
and termination of franchises and the refusal to renew franchises.  Continued
compliance with this broad federal, state and local regulatory network is
essential and costly and the failure to comply with such regulations may have an
adverse effect on the Company and its franchisees.  Violation of franchising
laws and/or state laws and regulations regulating substantive aspects of doing
business in a particular state could limit the Company's ability to sell
franchises or subject the Company and its affiliates to rescission offers,
monetary damages, penalties, imprisonment and/or injunctive proceedings.  In
addition, under court decisions in certain states absolute vicarious liability
may be imposed upon franchisors based upon claims made against franchisees.
While the Company believes that it maintains adequate insurance coverage for
such claims, there can be no assurance that such insurance will be sufficient to
cover potential claims against the Company.

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


EMPLOYEES

  As of October 27, 1996, the Company employed approximately 10,000 persons.  Of
those employees, approximately 150 hold management or administrative positions,
approximately 800 are involved in restaurant management, and the remainder are
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 27, 1996, 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 five
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 27, 1996, and expects to own most of its new Burger
King restaurants.

                                      -13-
<PAGE>
 
  As of October 27, 1996, the Company owned 9 of its Chili's restaurants and
five of its Italian Dining restaurants. The Company leased its other 13 Chili's
restaurants and one Italian Dining restaurant from unrelated parties.

  As of October 27, 1996, one of the Company-owned Bruegger's Bagel Bakeries was
leased from an entity with which two of the Company's Directors are affiliated.
See ITEM 13, "Certain Relationships and Related Transactions." The Company also
leased 99 Company-owned Bruegger's Bagel Bakeries from unrelated 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.

  As of October 27, 1996, the Company leased 19 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 22 Grady's American Grill
restaurants were owned by the Company.

  The following table sets forth, as of October 27, 1996, the 23 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  BRUEGGER'S  AMERICAN          
                             KING   CHILI'S  DINING    BAKERIES    GRILL    TOTAL   
                            ------  -------  -------  ----------  --------  -----   
                                                                                    
          <S>               <C>     <C>      <C>      <C>         <C>       <C>    
          Alabama.........                                               1      1   
          Arkansas........                                               1      1   
          Colorado........                                               3      3   
          Delaware........                1                                     1   
          Florida.........                                               6      6   
          Georgia.........                                               5      5   
          Illinois........                                    19         1     20   
          Indiana.........      32        4        2           4               42   
          Louisiana.......                                               1      1   
          Massachusetts...                                     9                9   
          Michigan........      31        5        2          10         1     49   
          Mississippi.....                                               1      1   
          New Hampshire...                                     4                4   
          New Jersey......                4                    6               10   
          New Mexico......                                               1      1   
          North Carolina..                                               3      3   
          Ohio............                2        2          43         1     48   
          Oklahoma........                                               1      1   
          Pennsylvania....                6                    4               10   
          Tennessee.......                                               5      5   
          Texas...........                                              10     10   
          Vermont.........                                     1                1   
          Virginia........                                               1      1   
                                --       --       --         ---        --    ---   
                                63       22        6         100        42    233   
                            ======       ==  =======         ===        ==    ===    
</TABLE>

  The Company's headquarters facility, a 9,700 square-foot office building
constructed in 1988, is located in Mishawaka, Indiana, and is leased from an
affiliated partnership.  A new headquarters facility is currently under
construction and is expected to be occupied in March 1997.  The new 53,000
square-foot headquarters office building is located in Mishawaka, Indiana, and
is leased from a limited liability company in which the Company has a 50%
interest.  The Company's existing headquarters facility has been subleased to a
local financial institution for a term extending through the expiration of the
Company's lease.  The Company leases office space in Philadelphia, 

                                      -14-
<PAGE>
 
Pennsylvania, Phoenix, Arizona, Burlington, Vermont and Cleveland, Ohio for
regional management of its Bruegger's concept. 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.

  Big D Bagels, Inc. ("Big D"), a wholly-owned subsidiary of Ciatti's, Inc.
("Ciatti's"), is a franchisee of Bruegger's. Ciatti's is a publicly-held
corporation.  Ciatti's filed a Registration Statement with the Securities and
Exchange Commission pursuant to which it proposed to commence a rights offering
to its existing shareholders to raise approximately $4.4 million in additional
equity (the "Proposed Offering").  When Bruegger's learned of the Proposed
Offering, it notified Ciatti's that the Development and Franchise Agreements
existing between Bruegger's Franchise Corporation, a wholly-owned subsidiary of
Bruegger's Corporation, and Big D (the "Franchise Documents") required Big D and
Ciatti's to obtain the consent of  Bruegger's Franchise Corporation prior to
proceeding with the Proposed Offering.  Ciatti's and Big D maintained that the
Franchise Documents did not require such consent, and they were unwilling to
request such consent.  On November 8, 1996, Ciatti's and Big D filed a Complaint
for Declaratory and Injunctive Relief in the United States District Court for
the District of Minnesota, naming Quality Dining, Inc. and Bruegger's Franchise
Corporation as defendants and requesting the Court to determine that the
Franchise Documents do not require them to obtain consent for the Proposed
Offering.  The Company and Bruegger's Franchise Corporation have requested the
Court to determine that the Franchise Documents require Ciatti's and Big D to
obtain such consent before proceeding with the Proposed Offering.  On December
20, 1996, Ciatti's and Big D filed a Motion for Summary Judgment and Declaratory
Relief.  Bruegger's Franchise Corporation is conducting certain discovery in
advance of preparing its response to the pending Motion for Summary Judgment and
Declaratory Relief.  Currently, neither Ciatti's nor Big D has sought any
damages in this matter.  Management does not expect that the 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 1996 fiscal year.

                                      -15-
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
         Name            Age                            Position
 
<S>                      <C>  <C> 
 
Daniel B. Fitzpatrick     39  Chairman of the Board, President and Chief Executive Officer
 
John C. Firth             39  Senior Vice President, General Counsel and Secretary
 
James K. Fitzpatrick      41  Senior Vice President, Chief Administrative Officer, Chief
                              Development Officer and Director
 
William R. Schonsheck     46  Senior Vice President, Chief Operating Officer of Burger 
                              King Division and Director

Gerald O. Fitzpatrick     36  Senior Vice President, Burger King Division
 
W. Clark Knippers         35  Senior Vice President - Director of Development
 
Scott C. Smith            41  Senior Vice President - Full Service Dining Division

David M. Findlay          35  Vice President and Treasurer

Bruce A. Phillips         41  Vice President - Bruegger's Advertising and Marketing

Marti'n L. Miranda        33  Vice President, Controller and Assistant Secretary

Michael J. Wargo          36  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 23 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.

  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.  Since 1985, he has represented the Company as outside legal
counsel with responsibility for the Company's legal affairs.

  James K. Fitzpatrick serves as Senior Vice President, Chief Administrative
Officer and Chief Development Officer. He has served as Senior Vice President
and Chief Development Officer of the Company since August 1995.  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 25 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 King
system, most recently as a franchisee in Detroit, Michigan.  Pursuant to an
employment agreement between the 

                                      -16-
<PAGE>
 
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 28 years of experience in the Burger King business.

  Gerald O. Fitzpatrick has served as the Vice President or Senior Vice
President of the Company in charge of the Company's South Bend, Indiana 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 17
years of experience in the restaurant business.

  W. Clark Knippers joined the Company in October 1996 and serves as Senior Vice
President - Director of Development.  From October 1994 to October 1996, he was
President of Bread Garden Restaurants, Inc.  Prior to October 1994, he was Vice
President of Development and Real Estate for Brinker, where he served for nearly
10 years.

  Scott C. Smith joined the Company in May 1994 and has served as Vice President
or Senior Vice President of the Company in charge of the Company's Chili's and
Italian Dining operations since June 1994.  Prior to joining the Company, he
served as director of franchise operations for the Chili's and Spageddies
divisions of Brinker.  He has 22 years of experience in the restaurant business.

  David M. Findlay has served as Vice President and Treasurer since October
1996.  He joined the Company in May 1995 as Vice President - Director of
Planning and Investor Relations.  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.

  Bruce A. Phillips serves as the Company's Vice President - Bruegger's
Advertising and Marketing.  He joined the Company in May 1994  as Vice President
in charge of the Company's Bruegger's Bakeries operations.  Prior to joining the
Company, he served as a marketing manager and an operations manager for Burger
King Corporation.  He has over eight years of experience in the restaurant
business.

  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.  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 13 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 1997 Annual Meeting of
Shareholders.)

                                      -17-
<PAGE>
 
                                    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 14, 1997, there were 287 holders
of record and approximately 4,500 beneficial owners.

<TABLE>
<CAPTION>
                     Calendar 1996                 Calendar 1995
                      High      Low                 High      Low
                  --------------------          --------------------
<S>               <C>       <C>                 <C>       <C>
First Quarter      $ 31.250  $ 19.750            $ 12.625  $ 11.625
Second Quarter       39.500    26.500              16.375    12.188
Third Quarter        33.500    24.563              21.500    15.750
Fourth Quarter       28.625    16.750              26.875    18.875
</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
business and does not anticipate paying cash dividends in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, results of operations, capital requirements, the financial condition
of the Company and general business conditions.  The Company's revolving credit
agreement limits the payment of cash dividends and other distributions to an
aggregate amount not to exceed, for a given fiscal year, 40% of the Company's
consolidated net income for the immediately preceding fiscal year.

