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

                                   FORM 10-K

       (Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 
     For the fiscal year ended           OCTOBER 25, 1998
                                       OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
              For the transition period from _______ to ________
Commission file number     0-23420

                             QUALITY DINING, INC.
            (Exact name of registrant as specified in its charter)

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

      4220 EDISON LAKES PARKWAY
         MISHAWAKA, INDIANA                                46545
  (Address of principal executive offices)              (Zip Code)

                                (219) 271-4600
             (Registrant's telephone number, including area code)

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

                                     NONE

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

                      COMMON STOCK, WITHOUT PAR VALUE

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

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

                                  $31,889,193

Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at November 25, 1998
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").

                                  12,599,444

     Number of shares of Common Stock, without par value, outstanding at 
                               January 18, 1999

                      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 9, 1999.   PART III
 
<PAGE>
 
                             QUALITY DINING, INC.
                              Mishawaka, Indiana

              Annual Report to Securities and Exchange Commission

                               October 25, 1998

                                    PART I

ITEM 1. BUSINESS.

GENERAL

  Quality Dining, Inc. (the "Company") operates four distinct restaurant
concepts. It owns the Grady's American Grill(R) and two Italian Dining concepts
and operates Burger King(R) restaurants and Chili's Grill & Bar(TM)
("Chili's"(R)) as a franchisee of Burger King Corporation and Brinker
International, Inc. ("Brinker"), respectively. The Company operates its Italian
Dining restaurants under the tradenames of Spageddies Italian Kitchen(R)
("Spageddies"(R)) and Papa Vino's Italian Kitchen(R) ("Papa Vino's"(R)). As of
October 25, 1998, the Company operated 145 restaurants, including 70 Burger King
restaurants, 28 Chili's, 39 Grady's American Grill restaurants, four Spageddies
and four Papa Vino's.

  The Company was founded in 1981 and has grown from a two-unit Burger King
franchisee to a multi-concept restaurant operator. The Company has grown by
capitalizing on (i) its significant presence in targeted markets, (ii) the
stable operating performance of its Burger King restaurants, (iii) strategic
acquisitions of Burger King restaurants, Chili's restaurants and the Grady's
American Grill concept, and (iv) management's extensive experience.

  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.

DISPOSITION OF BAGEL-RELATED BUSINESSES

  On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The sale included the stock of Bruegger's Corporation and the
stock of all of the other bagel-related businesses. The total proceeds from the
sale were $45,164,000. The consideration included the issuance by Bruegger's
Corporation of a junior subordinated note in the amount of $10,000,000, which
was recorded as $6,000,000 due to a $4,000,000 reserve for legal
indemnification, the transfer of 4,310,740 shares of the Company's common stock
valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a
receivable for purchase price adjustment of $500,000, and $16,841,000 in cash.
The subordinated note has an annual interest rate of 12% and matures in October
2004. Interest will be accrued and added to the principal amount of the note
through October 2000 and will be paid in cash for the remaining life of the
note. The Company did not recognize any interest income from this note in fiscal
1998. The cash component of the proceeds included an adjustment for the
calculation of the net working capital deficit. The calculation used was subject
to final adjustment and is being disputed by Messrs. Brue and Dressell. The
Company does not expect the ultimate resolution of this dispute to have a
material adverse effect on the Company's financial position or results of
operations but there can be no assurance thereof.

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

                                       2
<PAGE>
 
BUSINESS STRATEGY

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

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

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

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

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

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

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

EXPANSION

  The Company intends to limit its expansion in fiscal 1999 and focus on
operations. The Company currently plans to open two to four Burger King
restaurants and one full service restaurant in fiscal 1999. During fiscal 1998,
the Company added four new Burger King restaurants, converted one Spageddies
into a Papa Vino's and sold one Grady's American Grill. At the end of fiscal
1998, the Company operated 39 Grady's American Grill restaurants, four
Spageddies, four Papa Vino's, 70 Burger King restaurants and 28 Chili's
restaurants. Subsequent to the conclusion of fiscal 1998, the Company sold one
Grady's American Grill restaurant.