  No unregistered equity securities were sold by the Company during fiscal 1996.

                                     -18-

<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA.
 
<TABLE>
<CAPTION>
QUALITY DINING, INC.
SELECTED FINANCIAL DATA
(In thousands, except unit and per share data)  
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   Fiscal Year Ended (1)
                                                            OCTOBER 27,   October 29,   October 30,   October 31,   October 25,
                                                               1996          1995          1994          1993          1992
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>           <C>           <C>           <C> 
INCOME STATEMENT DATA(2):
Revenues:
Restaurant sales:
  Bruegger's Bagel Bakery                                    $ 25,967      $  5,270       $   191       $     -       $     -
  Grady's American Grill                                       85,101             -             -             -             -
  Italian Dining Division                                       8,388         4,741           174             -             -
  Burger King                                                  70,987        57,013        49,716        49,032        43,762
  Chili's Grill & Bar                                          41,913        38,267        14,286         9,963         4,625
-----------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales                                        232,356       105,291        64,367        58,995        48,387
  Franchise related revenue                                     5,274             -             -             -             -
-----------------------------------------------------------------------------------------------------------------------------------
Total revenues                                                237,630       105,291        64,367        58,995        48,387
-----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
  Restaurant operating expenses:
    Food and beverage                                          72,201        31,176        18,576        16,465        13,168
    Payroll and benefits                                       66,176        27,191        16,190        14,830        12,193
    Depreciation and amortization                              11,635         5,109         2,610         2,376         2,044
    Other operating expenses                                   52,452        24,057        15,351        15,065        12,516
----------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses                           202,464        87,533        52,727        48,736        39,921
  General and administrative                                   12,047         5,706         4,065         3,543         3,087
  Consulting fee                                                    -             -             -           600             -
  Amortization of intangibles                                   2,537           682            83            83             -
  Restructuring and integration costs                           9,938             -             -             -             -
-----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses                                      226,986        93,921        56,875        52,962        43,008
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (3)                                           10,644        11,370         7,492         6,033         5,379
-----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
  Interest expense                                             (6,340)       (2,699)       (1,314)       (1,673)       (1,226)
  Gain (loss) on sale of property and equipment                     4           343           (59)            2             -
  Interest income                                                 206           127           155           165           169
  Other income (expense), net                                     154           (12)          (14)            -             -
-----------------------------------------------------------------------------------------------------------------------------------
Total other expense                                            (5,976)       (2,241)       (1,232)       (1,506)       (1,057)
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                      4,668         9,129         6,260         4,527         4,322
Income taxes                                                    1,998         3,240         2,332             -             -
-----------------------------------------------------------------------------------------------------------------------------------
Net income                                                   $  2,670      $  5,889       $ 3,928       $ 4,527       $ 4,322
-----------------------------------------------------------------------------------------------------------------------------------
Net income per share                                            $0.23         $0.85
-------------------------------------------------------------------------------------
Weighted average shares outstanding                            11,855         6,925
-------------------------------------------------------------------------------------
Pro forma income data:
  Net income as reported                                                                  $ 3,928       $ 4,527       $ 4,322
  Pro forma provision for income taxes (4)                                                    512         1,675         1,599
-----------------------------------------------------------------------------------------------------------------------------------
  Pro forma net income                                                                    $ 3,416       $ 2,852       $ 2,723
-----------------------------------------------------------------------------------------------------------------------------------
  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)                                                       5,801         4,438
-----------------------------------------------------------------------------------------------------------------
 
RESTAURANT DATA:
Units open at end of period:
  Bruegger's Bagel Bakery Division:
    Company-owned                                                 100            12              3             -            -
    Franchised                                                    325             -              -             -            -
  Grady's American Grill                                           42             -              -             -            -
  Italian Dining Division                                           6             5              1             -            -
  Burger King                                                      63            59             48            44           44
  Chili's Grill & Bar                                              22            18              8             4            2
-----------------------------------------------------------------------------------------------------------------------------------
    Totals                                                        558            94             60            48           46
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                     -19-
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                                         <C>            <C>            <C>           <C>           <C>  
BALANCE SHEET DATA:
  Working capital deficiency                                 $ (1,387)     $ (1,826)      $(1,894)      $  (888)      $  (751)
  Total assets                                                388,014        99,247        43,273        24,946        22,671
  Long-term debt, capitalized lease
     and non-competition obligations                           85,046        14,298         7,492        16,621        15,666
  Total stockholders' equity                                  269,123        71,401        26,582         3,761         3,014
</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 income statement data include the operations of Bruegger's
     Corporation from June 7, 1996; 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 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. See Note 2 to the consolidated
     financial statements.
(5)  See Note 2 to the consolidated financial statements.


                                     -20-
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

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.

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------------
                                                                               Fiscal Year Ended
                                                                 OCTOBER 27,      October 29,     October 30,
                                                                    1996             1995            1994
----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>            <C>                <C>  
Revenues:
Restaurant sales:
  Bruegger's Bagel Bakery                                            10.9%            5.0%             0.3%
  Grady's American Grill                                             35.8               -                -
  Italian Dining Division                                             3.5             4.5              0.3
  Burger King                                                        29.9            54.2             77.2
  Chili's Grill & Bar                                                17.7            36.3             22.2
----------------------------------------------------------------------------------------------------------------------
Total restaurant sales                                               97.8           100.0            100.0
  Franchise related revenue                                           2.2               -                -
---------------------------------------------------------------------------------------------------------------------- 
Total revenues                                                      100.0           100.0            100.0
---------------------------------------------------------------------------------------------------------------------- 
Operating expenses:
  Restaurant operating expenses (as % of restaurant sales):
    Food and beverage                                                31.1            29.6             28.9
    Payroll and benefits                                             28.5            25.8             25.1
    Depreciation and amortization                                     5.0             4.8              4.0
    Other operating expenses                                         22.5            22.9             23.9
----------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses                                  87.1            83.1             81.9
  General and administrative                                          5.1             5.4              6.3
  Amortization of intangibles                                         1.1             0.7              0.1
  Restructuring and integration costs                                 4.2               -                -
----------------------------------------------------------------------------------------------------------------------
Total operating expenses                                             95.5            89.2             88.3
----------------------------------------------------------------------------------------------------------------------
Operating income                                                      4.5            10.8             11.7
----------------------------------------------------------------------------------------------------------------------
Other income (expense):
  Interest expense                                                   (2.7)           (2.5)            (2.1)
  Gain (loss) on sale of property and equipment                        -              0.3             (0.1)
  Interest income                                                     0.1             0.1              0.2
  Other income                                                        0.1               -                -
----------------------------------------------------------------------------------------------------------------------
Total other expense, net                                             (2.5)           (2.1)            (2.0)
----------------------------------------------------------------------------------------------------------------------
Income before income taxes                                            2.0             8.7              9.7
Income taxes                                                          0.9             3.1              3.6
----------------------------------------------------------------------------------------------------------------------
Net income                                                            1.1%            5.6%             6.1%
----------------------------------------------------------------------------------------------------------------------
Pro forma income data:
  Net income as reported                                                                               6.1%
  Pro forma provision for income taxes                                                                 0.8
---------------------------------------------------------------------------------------------------------------------
  Pro forma net income                                                                                 5.3%
----------------------------------------------------------------------------------------------------------------------
</TABLE>

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

Total revenues reached $237.6 million in fiscal 1996, an increase of 126%
compared to $105.3 million reported in fiscal 1995. In addition to restaurant
sales, total revenues in fiscal 1996 include $5.3 million 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.


                                     -21-
<PAGE>
 
Restaurant sales in fiscal 1996 increased 121% to $232.4 million, compared to
$105.3 million 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 $202.5 million in fiscal 1996, compared
to $87.5 million 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 $72.2 million, or 31.1% of total restaurant
sales in fiscal 1996, compared to $31.2 million 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 $66.2 million in fiscal 1996, compared to prior-year
levels of $27.2 million. 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 $6.5 million to $11.6 million 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, due to newly opened
units in the fiscal year.

Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $52.5 million in fiscal 1996 compared
to $24.1 million 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 includes corporate and district
management costs, were $12.0 million in fiscal 1996, compared to $5.7 million 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 $2.5 million in fiscal 1996, compared to $0.7
million 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 ($8.0 million) and the Grady's American Grill concept and
restaurants and the Spageddies Italian Kitchen concept ($1.9 million). 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 $6.0 million as part
of the cost of the acquisition for facility closures, 

                                     -22-
<PAGE>
 
restaurant remodeling and relocation and severance packages for personnel.
Through fiscal 1996, $4.9 million of these costs have been incurred, of which
$3.5 million were cash payments and $1.4 million were non-cash charges,
primarily for the write down of assets. The Company expects to complete these
actions in fiscal 1997. At October 27, 1996, $9.0 million related to the
Bruegger's integration costs remained in accrued liabilities. The Grady's
American Grill and Spageddies charge represents the integration of computer
systems, employee transition costs, recruitment and relocation costs, and legal
and professional fees. At October 27, 1996, substantially all costs related to
the Grady's American Grill and Spageddies charge had been incurred.

Operating income was $10.6 million in fiscal 1996 compared to $11.4 million in
fiscal 1995. The special charges noted above were the primary reason for the
decline in operating income. Excluding the special charges, operating income
would have increased 81% in fiscal 1996 to $20.6 million, primarily as a result
of increased revenues from acquisitions and new store openings.

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 $2.0 million from $3.2 million 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 $2.7 million compared to $5.9 million 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.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

Restaurant sales in fiscal 1995 were $105.3 million, an increase of 64% over
restaurant sales of $64.4 million in fiscal 1994. This increase was primarily
attributable to sales generated by restaurants operating in fiscal 1995 that
were not operating during fiscal 1994. New restaurants open at the conclusion of
fiscal 1995 that were not open during the full fiscal year in 1994 include: 14
Chili's restaurants, eight of which were acquired in November, 1994, as a result
of the acquisition of Grayling Corporation (see Note 14 to the consolidated
financial statements); 12 Bruegger's Bagel Bakeries; 17 Burger King restaurants,
eight of which were acquired in August, 1995 in the SHONCO acquisition; and five
Spageddies Italian Kitchen restaurants.

Total restaurant operating expenses were $87.5 million in fiscal 1995, a 66%
increase over the $52.7 million reported in fiscal 1994. As a percentage of
restaurant sales, total restaurant operating expenses increased from 81.9% in
fiscal 1994 to 83.1% in fiscal 1995.

Food and beverage costs increased $12.6 million to $31.2 million in fiscal 1995,
an increase of 68% from fiscal 1994. As a percentage of total restaurant sales,
food and beverage costs increased from 28.9% in fiscal 1994 to 29.6% in fiscal
1995. This increase was attributable to higher costs for lettuce and other
produce incurred primarily during the second quarter of fiscal 1995 and to the
relatively higher food and beverage costs associated with the increased number
of full service restaurants and Bruegger's Bagel Bakeries operated by the
Company.

Payroll and benefits were $27.2 million in fiscal 1995, an increase of 68% over
$16.2 million incurred in fiscal 1994. As a percentage of total restaurant
sales, payroll and benefits increased from 25.1% in fiscal 1994 to

                                     -23-
<PAGE>
 
25.8% in fiscal 1995, primarily as a result of the Company operating an
increased number of Chili's, Spageddies and Bruegger's restaurants. These
concepts typically operate at higher rates of payroll than the Company's Burger
King restaurants.

Depreciation and amortization was $5.1 million in fiscal 1995, compared to $2.6
million in fiscal 1994. As a percentage of total restaurant sales, depreciation
and amortization increased from 4.0% in fiscal 1994 to 4.8% in fiscal 1995.
These increases were primarily attributable to higher costs of newly opened
units and a substantial number of acquired restaurants.

Other restaurant operating expenses were $24.1 million in fiscal 1995, an
increase of 57% over the $15.4 million in fiscal 1994. As a percentage of total
restaurant sales, other restaurant operating expenses decreased from 23.9% in
fiscal 1994 to 22.9% in fiscal 1995. This decrease was primarily due to higher
sales at the Burger King restaurants, 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 includes corporate and district
management costs, totaled $5.7 million in fiscal 1995, an increase of 40% over
$4.1 million in fiscal 1994. As a percentage of total restaurant sales, general
and administrative expenses decreased from 6.3% in fiscal 1994 to 5.4% in fiscal
1995. This decrease was primarily attributable to the beneficial leverage
derived from increased sales at the Company's new and acquired restaurants.

Operating income increased $3.9 million to $11.4 million in fiscal 1995, a 52%
increase over fiscal 1994. As a percentage of total revenues, operating income
decreased from 11.7% in fiscal 1994 to 10.8% in fiscal 1995 as a net result of
the factors described above.

Total other expense increased $1.0 million in fiscal 1995 compared to fiscal
1994. This increase was primarily attributable to higher interest expense
associated with increased borrowings under the Company's revolving credit
facility to fund new restaurant openings and acquisitions. On July 10, 1995, the
Company completed the sale of two Burger King restaurants to a related party for
$850,000 consisting of $600,000 in cash and 20,000 shares of the Company's
common stock valued at $250,000. The Company realized a gain on the sale of
$350,000 or $.03 per share. As a percentage of total revenues, other expenses
increased from 2.0% in fiscal 1994 to 2.1% in fiscal 1995.

Income taxes in fiscal 1995 increased to $3.2 million from $2.8 million
(including a $0.5 million pro forma provision for income taxes) in fiscal 1994
due to higher pre-tax income in fiscal 1995. The Company's effective income tax
rate in fiscal 1994 was 45.4% compared to 35.5% in fiscal 1995. The decrease in
the effective tax rate was due principally to a non-recurring charge of $546,000
required during the second quarter of fiscal 1994 to establish a provision for
deferred income taxes upon termination of the Company's S Corporation status.
Excluding the non-recurring charge, the Company's effective income tax rate in
fiscal 1994 was 36.7%.

Net income was $5.9 million in fiscal 1995 compared to $3.9 million in fiscal
1994. As a percentage of total revenues, net income decreased to 5.6% in fiscal
1995 from 6.1% in fiscal 1994, as a net result of the factors described above.

                                     -24-
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------


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

<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------------------------------------------------------
                                                   Fiscal Year Ended
                                        OCTOBER 27,    October 29,   October 30,
                                           1996           1995          1994
--------------------------------------------------------------------------------
<S>                                     <C>        <C>               <C>

Net cash provided by operations           $ 14,464      $ 12,908      $  8,222
Nonoperating sources of cash:                                      
 Proceeds from sale of common stock, net    59,755        31,688        25,458
 Borrowings of long-term debt              218,285        37,721         6,000
Nonoperating uses of cash:                                        
 Acquisitions of businesses, net of cash                          
   acquired                                (77,168)      (23,472)            -
 Purchase of property and equipment        (41,135)      (25,357)      (14,574)
 Repayment of long-term debt              (163,223)      (30,308)      (14,200)
 Increase in notes receivable              (10,025)            -             -
</TABLE>

     Cash flow generated from restaurant operations provides the Company with a
significant source of liquidity. Approximately 35%, 51% and 56% of the funds
required to construct restaurants and purchase other property and equipment were
generated by operating activities during fiscal 1996, 1995 and 1994,
respectively.

     Increases in current assets and current liabilities are due in large part
to new restaurants opened during fiscal 1996. The Company is able to operate
effectively with negative working capital because substantially all sales are
for cash and costs are generally payable in 15 - 45 days.  Similar increases in
current assets and current  liabilities are expected as the Company continues
its aggressive restaurant development program.

     On April 26, 1996, the Company amended its existing revolving credit
facility.  The facility, as amended, provides for borrowings up to a maximum of
$150 million.  The interest rate paid by the Company is the adjusted LIBOR rate
plus 1.5% (6.9375% at October 27, 1996).  The loan agreement expires on April
26, 1999 and is unsecured.  As of  October 27, 1996, there was $78.6 million
outstanding under this revolving credit facility.  (See Note 9 to the
consolidated financial statements.)

     The Company's primary cash requirements in fiscal 1997 will be to finance
capital expenditures in connection with the opening of new restaurants and for
general working capital purposes.  The Company's capital expenditures budget is
expected to range from $35 million to $60 million for fiscal 1997.  During
fiscal 1997, the Company anticipates opening 50 to 100 Company-owned Bruegger's
Bagel Bakeries, one or two Grady's American Grill restaurants, one or two
Italian Dining restaurants, three to five Burger King restaurants and three to
five Chili's.  The actual amount of the Company's cash requirements for capital
expenditures depends in part on the number of new restaurants opened and the
land acquisition costs associated with such restaurants.  With the exception of
Bruegger's Bagel Bakeries, the Company expects to own the real estate for most
of the new restaurants, leasing only when purchasing is not feasible.

     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 1997.

     If the Company's Bruegger's franchisees are to continue their aggressive
development of Bruegger's Bagel Bakeries, they must secure significant
additional financing. The Company is considering various alternative programs to
provide necessary financing to certain Bruegger's franchisees to enable them to
execute their development plans. Any such program will likely require the
Company to secure additional debt or equity funds. Although the Company believes
that it will be able to implement such a program on terms acceptable to the
Company and such franchisees, there can be no assurance thereof. In the absence
of an acceptable program, the continued development of new bakeries by the
Company's Bruegger's franchisees could be adversely affected.

                                     -25-
<PAGE>
 
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.






     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 and its
franchisees; the ability of the Company and its franchisees to develop and
operate their restaurants; the hiring, training and retention of skilled
management and other restaurant personnel; the integration and assimilation of
acquired concepts; the ability to upgrade the Company's infrastructure to
support its operations and development plans; the overall success of the
Company's franchisors; the ability to obtain the necessary government approvals
and third-party consents; and changes in governmental regulations, including
increases in the minimum wage.