  The amount of the Company's total investment to develop new restaurants
depends upon various factors, including prevailing real estate prices and lease
rates, raw material costs and construction labor costs in each market in which a
new restaurant is to be opened. The Company may own or lease the real estate for
future development.
 
  The Company's ability to manage the diverse operations resulting from its past
growth will be essential to its ability to succeed. Prior to fiscal 1996, the
Company's business historically was focused primarily on the development and
operation of Burger King restaurants and Chili's restaurants. The Grady's
American Grill and Italian Dining concepts have varying degrees of name
recognition. Although the Company opened its first Spageddies in 1994, the
Company's Italian Dining concepts are not yet time proven. In addition, the
Company's acquisitions of Grady's American Grill and Spageddies have caused it
to assume many functions performed by the previous owners, requiring increased
staffing and expenditures in the areas of advertising and marketing, purchasing,
management information systems and others. Accordingly, the Company's
development and operation of these restaurant concepts are subject to a wider
range of risks than those associated with the development and operation of its
Burger King and Chili's restaurants.

                                       3
<PAGE>
 
BURGER KING RESTAURANTS

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

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

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

CHILI'S GRILL & BAR

  General. The Chili's concept is owned by Brinker, a publicly-held corporation
headquartered in Dallas, Texas. The first Chili's Grill & Bar restaurant opened
in 1975.

  Menu. Chili's restaurants are full service, casual dining restaurants
featuring quick, efficient and friendly table service designed to minimize
customer waiting and facilitate table turnover. Service personnel are dressed
casually to reinforce the casual, informal environment. Chili's restaurants
feature a diverse 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. Each Chili's restaurant has a full
bar serving beer, wine and cocktails.

  Advertising and 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. As part of a system-wide
promotional effort, the Company has agreed that for the period beginning January
1, 1999 and ending June 30, 1999, it will pay an additional advertising fee of
3/4% of sales. 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 and
radio 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.

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 37 of the 38 Grady's American Grill restaurants now owned and
operated by the Company. The Company's Grady's American Grill concept is
proprietary and provides the Company with significant flexibility for expansion
and development.

                                       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 high quality desserts. Entrees emphasize on-premise scratch
preparation in a classic American style.

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

ITALIAN DINING CONCEPTS

  General.  The Company's Italian Dining concept consists of Papa Vino's Italian
Kitchen and Spageddies Italian Kitchen. The first Papa Vino's restaurant was
opened in 1996 and the first Spageddies restaurant was opened in 1994. The
Company had been a franchisee of Spageddies since 1994, and became the owner of
the concept in October 1995. Papa Vino's and Spageddies each offers a casual
dining atmosphere with high-quality food, generous portions and moderate prices,
all enjoyed in a setting featuring the ambiance of a traditional Italian
trattoria with stone archways, large wines casks and wine racks lining the walls
and exhibition cooking in an inviting, comfortable environment. The Company's
Italian Dining concepts are proprietary and provide the Company with significant
flexibility for expansion and development.

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

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

TRADEMARKS

  The Company owns the following registered trademarks: Grady's American
Grill(R), Spageddies Italian Kitchen(R), Spageddies(R), Papa Vino's(R) and Papa
Vino's Italian Kitchen(R).  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,
cash management, information technology, purchasing and procurement, human
resources, finance, marketing, advertising, menu development, budgeting and
planning, legal, site selection and development support services for each of its
operating subsidiaries.

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

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

                                       5
<PAGE>
 
   Site Selection. Site selection for new restaurants is made by the Company's
senior management under the direction of the Company's Chief Development
Officer, subject in the case of the Company's franchised restaurants to the
approval of its franchisors. Within a potential market area, the Company
evaluates high-traffic locations to determine profitable trading areas. Site-
specific factors considered by the Company include traffic generators, points of
distinction, visibility, ease of ingress and egress, proximity to direct
competition, access to utilities, local zoning regulations and various other
factors. In addition, in evaluating potential full service dining 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. Additionally, the Company employs the use of toll
free customer feedback telephone services and outside "shopper services" to
visit restaurants periodically to ensure that the restaurants meet the Company's
operating standards. The Company's operational structure encourages all
employees to assume a proprietary role ensuring that such standards and
specifications are met.