                                     -26-
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>
QUALITY DINING, INC.                                                  
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
------------------------------------------------------------------------------
                                                     OCTOBER 27,   October 29,
                                                        1996          1995
------------------------------------------------------------------------------
<S>                                                     <C>           <C> 
ASSETS
Current assets:
  Cash and cash equivalents                            $    444      $  5,639
  Accounts receivable                                     4,518           599
  Accounts and note receivable, related parties          11,651             - 
  Note receivable                                         3,585             -
  Inventories                                             3,082           825
  Deferred income taxes                                   1,996            23
  Other current assets                                    3,438         1,352
------------------------------------------------------------------------------
Total current assets                                     28,714         8,438
------------------------------------------------------------------------------
Property and equipment, net                             177,044        63,209
------------------------------------------------------------------------------
Other assets:
  Franchise fees and development costs, net              10,406        10,698
  Goodwill, net                                         152,195        10,216
  Trademarks, net                                        13,082             -
  Pre-opening costs and non-competition agreements,
    net                                                   2,463         1,709
  Liquor licenses, net                                    2,876         2,131
  Investment in redeemable preferred stock                    -         2,625
  Other                                                   1,234           221
------------------------------------------------------------------------------
Total other assets                                      182,256        27,600
------------------------------------------------------------------------------
Total assets                                           $388,014      $ 99,247
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capitalized lease and
    non-competition obligations, principally
    to related parties                                 $    451      $    360
  Current portion of redeemable preferred
    stock subscription payable                                -           375
  Accounts payable                                        8,231         4,111
  Accounts payable, related parties                         300         1,076
  Accrued liabilities                                    21,119         3,631
  Income taxes payable                                        -           711
------------------------------------------------------------------------------
Total current liabilities                                30,101        10,264
Long-term debt                                           78,610         7,413
Capitalized lease and non-competition
 obligations, principally to related
 parties, less current portion                            6,436         6,885
Redeemable preferred stock subscription
 payable, less current portion                                -           875
Deferred income taxes                                     3,744         2,409
------------------------------------------------------------------------------
Total liabilities                                       118,891        27,846
------------------------------------------------------------------------------
Commitments and contingencies
 (Notes 11, 12 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; 16,929,035 and 8,856,520
    shares issued, respectively                              28            28
  Additional paid-in capital                            258,242        63,190
  Retained earnings                                      11,103         8,433
------------------------------------------------------------------------------
                                                        269,373        71,651
    Less treasury stock, at cost, 20,000 shares             250           250
------------------------------------------------------------------------------
Total stockholders' equity                              269,123        71,401
------------------------------------------------------------------------------
Total liabilities and stockholders' equity             $388,014      $ 99,247
------------------------------------------------------------------------------
</TABLE>

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

                                     -27-
<PAGE>
 
<TABLE> 
<CAPTION>  
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
--------------------------------------------------------------------------------------------------
                                                                  Fiscal Year Ended
                                                  OCTOBER 27,        October 29,       October 30,
                                                     1996               1995              1994
--------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>                  <C>  
Revenues:
Restaurant sales:
 Bruegger's Bagel Bakery                           $ 25,967            $  5,270           $   191
 Grady's American Grill                              85,101                   -                 -
 Italian Dining Division                              8,388               4,741               174
 Burger King                                         70,987              57,013            49,716
 Chili's Grill & Bar                                 41,913              38,267            14,286
--------------------------------------------------------------------------------------------------
Total restaurant sales                              232,356             105,291            64,367
 Franchise related revenue                            5,274                   -                 -
--------------------------------------------------------------------------------------------------
Total revenues                                      237,630             105,291            64,367
--------------------------------------------------------------------------------------------------
Operating expenses:                                              
 Restaurant operating expenses:                                   
  Food and beverage                                  72,201              31,176            18,576
  Payroll and benefits                               66,176              27,191            16,190
  Depreciation and amortization                      11,635               5,109             2,610
  Other operating expenses                           52,452              24,057            15,351
--------------------------------------------------------------------------------------------------
Total restaurant operating expenses                 202,464              87,533            52,727
 General and administrative                          12,047               5,706             4,065
 Amortization of intangibles                          2,537                 682                83
 Restructuring and integration costs                  9,938                   -                 -
--------------------------------------------------------------------------------------------------
Total operating expenses                            226,986              93,921            56,875
--------------------------------------------------------------------------------------------------
Operating income                                     10,644              11,370             7,492
--------------------------------------------------------------------------------------------------
Other income (expense):                                          
 Interest expense                                    (6,340)             (2,699)           (1,314)
 Gain (loss) on sale of property and equipment            4                 343               (59)
 Interest income                                        206                 127               155
 Other income (expense), net                            154                 (12)              (14)
--------------------------------------------------------------------------------------------------
Total other expense                                  (5,976)             (2,241)           (1,232)
--------------------------------------------------------------------------------------------------
Income before income taxes                            4,668               9,129             6,260
Income taxes                                          1,998               3,240             2,332
--------------------------------------------------------------------------------------------------
Net income                                         $  2,670            $  5,889           $ 3,928
--------------------------------------------------------------------------------------------------
Net income per share                                  $0.23               $0.85
-------------------------------------------------------------------------------
Weighted average shares outstanding                  11,855               6,925
-------------------------------------------------------------------------------
Pro forma income data (unaudited):                               
  Net income as reported                                                                  $ 3,928
  Pro forma provision for income taxes                                                        512
--------------------------------------------------------------------------------------------------
  Pro forma net income                                                                    $ 3,416
--------------------------------------------------------------------------------------------------
  Pro forma net income per share                                                            $0.59
--------------------------------------------------------------------------------------------------
                                                                 
  Pro forma weighted average number of                                                     
  common shares and common stock                                 
  equivalent shares outstanding                                                             5,801
--------------------------------------------------------------------------------------------------
</TABLE>

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

                                     -28-
<PAGE>
 
<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------
                                                                      Additional                           Total
                                                  Preferred   Common   Paid-in   Retained   Treasury   Stockholders'
                                                    Stock      Stock   Capital    Earnings    Stock        Equity
--------------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>    <C>         <C>          <C>        <C>
Balance, November 1, 1993                         $    -       $26    $    129    $ 3,606      $ -         $  3,761
   Net income, fiscal 1994                             -         -           -      3,928        -            3,928
   S Corporation distributions                         -         -           -     (6,567)       -           (6,567)
   Issuance of common stock                            -         2           -          -        -                2
   Proceeds from sale of common stock,
    net of offering expenses                           -         -      25,458          -        -           25,458
   Reclassification of S Corporation deficit           -         -      (1,577)     1,577        -                -
-------------------------------------------------------------------------------------------------------------------
Balance, October 30, 1994                              -        28      24,010      2,544        -           26,582
   Net income, fiscal 1995                             -         -           -      5,889        -            5,889
   Issuance of common stock in acquisitions:
        Grayling                                       -         -       3,350          -        -            3,350
        SHONCO                                         -         -       4,000          -        -            4,000
   Proceeds from sale of common stock,
    net of offering expenses                           -         -      31,688          -        -           31,688
   Exercise of stock options                           -         -         129          -        -              129
   Tax benefit arising from the exercise
    of stock options                                   -         -          13          -        -               13
   Treasury stock acquired                             -         -           -          -       (250)          (250)
-------------------------------------------------------------------------------------------------------------------
Balance, October 29, 1995                              -        28      63,190      8,433       (250)        71,401
   Net income, fiscal 1996                             -         -           -      2,670        -            2,670
   Bruegger's acquisition:
    Issuance of common stock                           -         -     123,051          -        -          123,051
    Issuance of preferred stock                      11,780      -           -          -        -           11,780
    Exchange of preferred stock for common stock    (10,115)     -      10,115          -        -                -
  Redemption of preferred stock                      (1,665)     -           -          -        -           (1,665)
  Proceeds from sale of common stock,
    net of offering expenses                           -         -      59,755          -        -           59,755
  Exercise of stock options                            -         -       1,228          -        -            1,228
  Tax benefit arising from the exercise
    of stock options                                   -         -         903          -        -              903
-------------------------------------------------------------------------------------------------------------------
Balance, October 27, 1996                         $    -       $28    $258,242    $11,103      $(250)      $269,123
-------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                     -29-
<PAGE>
 

<TABLE>
<CAPTION>
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
                                                                                 Fiscal Year Ended
                                                                        OCTOBER 27,   October 29,  October 30,
                                                                          1996           1995           1994
--------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>           <C>
Cash flows from operating activities:
 Net  income                                                           $   2,670      $  5,889      $  3,928
 Adjustments to reconcile net income to net
    cash provided by operating activities:
       Depreciation and amortization of property and equipment             9,836         4,008         2,221
       Amortization of other assets                                        5,192         1,991           549
       (Gain) loss on sale of property and equipment                          (4)         (343)           59
       Deferred income taxes                                                  42           413           623
 Changes in operating assets and liabilities, excluding
    effects of acquisitions and dispositions:
       Accounts receivable                                                (4,609)         (243)         (179)
       Inventories                                                          (796)         (182)         (146)
       Other current assets                                               (1,319)         (707)         (149)
       Accounts payable                                                      603         1,012           897
       Accrued liabilities                                                 2,657           994          (215)
       Income taxes payable                                                  192            76           634
------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                 14,464        12,908         8,222
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
 Acquisitions of businesses, net of cash acquired                        (77,168)      (23,472)            -
 Proceeds from sales of property and equipment                                 4           598           736
 Purchase of property and equipment                                      (41,135)      (25,357)      (14,574)
 Purchase of redeemable preferred stock                                        -          (375)         (750)
 Repayment of stockholder notes receivable                                     -             -           623
 Increase in notes receivable                                            (10,025)            -             -
 Payment of other assets                                                  (3,960)       (1,799)       (1,806)
 Other, net                                                               (1,147)         (101)           34
------------------------------------------------------------------------------------------------------------
Net cash used for investing activities                                  (133,431)      (50,506)      (15,737)
------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
 Proceeds from sale of common stock, net                                  59,755        31,688        25,458
 Proceeds from exercise of stock options                                   1,228           129             -
 Borrowings of long-term debt                                            218,285        37,721         6,000
 Repayment of long-term debt                                            (163,223)      (30,308)      (14,200)
 Repayment of capitalized lease and non-competition obligations             (358)         (196)         (172)
 Payment of redeemable preferred stock subscription payable                 (250)         (250)            -
 Redemption of preferred stock                                            (1,665)            -             -
 Repayment of stockholder notes payable                                        -             -        (3,158)
 S Corporation distributions paid                                              -             -        (4,138)
------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                113,772        38,784         9,790
------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                      (5,195)        1,186         2,275
Cash and cash equivalents, beginning of year                               5,639         4,453         2,178
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                 $     444      $  5,639      $  4,453
------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid for interest, net of amounts capitalized                    $   6,131      $  2,687      $  1,376
 Cash paid for income taxes                                                2,850         2,665         1,075
NONCASH INVESTING AND FINANCING ACTIVITIES:
 Acquisition of redeemable preferred stock                                     -           500         1,000
 Property and equipment purchased and
    related liability included in accounts payable                         2,075         1,288         1,592
 Common stock issued in acquisitions                                     123,051         7,350             -
 Preferred stock issued in acquisition                                    11,780             -             -
 Long-term debt assumed in acquisition                                    16,135             -             -
 Treasury stock acquired in disposition of restaurants                         -           250             -
 Non-competition agreement                                                     -           510             -
 Note receivable acquired in disposition of restaurants                    3,500             -             -
</TABLE>

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

                                     -30-
<PAGE>
 
Quality Dining, Inc.
Notes to Consolidated Financial Statements

{1}  NATURE OF BUSINESS, REORGANIZATION AND PUBLIC OFFERINGS          

NATURE OF BUSINESS - Quality Dining, Inc. and its subsidiaries (the "Company")
develop and operate both quick service and full service restaurants throughout
the United States. The Company owns, operates and franchises Bruegger's Bagel
Bakeries.  As of October 27, 1996, there were 425 retail bagel bakeries, of
which 325 were operated by franchisees and 100 were Company-owned and operated.
The Company owns and operates 42 Grady's American Grill restaurants, five
restaurants under the trade name of Spageddies Italian Kitchen and one
restaurant under the trade name Papa Vino's Italian Kitchen. The Company also
operates, as a franchisee, 63 Burger King restaurants and 22 Chili's Grill & Bar
restaurants.

REORGANIZATION - On December 17, 1993, in connection with the initial public
offering of the Company's common stock described below, the Company's Board of
Directors and stockholders adopted Restated Articles of Incorporation and
authorized the reorganization of the Company. Under the Company's Restated
Articles of Incorporation, the Company's authorized capital stock consists of 50
million shares of common stock and five million shares of preferred stock, each
without par value. In addition, the Company's Board of Directors authorized a
7,869.1-for-one stock split of the common stock effected as a stock dividend on
December 17, 1993.

     The Company's Board of Directors also adopted a share exchange and
reorganization agreement dated as of December 17, 1993 (the "Reorganization
Agreement") among the Company, certain of its affiliated companies and their
respective stockholders. Pursuant to the Reorganization Agreement, on March 1,
1994 the Company acquired all of the outstanding shares of capital stock of the
affiliated companies in a share exchange transaction under which additional
shares of the Company's common stock were issued to the stockholders of the
affiliated companies in exchange for all of their capital stock in the
affiliated companies.

     The authorization of the common and preferred stock and effects of the
stock split and the reorganization have been reflected retroactively in the
accompanying consolidated financial statements as if the share exchange and
related mergers had been consummated at the beginning of the earliest period
presented.

PUBLIC OFFERINGS -  On March 8, 1994, the Company completed an initial public
offering of 2,471,250 shares of its common stock at $11.50 per share. Net of
underwriting fees and offering expenses, proceeds to the Company amounted to
$25.5 million. On October 16, 1995, the Company completed a second 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 $31.7 million. On July 31, 1996, the Company completed a third 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 $59.8 million.

{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 27, 1996
(fiscal 1996), October 29, 1995 (fiscal 1995) and October 30, 1994 (fiscal 1994)
each contained 52 weeks.

BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of Quality Dining, Inc. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates are accounted for using the equity
method.

                                     -31-
<PAGE>
 
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, which range from three to 31 1/2 years, or the terms of the related
leases, if shorter. 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.

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 27, 1996 and October
29, 1995 was $2,455,801 and $546,835, respectively. Accumulated amortization of
trademarks as of October 27, 1996 was $281,287 (none at October 29, 1995). The
Company reviews the carrying value of these recorded assets whenever events or
changes in circumstances warrant, and measures the potential impairment by
comparing the carrying value of the asset to the expected undiscounted net
future cash inflows resulting from the assets to which the intangible relates.
Management believes that no impairment of goodwill and trademarks has occurred
and that no reduction of the estimated useful life is warranted.

FRANCHISE FEES AND DEVELOPMENT COSTS - 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 costs 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. Accumulated
amortization of franchise fees and development costs as of October 27, 1996 and
October 29, 1995 was $1,702,510 and $1,050,572, 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.
Franchisees are required to pay monthly royalties, generally 4% to 5% of
restaurant sales, which the Company recognizes as earned. Each franchisee also
pays an initial franchise fee for each bakery opened. Development fees, which
result from area development agreements with franchisees, are deferred and
recognized as revenue when all material conditions have been substantially
completed by the Company, which generally occurs when the bakeries under the
related area development agreements are opened. Deferred development fees at
October 27, 1996 were $770,000. Net commissary revenue results from products
sold to franchisees from Company-owned commissaries. Interest income results
from the Company's notes receivable from franchisees.

ADVERTISING - The Company maintains an advertising fund for national and
regional advertising for the Bruegger's Bagel Bakery ("Bruegger's") concept. The
advertising fund collects fees paid by Company-owned 

                                     -32-
<PAGE>
 
and franchised bakeries, and disburses 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 are based on a specified percentage of sales, generally 2% to 4%. Such
contributions are recorded as earned and have been reflected as a reduction of
advertising expenses in the 1996 consolidated statement of income. The Company
incurs advertising expense related to its other concepts under franchise
agreements (see Note 5) or through local advertising. Advertising costs are
expensed at the time the related advertising first takes place. Advertising
costs for all concepts were $4.6 million, $2.9 million and $2.8 million for
fiscal years 1996, 1995 and 1994, 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 $1,848,021, $1,007,320 and $248,264 for fiscal years 1996, 1995 and
1994, 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 27, 1996 and October
29, 1995 was $269,752 and $146,157, 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 27, 1996 and October 29, 1995, capitalized
computer software costs, net of related accumulated amortization, aggregated
$1,707,512 and $406,957, respectively. Amortization of computer software costs
was $197,472 for fiscal year 1996. Amortization of computer software costs in
fiscal 1995 and 1994 was not significant.

CAPITALIZED INTEREST - Interest costs capitalized during the construction period
of new restaurants were $233,837 and $137,545 for fiscal years 1996 and 1995,
respectively. No interest was capitalized in fiscal 1994.

INCOME TAXES - In connection with the reorganization on March 1, 1994, the
Company terminated its S Corporation status and became taxable as a C
Corporation. On that date, the Company adopted the provisions of 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. Upon
termination of the Company's S Corporation status and adoption of SFAS No. 109,
the Company established a net deferred tax liability of $546,000 representing
the tax effect of cumulative temporary differences as of that date (see Note 7).

     The consolidated statements of income for the fiscal years ended October
27, 1996 and October 29, 1995 include a provision for income taxes for the
entire period. Prior to March 1, 1994, the Company (or its predecessors) had
elected to be taxed under Subchapter S of the Internal Revenue Code. As a result
of the election, federal and state income taxes on the net income of the Company
were payable personally by the stockholders. The consolidated statement of
income for the fiscal year ended October 30, 1994 includes a provision for
federal and state income taxes only for the period March 1, 1994 through October
30, 1994. Accordingly, a pro forma provision for federal and state income taxes,
using a 37% effective rate, is presented for the period November 1, 1993 through
February 28, 1994 as if the Company were taxed as a C Corporation for the entire
fiscal year.

                                     -33-
<PAGE>
 
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Company to credit risk, consist primarily of cash and cash equivalents and
notes receivable (see Notes 13 and 14).  Substantially all of the Company's cash
and cash equivalents at October 27, 1996 are concentrated with a bank located in
Michigan City, Indiana.

CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

PRO FORMA DATA (UNAUDITED) - Pro forma net income per share for the fiscal year
ended October 30, 1994 is based on 4,437,552 shares of common stock and common
stock equivalents outstanding from November 1, 1993 to March 1, 1994, which
includes 4,000,000 shares of common stock outstanding, including shares issued
in the exchange of shares discussed in Note 1, and 437,552 shares of common
stock and common stock equivalents assumed to be outstanding, and 6,471,250
shares of common stock outstanding from that date through October 30, 1994.