     Burger King.  The Company's Burger King operations are focused on achieving
   a high level of customer satisfaction with speed, accuracy and quality of
   service closely monitored.  The Company's senior management and restaurant
   management staff are principally responsible for ensuring compliance with the
   Company's and BKC's operating procedures.  The Company and BKC 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.  These standards include food preparation rules regarding,
   among other things, minimum cooking times and temperatures, sanitation and
   cleanliness.  In addition, BKC has set maximum time standards for holding
   unsold prepared food.  For example, sandwiches and french fries are required
   to be discarded after ten minutes following preparation.

     Full Service Dining. The Company has uniform operating standards and
   specifications relating to the quality, preparation and selection of menu
   items, maintenance and cleanliness of the premises and employee conduct in
   its full service dining concepts. At the Company's Chili's restaurants,
   compliance with these standards and specifications is monitored by
   representatives of Brinker. Each Grady's American Grill and Italian Dining
   restaurant typically has a general manager and three to four assistant
   managers who together train and supervise employees and are, in turn,
   overseen by an Area Director.

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

   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.

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

                                       6
<PAGE>
 
     Full Service Dining. The Company requires all general and restaurant
   managers of its full service dining concepts to participate in a system-wide,
   comprehensive training program. These programs teach management trainees
   detailed food preparation standards and procedures for each concept. These
   programs are designed and implemented by the Company's senior concept
   management teams.

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

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

IMPACT OF YEAR 2000

   The term "Year 2000" is a general term used to describe the various problems
that may result from the improper processing of dates and date-sensitive
calculations by computers and other machinery and equipment as the year 2000 is
approached and thereafter.  These problems generally arise from the fact that
most of the world's computer hardware and software has historically used only
two digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000's" from dates in the "1900's."

   The Company's State of Readiness.  The Company has established a formal plan
("Year 2000 Plan") to (i) test its information technology systems to evaluate
Year 2000 compliance, (ii) assess the Year 2000 compliance of its information
technology vendors, (iii) assess its non-information technology systems that
utilize embedded technology such as micro-controllers and (iv) determine the
readiness of third parties such as government agencies, utility companies,
telecommunication companies, suppliers and other "non-technology" third party
vendors. The Company has completed the testing and assessment of its information
technology systems including non-information technology systems that utilize
embedded technology. The Company has determined that 34 of its critical systems
were Year 2000 compliant by December 31, 1998 and anticipates that the 20
remaining critical systems will be Year 2000 compliant by June, 1999.

   Independent of the Company's Year 2000 Plan, the Company has previously
determined it would replace its point of sale equipment in as many as 75 of its
full service dining restaurants. This determination was part of the Company's
ongoing efforts to enhance financial controls through a centralized,
computerized, accounting system to enhance the tracking of data to enable the
Company to better manage its operations. The Company is currently in the process
of replacing the point of sale equipment in its full service restaurants and
expects to complete this process by August, 1999. The replacement systems will
be Year 2000 compliant. The Company expects the replacement of the point of sale
equipment in its 75 full service restaurants to cost approximately $3 million.
The Company anticipates incurring non-cash charges of approximately $500,000 to
$750,000 in connection with the disposition of certain of its point of sale
equipment. The Company has determined that its point of sale equipment in its 70
Burger King restaurants is Year 2000 compliant.

   Costs to Address the Company's Year 2000 Issues.  The Company expenses costs
associated with its Year 2000 Plan as the costs are incurred except for costs
that the Company would otherwise capitalize. The Company does not expect the
costs associated with its Year 2000 Plan to have a material adverse effect on
its financial position or results of operations. The Company is unable to
estimate the costs it may incur as a result of Year 2000 problems suffered by
third parties with which it deals. The Company has surveyed its critical
vendors, other than utilities and government agencies, and believes that each
vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable
alternative suppliers that are Year 2000 compliant will be available.