     The 437,552 shares of common stock and common stock equivalents assumed to
be outstanding are equivalent to the number of shares of common stock at the
initial public offering price of $11.50 per share (after deducting underwriting
discounts) necessary to fund that portion of the $5.1 million S Corporation and
special distributions payable to stockholders in excess of fiscal 1993
undistributed earnings in the aggregate amount of $4.4 million at October 31,
1993 and 26,359 common stock equivalents assumed outstanding resulting from the
granting of nonqualified stock options to certain employees of the Company to
purchase an aggregate of 26,590 shares of the Company's common stock.

RECLASSIFICATIONS - Certain information in the consolidated financial statements
for fiscal 1995 and 1994 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.

RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".  This statement
establishes financial accounting and reporting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.  This statement is effective for
fiscal years beginning after December 15, 1995.  The Company does not expect
that the adoption of SFAS No. 121 in fiscal 1997 will have a material effect on
its consolidated financial position or results of operations.

  In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation".  This statement establishes a fair value based method of
accounting for employee stock options or similar equity instruments, but allows
companies to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees".
Companies electing to continue to apply the accounting requirements in APB
Opinion No. 25 must, however, make pro forma disclosures of net income and net
income per share as if the fair value based method of accounting defined in SFAS
No. 123 had been applied.  These disclosure requirements are effective for
fiscal years beginning after December 15, 1995.  The Company expects to adopt
SFAS No. 123 on a disclosure basis only, beginning in fiscal 1997.

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

<TABLE>
<CAPTION>
Other current assets and accrued liabilities consist of the following:
----------------------------------------------------------------------------
                                                    OCTOBER 27,  October 29,
(Dollars in thousands)                                 1996         1995
----------------------------------------------------------------------------
<S>                                                 <C>            <C>   
Other current assets:
 Deposits                                            $  1,499      $   465
 Refundable income taxes                                1,300            -
 Prepaid expenses and other                               639          887
----------------------------------------------------------------------------
                                                     $  3,438      $ 1,352
----------------------------------------------------------------------------
Accrued liabilities:
 Accrued salaries and wages                          $  3,489      $ 1,621
 Accrued advertising and royalties                        756          633
 Accrued property taxes                                 1,505          421
 Accrued sales taxes                                    1,225          521
 Accrued restructuring and integration costs            8,984            -
 Deferred development fees                                770            -
 Other accrued liabilities                              4,390          435
----------------------------------------------------------------------------
                                                     $ 21,119      $ 3,631
----------------------------------------------------------------------------
</TABLE> 
 
{4} PROPERTY AND EQUIPMENT

<TABLE> 
<CAPTION>  
Property and equipment consist of the following:
----------------------------------------------------------------------------
                                                    OCTOBER 27,  October 29,
(Dollars in thousands)                                1996         1995
----------------------------------------------------------------------------
<S>                                                 <C>          <C>   
Land                                                 $ 29,573      $10,217
Land improvements                                       7,406        3,411
Buildings                                              33,740       18,510
Capitalized leased property                             7,644        7,644
Leasehold improvements                                 52,864       10,814
Restaurant equipment                                   60,885       26,510
Office furniture and equipment                          4,288        1,289
Vehicles                                                  979          552
Construction in progress                                6,019          979
----------------------------------------------------------------------------
                                                      203,398       79,926
----------------------------------------------------------------------------
Less, accumulated depreciation and amortization:
  Capitalized leased property                           2,909        2,527
  All other                                            23,445       14,190
----------------------------------------------------------------------------
                                                       26,354       16,717
----------------------------------------------------------------------------
Property and equipment, net                          $177,044      $63,209
----------------------------------------------------------------------------
</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.

                                     -35-
<PAGE>
 
("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 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.

     The Company's Bruegger's Bagel Bakeries and Spageddies restaurant concepts
were previously subject to franchise and development agreements with Bruegger's
Corporation and Brinker, respectively. These agreements required the payment of
royalty and advertising fees and an initial franchise fee upon opening a
restaurant.  On June 7, 1996, the Company acquired all of the issued and
outstanding shares of common stock of Bruegger's Corporation and is no longer
subject to such fees.  On October 28, 1995, the Company acquired all rights to
the Spageddies restaurant concept in the United States from Brinker for a cash
payment of $100,000 and is no longer subject to such fees.

{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 and are based upon 5.7% of annual participant compensation in
excess of the social security wage base.  Contributions in excess of that
amount, if any, are allocated to all plan participants on a pro-rata basis.

     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 $100,000, $70,000
and $60,000 for fiscal years 1996, 1995 and 1994, respectively.

{7} INCOME TAXES

The provision for income taxes for the fiscal years ended October 27, 1996,
October 29, 1995 and for the period March 1, 1994 through October 30, 1994 (see
Note 2) is summarized as follows:

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------
                                                         Fiscal Year Ended          March 1, 1994
                                                     OCTOBER 27,    October 29,           to
(Dollars in thousands)                                  1996           1995        October 30, 1994

---------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C> 
Current:
 Federal                                               $1,736         $2,320            $1,489
 State                                                    220            507               220
---------------------------------------------------------------------------------------------------
                                                        1,956          2,827             1,709
---------------------------------------------------------------------------------------------------
Deferred:
 Establishment of net deferred
  tax liability at date of termination
  of S Corporation status (March 1, 1994)                   -              -               546
 Provision for the period                                  42            413                77
---------------------------------------------------------------------------------------------------
                                                           42            413               623  
---------------------------------------------------------------------------------------------------
 Total                                                 $1,998         $3,240            $2,332
---------------------------------------------------------------------------------------------------
</TABLE>

                                     -36-
<PAGE>
 
The components of the deferred tax asset and liability are as follows:
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                    OCTOBER 27,   October 29,
(Dollars in thousands)                                  1996          1995
------------------------------------------------------------------------------
<S>                                                     <C>           <C>
Current deferred tax asset:
     FICA tip credit                                $   215       $     -
     Restructuring and integration costs              1,584             -
     Stock appreciation rights                          549             -
     Accrued liabilities                                700             -
     Other                                               55            23
------------------------------------------------------------------------------
     Current deferred tax asset                       3,103            23
     Less: Valuation allowance                       (1,107)            -
------------------------------------------------------------------------------
                                                    $ 1,996       $    23
------------------------------------------------------------------------------
Long-term deferred tax asset (liability):
     Bruegger's net operating loss carryforwards    $ 3,553       $     -
     Property and equipment                          (2,617)       (1,098)
     Franchise fees                                  (1,463)       (1,481)
     Pre-opening costs                                 (698)         (356)
     Capitalized lease obligations                      679           598
     Other                                             (228)          (72)
------------------------------------------------------------------------------
     Net long-term deferred tax liability              (774)       (2,409)
     Less: Valuation allowance                       (2,970)            -
--------------------------------------------------------------------------
                                                    $(3,744)      $(2,409)
--------------------------------------------------------------------------
</TABLE>

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 of goodwill. Any future reductions in the valuation
allowance will also reduce goodwill. Net operating losses of Bruegger's
Corporation in the amount of $9.4 million expire through the year 2011 and are
subject to limitations as to their utilization.

Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                            Fiscal Year Ended
                                                  OCTOBER 27,   October 29,   October 30,
(Percent of pretax income)                            1996          1995          1994
------------------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>
Statutory tax rate                                   34.0%         34.0%         34.0%
State income taxes, net of federal income
     tax benefit                                      3.1           3.6           3.3
S Corporation income for which no
     income taxes were provided                         -             -          (8.2)
Recognition of net deferred tax liability upon
     termination of S Corporation status                -             -           8.7
FICA tax credit                                      (5.9)         (1.6)          (.6)
Goodwill amortization                                10.5             -             -
Other, net                                            1.1           (.5)           .1
------------------------------------------------------------------------------------------
Effective tax rate                                   42.8%         35.5%         37.3%
------------------------------------------------------------------------------------------
</TABLE>

{8}  DISTRIBUTIONS

     As an S Corporation, the Company (or its predecessors) made annual
S Corporation distributions to its stockholders. On February 28, 1994, the
Company distributed to its stockholders its S Corporation earnings from November
1, 1993 through that date in the aggregate amount of $1.4 million. On December
17, 1993, the Company and its predecessors declared distributions to their
respective stockholders aggregating $5.1 million

                                     -37-
<PAGE>
 
that were paid on January 4, 1994. Of the total distributions, an amount
representing undistributed S Corporation earnings through October 31, 1993 ($2.7
million) was paid in cash and a special distribution of $2.4 million was
represented by two-year promissory notes bearing interest at the rate of 6% per
annum. The promissory notes were repaid in full from the proceeds of the
Company's initial public offering.

{9}  LONG-TERM DEBT AND CREDIT AGREEMENTS

     On April 26, 1996, the Company amended its revolving credit agreement
providing for borrowings up to $150 million. The interest rate paid by the
Company is the adjusted LIBOR rate plus 1.5% (6.9375% at October 27, 1996).
Concurrently, the Company repaid the amount then outstanding under the previous
revolving loan agreement, which was terminated.