   Risks Presented by Year 2000 Problems.  To operate its businesses, the
Company relies upon government agencies, utility companies, telecommunications
companies, suppliers and other third party service providers over which it can
assert little control.  The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid Year 2000 related
disruption.  If they do not adequately address their Year 2000 issues, the
Company's business may be materially affected which could result in a materially
adverse effect on the 

                                       7
<PAGE>
 
Company's results of operations and financial condition. If the Company is not
able to integrate replacement point of sale systems at its full service
restaurants, its ability to effectively operate those restaurants could be
substantially impaired. As a result of the Company's ongoing assessment, the
Company may identify additional areas of its business that are at risk of Year
2000 disruption. The absence of any such determination at this point represents
only the current status of the assessment phase of the Company's Year 2000 Plan
and should not be construed to mean that there are no other areas of the
Company's business which are at risk of a Year 2000 related disruption.

   The Company's Contingency Plans.  The Company's Year 2000 Plan calls for the
development of contingency plans for areas of its business that are susceptible
to a substantial risk of a Year 2000 related disruption where the Company
determines that such disruption could be mitigated through reasonable, cost
effective contingency plans.  The Company has not yet developed detailed
contingency plans specific to Year 2000 events for any specific area of
business.  Consistent with its Year 2000 Plan, the Company will develop specific
Year 2000 contingency plans for such areas of business as and if such
determinations are made.

FRANCHISE AND DEVELOPMENT AGREEMENTS

   Burger King.  The Company and BKC 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 25, 1998, the Company had developed 16 Burger King restaurants
under the Burger King Agreement.  To maintain its rights under the Burger King
Agreement, the Company must develop two additional Burger King restaurants by
December 31, 1999.  Although the Company has the right to develop 18 Burger King
restaurants, the Company is not obligated to do so and may terminate the Burger
King Agreement since it had developed at least 10 Burger King restaurants prior
to December 31, 1996.

   Under the Burger King Agreement, the Company is responsible for all costs and
expenses incurred in locating, acquiring and developing restaurant sites. The
Company must also satisfy BKC'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. BKC 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 BKC's franchise requirements. BKC may terminate the Burger
King Agreement if the Company defaults in the performance thereunder or under
any franchise agreement. BKC 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.

   In addition, as of October 25, 1998, the Company had opened two additional
Burger King restaurants under separate agreements with Burger King during fiscal
1998.

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

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

   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.

                                       8
<PAGE>
 
    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 ("Midwest Region"), Delaware, New
Jersey and Pennsylvania ("Philadelphia Region"). The Company paid development
fees totaling $260,000 for the right to develop the restaurants in the regions.
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 part of a system-wide promotional effort, the Company has agreed that
for the period beginning January 1, 1999 and ending June 30, 1999, it will pay
additional advertising fees of 3/4% of sales. In addition, the Company is
required to spend 2% of sales from each restaurant on local advertising. As of
October 25, 1998, the Company operated 28 Chili's.

    The Company may develop up to 41 Chili's without specific approval of the
franchisor, but is obligated to satisfy the following development schedule:

<TABLE>
<CAPTION>
                                                                  MINIMUM CUMULATIVE NUMBER OF RESTAURANTS
                                                                  ----------------------------------------
 
                                                                  MIDWEST       PHILADELPHIA     ENTIRE
                                                                  REGION        REGION           TERRITORY
                                                                  ------        ------           ---------
                              <S>                                 <C>           <C>              <C>
                              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 and Brinker could terminate 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 specifications for designs, color schemes,
signs and equipment, formulas for preparation of food and beverage products,
marketing concepts, inventory, operations and financial control methods,
management training and technical assistance and materials. Each franchise
agreement prohibits the Company from transferring a franchise without the prior
approval of the franchisor.

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

                                       9
<PAGE>
 
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. McDonald's and Wendy's restaurants are the
principal competitors to the Company's Burger King restaurants. The competitors
to the Company's Chili's and Italian Dining restaurants are other casual dining
concepts such as T.G.I. Friday's, Applebee's, Bennigan's, Olive Garden and Red
Lobster restaurants. The primary competitors to Grady's American Grill are
Houston's, J. Alexander's, Outback Steakhouse, Houlihan's, Cooker Bar & Grille,
and O'Charley's Restaurant & Lounge, as well as a large number of locally-owned,
independent restaurants. The Company believes that competition is likely to
become even more intense in the future.