     The revolving credit agreement expires on April 26, 1999 and is unsecured.
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, as defined,
limitations on the incurrence of additional indebtedness and annual limitations
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 aggregate amounts
exceeding 40% of the Company's net income for the immediately preceding fiscal
year. As of October 27, 1996, there was $78.6 million outstanding under this
revolving credit agreement.

     In connection with the Grady's American Grill acquisition (see Note 14),
the Company entered into a revolving credit agreement  providing for borrowings
of up to $85 million with interest payable monthly at the lower of the adjusted
LIBOR rate plus 2% or the bank's prime rate less 0.5%. On December 21, 1995, the
Company borrowed $82 million under this agreement to finance the Grady's
American Grill acquisition and to repay the amount then outstanding under the
previous revolving credit agreement, which was terminated.

     On February 22, 1994, the Company entered into a revolving credit
agreement, which as amended through August 10, 1995, provided for borrowings up
to a maximum of $45 million with interest payable monthly at the lower of the
LIBOR rate plus 2% or the bank's prime rate less 0.5%.  As of October 29, 1995,
there was $7.4 million outstanding under this revolving credit agreement.

{10} STOCK OPTION PLANS

     The Company has two stock option plans:  the 1993 Stock Option and
Incentive Plan (the "Employee Plan") and the Outside Directors Stock Option Plan
(the "Outside Directors Plan").

     Under the Employee Plan, shares of restricted stock and options to purchase
shares of the Company's common stock may be granted to officers and other
employees. An aggregate of one million shares of common stock, including an
additional 500,000 shares reserved in fiscal 1996, have been reserved for
issuance under the Employee Plan. On December 17, 1993, the Company's Board of
Directors granted nonqualified stock options for 770 employees to purchase an
aggregate of 26,590 shares of common stock at an exercise price of $.10 per
share. The options have a term of 10 years and were exercisable beginning
February 1, 1995. Compensation expense of approximately $300,000 associated with
the granting of these nonqualified stock options was recognized at the date of
the Company's initial public offering (March 8, 1994). Since that date, certain
of these employees terminated their employment with the Company prior to
exercising the options. As a result, the amount of compensation expense was
reduced to $212,838 for fiscal year 1994 and was further reduced by $37,883 and
$6,739 during fiscal years 1995 and 1996, respectively. These amounts are
included in general and administrative expenses in the consolidated statements
of income.

     Under the Outside Directors 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 

                                     -38-
<PAGE>
 
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.

     Activity with respect to the Company's stock option plans for fiscal years
1996, 1995 and 1994 was as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------
                                    Number of Shares  Price Range
-------------------------------------------------------------------
<S>                                 <C>             <C>
Outstanding, November 1, 1993                -             $-
  Granted                                 112,590     .10   - 11.50
  Canceled                                            .10
-------------------------------------------------------------------
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  - 31.375
  Canceled                                (35,450)    .10   - 24.50
  Exercised                              (118,527)    .10   - 12.125
-------------------------------------------------------------------
Outstanding, October 27, 1996             703,117     .10   - 31.375
-------------------------------------------------------------------
Exercisable, October 27, 1996             129,812
-------------------------------------------------
Available for future grants at October 
  27, 1996                                207,286
-------------------------------------------------
</TABLE>

{11} 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 approximately $1,087,900, $686,500 and $514,000 for fiscal years
1996, 1995 and 1994, respectively.

     As of October 27, 1996, future minimum lease payments related to these
leases were as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------------------------------------------------------
Fiscal Year                             Capital Leases  Operating Leases   Total
--------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>
1997                                        $ 1,081         $ 12,048    $ 13,129
1998                                          1,081           12,127      13,208
1999                                          1,081           11,888      12,969
2000                                          1,081           10,971      12,052
2001                                          1,081            9,700      10,781
2002 and thereafter                           7,813           52,855      60,668
--------------------------------------------------------------------------------
                                             13,218         $109,589    $122,807
                                                            --------------------

Less: Amount representing interest            6,697
---------------------------------------------------
Present value of  future minimum
  lease payments of which $242 is
  included in current
  liabilities at October 27, 1996           $ 6,521
---------------------------------------------------
</TABLE>

                                     -39-
<PAGE>
 
     Future minimum lease payments do not include amounts payable by the Company
for maintenance costs, real estate taxes, insurance, contingent rentals payable
based on a percentage of sales above specified minimum amounts for restaurant
facilities, amounts due under an operating lease for Bruegger's office space
located in Vermont (see Note 13) or amounts due under a lease for the new
corporate headquarters (see Note 12).

     Rent expense, including percentage rentals based on sales, was $9.9
million, $5.1 million and $3.2 million for fiscal years 1996, 1995 and 1994,
respectively.

{12} COMMITMENTS AND CONTINGENCIES

     The Company is party to several legal proceedings which are considered by
management to be customary and incidental to its business.  In the opinion of
management, after consulting with legal counsel, the ultimate disposition of
these lawsuits should not have a material adverse effect on the Company's
consolidated financial position or results of operations.

     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 $2.2 million.  The aggregate annual deductible is determined by
the number of eligible covered employees during the year and the coverage they
elect.

     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
approximately $600,000.

     During fiscal 1996, the Company invested $718,750 for a 50% ownership
interest in a limited liability company ("LLC") established to acquire and
develop a 53,000 square-foot facility, which the Company intends to occupy in
1997 as its corporate headquarters and lease from the LLC.  The investment is
accounted for using the equity method.  The related lease agreement provides for
a fifteen-year initial term, with four additional five-year renewal options.
Minimum annual rental payments are estimated to be approximately $600,000 and
have not been included in the future minimum lease payments summarized in Note
11.  The Company is responsible for costs incurred on the headquarters facility
in excess of those originally planned.  The Company and the other member of the
LLC have jointly and severally guaranteed the debt of the LLC, which amounted to
$4.0 million at October 27, 1996.

     At October 27, 1996, the Company had commitments aggregating $1.3 million
for the construction of restaurants.

                                     -40-
<PAGE>
 
{13} RELATED PARTY TRANSACTIONS

The Company leases its current headquarters facility, one Bruegger's Bagel
Bakery 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 27,  October 29,  October 30,
(Dollars in thousands)                   1996         1995          1994
<S>                                  <C>           <C>         <C> 
--------------------------------------------------------------------------------
Operating leases:
     Base rentals                      $2,542         $2,451        $2,424
     Percentage rentals                   350            365           353
--------------------------------------------------------------------------------
                                        2,892          2,816         2,777
--------------------------------------------------------------------------------
Capitalized leases:
     Interest                             821            913           969
     Reduction of lease obligations       204            188           168
     Percentage rentals                   200            160           123 
--------------------------------------------------------------------------------
                                        1,225          1,261         1,260
--------------------------------------------------------------------------------
     Total                             $4,117         $4,077        $4,037
--------------------------------------------------------------------------------
</TABLE>

     The Company guarantees future minimum lease payments of certain affiliated
franchisees of Bruegger's. As of October 27, 1996, future minimum lease payments
related to these leases were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)   
--------------------------------------
Fiscal Year            
--------------------------------------
<S>                            <C> 
1997                            $1,200
1998                             1,175
1999                             1,075
2000                               919
2001                               610
2002 and thereafter              1,826
--------------------------------------
Total minimum lease payments    $6,805
--------------------------------------
</TABLE>

     In October 1996, the Company entered into an agreement with a related party
to terminate a lease for office space located in Vermont. The agreement requires
a payment of $900,000 to be made in the first quarter of 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 the 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 1996, 1995
and 1994 were $14,500, $15,750 and $16,000, respectively.

     During the fiscal years 1996, 1995 and 1994, the Company made payments to
companies owned by certain directors, stockholders and officers of the Company
of $399,140, $324,500 and $204,398, respectively, for air transportation
services and $11.7 million and $6.1 million in fiscal 1995 and 1994,
respectively, 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, the Company loaned $9.9 million to 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. The $9.9 million
promissory note bears interest at 11%, is due April 15, 1997 and is
collateralized by substantially all assets of the related company. Interest
income recognized by the Company on this note in fiscal 1996 amounted to
$119,000. Subsequent to October 27, 1996 and through January 10, 1997, the

                                     -41-
<PAGE>
 
Company loaned this related company an additional $14.5 million to acquire
additional Bruegger's Bagel Bakeries from independent franchisees and for
working capital purposes. The Company anticipates that all of these bakeries
will be sold to other unrelated franchisees of Bruegger's in fiscal 1997.

     The Company and its Bruegger's concept transact certain business activities
with the aforementioned related company and certain other entities whose
principal shareholders are directors and/or officers of the Company. A summary
of these transactions for the fiscal year ended October 27, 1996 included:
purchases of cream cheese ($2.0 million); sales of bagels and related products
($2.0 million); royalties earned ($1.7 million); marketing fees earned
($764,000); installation of point-of-sale registers ($410,000); management,
accounting, legal and computer support services ($534,000); and transaction fees
($210,000).

     At October 27, 1996 and October 29, 1995, amounts owed by the Company to
related companies were $300,282 and $1.1 million, respectively. At October 27,
1996, amounts receivable from related parties aggregated $11.7 million (none at
October 29, 1995), which included the above note receivable of $9.9 million.

{14} ACQUISITIONS AND DISPOSITIONS

     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 $3.6 million 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 $3.5 million and entered into
development and franchise agreements for which the Company collects franchise
related revenues. The promissory note bears interest at 11%, is due April 15,
1997 and is collateralized by substantially all assets of Moe's. The Company
retained the rights to all of Moe's trademarks and other intangible 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 $123.1 million, and
direct acquisition and estimated post-merger integration costs aggregating $6.9
million. 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 $143.9 million has been allocated to
goodwill and is being amortized on a straight-line basis over 40 years.

     In connection with the acquisition, the Company recorded a special pre-tax
charge of $8.0 million 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 $6.0 million recorded as
part of the cost of the acquisition for facility closures, restaurant remodeling
and relocation and severance packages for Bruegger's personnel. Through fiscal
1996, approximately $4.9 million of these costs have been incurred, of which
$3.5 million were cash payments and $1.4 million were non-cash charges,
primarily for the write down of assets. The Company expects to complete these
actions in fiscal 1997.

     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 $75.4 million consisting of
$74.4 million in cash and the incurrence of $1.0 million 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 $13.2
million has been allocated to trademarks and is being amortized on a straight-
line basis over 40 years.


                                     -42-
<PAGE>
 
     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
$1.9 million 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, substantially 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 $9.6 million and consisted of $5.1 million in cash
(including $450,000 paid in fiscal 1996), the issuance of 316,832 shares of the
Company's common stock, valued at $4.0 million, 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 $1.4
million 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 $7.7 million has been allocated to franchise rights and is being
amortized on a straight-line basis over 20 years.

     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 $19.7 million consisting of $16.3 million in cash and the issuance of
286,080 shares of the Company's common stock valued at $3.4 million. The Company
also paid $2.6 million 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 $10.6 million has
been allocated to goodwill and is being amortized on a straight-line basis over
20 years.

                                     -43-
<PAGE>
 
     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.

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------
                                                      Fiscal Year Ended
                                                   OCTOBER 27,     October 29,
(Dollars in thousands, except per share data)         1996            1995
------------------------------------------------------------------------------
                                                          (Unaudited)
<S>                                                <C>              <C>
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.

                                     -44-
<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 as of October 27, 1996 and October 29, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for the fifty-two week periods ended October 27, 1996, October 29, 1995 and
October 30, 1994. 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 27, 1996 and October 29, 1995, and the
consolidated results of their operations and their cash flows for the fifty-two
week periods ended October 27, 1996, October 29, 1995 and October 30, 1994, in
conformity with generally accepted accounting principles.

                                         COOPERS & LYBRAND L.L.P.

South Bend, Indiana
January 10, 1997


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.


                                     -45-
<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 1997 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 1997 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 1997 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 1997 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.

                                      -46-

<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 27, 1996 and October 29,
          1995

          Consolidated Statements of Income for the fiscal years ended October
          27, 1996, October 29, 1995 and October 30, 1994

          Consolidated Statements of Stockholders' Equity for the fiscal years
          ended October 27, 1996, October 29, 1995 and October 30, 1994

          Consolidated Statements of Cash Flows for the fiscal years ended
          October 27, 1996, October 29, 1995 and October 30, 1994

          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.
 

                                      -47-

<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
Date:  January 23, 1997                President and Chief Executive Officer

  Pursuant to the requirements of the Securities 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           January 23, 1997
---------------------------------------       Executive Officer and Director
Daniel B. Fitzpatrick                         (Principal Executive Officer)
 
          /s/ David M. Findlay                Vice President and Treasurer (Principal           January 23, 1997
---------------------------------------       Financial Officer)
David M. Findlay                                   
 
          /s/ Marti'n L. Miranda              Vice President, Controller and Assistant          January 23, 1997
---------------------------------------       Secretary (Principal Accounting Officer)
Marti'n L. Miranda                                  
 
         /s/ Stephen A. Finn                  President and Chief Executive Officer of          January 23, 1997
---------------------------------------       Bruegger's Corporation and Director
Stephen A. Finn                               
 
        /s/ James K. Fitzpatrick              Senior Vice President, Chief Administrative       January 23, 1997
---------------------------------------       Officer, Chief Development Officer and Director
James K. Fitzpatrick                          
    
        /s/ William R. Schonsheck             Senior Vice President, Chief Operating Officer    January 23, 1997
---------------------------------------       of Burger King Division and Director
William R. Schonsheck                               
 
                                              Co-Chairman of the Board and Director             January   , 1997
---------------------------------------
Nordahl L. Brue
 
        /s/ Arthur J. Decio                   Director                                          January 23, 1997
---------------------------------------
Arthur J. Decio
 
                                              Director                                          January   , 1997
---------------------------------------
Michael J. Dressell
 
        /s/ Ezra H. Friedlander               Director                                          January 23, 1997
---------------------------------------
Ezra H. Friedlander
 
        /s/ Steven M. Lewis                   Director                                          January 23, 1997
---------------------------------------
Steven M. Lewis
 
        /s/ Christopher J. Murphy III         Director                                          January 23, 1997
---------------------------------------
Christopher J. Murphy III
</TABLE>

                                      S-1
<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 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..............................

3-A         (9)  Restated Articles of Incorporation 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), SunTrust Bank, Central Florida,
                 N.A., The Northern Trust Company and Key Bank..................................

4-A              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), SunTrust Bank, Central Florida,
                 N.A., The Northern Trust Company and Key Bank..................................

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

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

10-D        (1)  Form of Bruegger's Bakeries Franchise Agreement................................
</TABLE>

                                      S-2
<PAGE>
 
<TABLE> 
<CAPTION>                                                                                   
                                                                                                     PAGE NO.
 EXHIBIT                                                                                             IN THIS
   NO.                                             DESCRIPTION                                        FILING
---------        -------------------------------------------------------------------------------    ----------
<S>         <C>                                                                                     <C> 
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       (11)  Form of Bruegger's Development Agreement (Preferred Stock
                 Franchisees)...................................................................

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-Q             Form of Bruegger's Development Agreement and Form of
                 Bruegger's Franchise Agreement attached thereto (Standard
                 Franchisees)...................................................................

10-R             Form of Bruegger's Development Agreement and Form of
                 Bruegger's Franchise Agreement attached thereto (Related
                 Party Franchisees).............................................................

10-S             Form of Bruegger's Development Agreement and Form of
                 Bruegger's Franchise Agreement attached thereto (Future
                 Franchisees)...................................................................

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

10-U             Schedule of Bruegger's Related Party Development Agreements....................

10-V        (4)  *Employment Agreement between the Registrant and William R.
                 Schonsheck 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...................................
</TABLE> 

                                      S-3
<PAGE>
 
<TABLE> 
<CAPTION>         
                                                                                                     PAGE NO.
 EXHIBIT                                                                                             IN THIS
   NO.                                             DESCRIPTION                                        FILING
---------        -------------------------------------------------------------------------------    ----------
<S>         <C>                                                                                     <C> 
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-AC       (9)  Agreement between the Registrant and Nordahl L. Brue and Michael J.
                 Dressell, dated February 21, 1996..............................................

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

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

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

10-AG            Stock Option Agreement between the Registrant, Daniel B. Fitzpatrick and 
                 Bagel Acquisition Corporation, dated August 12, 1996...........................

10-AH            Computer and Communications Systems Agreement between the Registrant and
                 Bagel Acquisition Corporation, dated as of August 12, 1996.....................

10-AI            Accounting Services Agreement between the Registrant and Bagel Acquisition
                 Corporation, dated as of August 12, 1996.......................................

10-AJ            Management Services Agreement between the Registrant and Bagel Acquisition
                 Corporation, dated as of August 12, 1996.......................................

10-AK            Schedule of Related Party Franchise Agreements.................................

10-AL            (i) Revolving Credit Loan Agreement between the Registrant and Bagel
                 Acquisition Corporation, dated August 12, 1996; (ii) Promissory Note between
                 the Registrant and Bagel Acquisition Corporation, dated August 12, 1996........

10-AM            First Amendment to Revolving Credit Loan Agreement, Promissory Note and Security 
                 Agreement between the Registrant and Bagel Acquisition Corporation, dated as of
                 December 2, 1996...............................................................
</TABLE> 
                                      S-4
<PAGE>
 
<TABLE> 
<CAPTION>   
                                                                                                     PAGE NO.
 EXHIBIT                                                                                             IN THIS
   NO.                                             DESCRIPTION                                        FILING
---------        -------------------------------------------------------------------------------    ----------
<S>              <C>                                                                                <C> 
10-AN            (i) Termination and Modification Agreement between the Registrant
                 and Howard Opera House Associates, dated October 23, 1996;
                 (ii) Lease between the Registrant and Howard Opera House
                 Associates, dated as of January 28, 1991; (iii) Lease between
                 the Registrant and Howard Opera House Associates, dated as of
                 January 28, 1991...............................................................

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.

   (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 Quarterly Report on Form 10-Q for the quarterly period ended
        August 4, 1996 is incorporated herein by reference.

   (11) The copy of this exhibit filed as exhibit 10-H(i) "Development Agreement
        between Bruegger's Franchise Corporation and Registrant dated November
        15, 1993," to the Company's Registration Statement on Form S-1
        (Registration No. 33-73826) is incorporated herein by reference.

                                      S-5