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

GOVERNMENT REGULATION

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

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

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

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

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

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


EMPLOYEES

     As of October 25, 1998, the Company employed approximately 8,400 persons.
Of those employees, approximately 100 held management or administrative
positions, approximately 520 were involved in restaurant management, and the
remainder were engaged in the operation of the Company's restaurants. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its employee relations to be good.


ITEM 2.  PROPERTIES.

     The following table sets forth, as of October 25, 1998, the 19 states in
which the Company operated restaurants and the number of restaurants in each
state. Of the 145 restaurants which the Company operated as of October 25, 1998,
the Company owned 49 and leased 96. Many leases provide for base rent plus an
additional rent based upon sales to the extent the additional rent exceeds the
base rent, while other leases provide for only a base rent.

<TABLE>
<CAPTION>
                    Number of Company-Operated Restaurants                                                 
                    --------------------------------------                                                 
                                                                 Grady's                                   
                                          Burger                 American    Italian                       
                                           King      Chili's      Grill       Dining    Total              
                                           ----      -------      -----       ------    -----              
                    <S>                   <C>        <C>         <C>         <C>        <C>                
                    Alabama                                           1                       1             
                    Arkansas                                          1                       1             
                    Colorado                                          3                       3             
                    Delaware                              2                                   2             
                    Florida                                           6                       6             
                    Georgia                                           5                       5             
                    Illinois                                          1                       1             
                    Indiana                  38           5                       2          45             
                    Michigan                 32           6           1           4          43             
                    Mississippi                                       1                       1             
                    New Jersey                            5           1                       6             
                    New Mexico                                        1                       1             
                    North Carolina                                    3                       3             
                    Ohio                                  3           1           2           6             
                    Oklahoma                                          1                       1             
                    Pennsylvania                          7                                   7             
                    Tennessee                                         5                       5             
                    Texas                                             7                       7             
                    Virginia                                          1                       1             
                                           ----------------------------------------------------
                                             70          28          39           8         145         
                                             ==          ==          ==           =         ===         
</TABLE>

     Burger King.  As of October 25, 1998, 41 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, a director and executive
officer of  the Company, 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 seven restaurants
from unrelated third parties.  The eight leases with Burger King Corporation are
subject to the renewal of the franchise agreements for those locations.  The
Company owned 12 of its Burger King restaurants as of October 25, 1998.

     Chili's Grill & Bar.  As of October 25, 1998, the Company owned 10 of its
Chili's restaurants and leased 18 other restaurants from unrelated parties.

                                       11
<PAGE>
 
     Grady's American Grill. As of October 25, 1998, the Company owned 22 of its
Grady's American Grill restaurants. 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 16 Grady's American Grill
restaurants were leased from unrelated parties.

     Italian Dining. As of October 25, 1998, the Company owned five of the
Italian Dining restaurants and leased the three other restaurants from unrelated
parties.

     Office Leases.  The Company leases approximately 53,000 square feet for its
headquarters facility in an office building located in Mishawaka, Indiana that
was constructed in 1997 and is leased from a limited liability company in which
the Company has a 50% interest.  The term of the lease agreement is 15 years.
Approximately 4,500 square feet and 5,200 square feet of the Company's
headquarters building have been subleased to two tenants for terms of seven and
10 years, respectively.  The Company's former headquarters facility, a 9,700
square foot office building which is leased from an affiliated partnership, has
been subleased to a local financial institution for a term extending through the
expiration of the Company's lease on December 31, 1999.  See Item 13 "Certain
Relationships and Related Transactions."  The Company is responsible for a lease
relating to office space in Burlington, Vermont, which was utilized for regional
management of its Bruegger's concept, which was sold on October 20, 1997.  The
Company is attempting to sublease this office.  The Company also leases office
space in Detroit, Michigan and Fort Wayne, Indiana  for management of its Burger
King restaurants and in Dallas, Texas for management of its Grady's American
Grill restaurants.  The Company no longer utilizes the office space in Detroit,
Michigan and is attempting to sublease it.


ITEM 3.  LEGAL PROCEEDINGS.

     The Company and certain of its officers and directors are parties to
various legal proceedings relating to the Company's purchase, operation and
financing of the Company's bagel-related businesses.

     Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation, and
Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality Baking,
LLC, commenced an action on July 9, 1997 filed in the United States District
Court, for the Eastern District of Missouri, Eastern Division, against
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael
Dressell, Daniel B. Fitzpatrick and John Firth.  On April 22, 1998, the Court
granted the defendants' Motion to Transfer this matter to the United States
District Court for the Northern District of Indiana.  The complaint alleges that
the plaintiffs purchased their franchises based upon financial representations
that have not materialized, that they purchased preferred stock in Bruegger's
Corporation  based upon false representations, that the defendants falsely
represented their intentions with respect to repurchasing bakeries from the
plaintiffs, and that the defendants violated implied covenants of good faith and
fair dealing.

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

     Both of the above pending franchise related actions are in preliminary
stages and only limited discovery has occurred. In each of these cases, one or
more present or former officers and directors of the Company have been named as
party defendants and the Company has and is advancing defense costs on their
behalf. Pursuant to the Share Exchange Agreement by and among Quality Dining,
Inc., Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, the
Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel
Disposition Corporation and Lethe, LLC, and certain other related agreements
entered into as part of the disposition of the Company's bagel-related
businesses, the Company is responsible for 50% of the first $14 million of
franchise related litigation expenses, inclusive of attorney's fees, costs,
expenses, settlements and judgments (collectively "Franchise Damages").
Bruegger's Corporation and certain of its affiliates are obligated to indemnify
the Company from all other Franchise Damages. The Company is obligated to pay
the first $3 million of its share of Franchise Damages in cash. Through October
25, 1998, the Company has paid approximately $850,000 in cash and assigned 

                                       12
<PAGE>
 
its $1.2 million note from BruWest to Bruegger's Corporation which together
reduce the Company's remaining obligation to pay cash in respect of Franchisee
Damages to approximately $950,000. The remaining $4 million of the Company's
share of Franchise Damages is payable by crediting amounts owed to the Company
pursuant to the $10 million junior subordinated note issued to the Company by
Bruegger's Corporation. Through October 25, 1998, the outstanding balance due
under the junior subordinated note has been reduced by $600,000 in respect of
Franchisee Damages. Based upon the currently available information, the Company
does not believe that these cases individually or in the aggregate will have a
material adverse effect on the Company's financial position and results of
operations but there can be no assurance thereof. Such assessment is based in
part upon the Company's belief that Bruegger's Corporation has and will continue
to have the ability to perform its indemnity obligations.

     James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997.  The
complaint named as defendants 12 individuals who are current or former directors
or officers of the Company.  The complaint alleged that the individual
defendants as directors breached fiduciary duties to the Company by approving
certain transactions in 1997 involving loans to Bagel Acquisition Corporation
that allegedly benefited Daniel B. Fitzpatrick, the Company's Chairman,
President and Chief Executive Officer.  The plaintiff also alleged that
individual defendants participated in a "conspiracy to waste, dissipate, and
improperly use funds, property and assets" of the Company for the benefit of
Bagel Acquisition Corporation and Mr. Fitzpatrick.  The plaintiff alleged that
the Company and its shareholders had been damaged in an amount in excess of
$28,000,000.  The relief sought also included the appointment of a receiver, an
accounting and attorney's fees.  On April 27, 1998, the Court dismissed the
complaint without prejudice, for failure to make a "demand" upon the Company's
board of directors. By letter dated May 12, 1998, Mr. Bies has demanded that the
Company pursue these claims against the defendants.  In accordance with the
Indiana Business Corporation Law, the board of directors has appointed a special
committee to investigate the allegations and determine whether it is in the best
interests of the Company to pursue this matter.  The special committee consists
of three of the Company's outside directors, Messrs. Decio, Lewis and Murphy
(named defendants in the action) along with David T. Link, Dean of the Notre
Dame Law School. Subsequent to the establishment of the special committee, Mr.
Bies refiled his action on July 30, 1998.  As a result of its investigation of
Mr. Bies' demand, the special committee has determined that the claims
identified by Mr. Bies are without merit and that it would not be in the
Company's best interests to pursue them.  Therefore, on January 6, 1999, the
special committee filed a motion to dismiss or alternatively for summary
judgement.

     On or about April 15, 1997, Texas Commerce Bank National Association
("Texas Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a
Florida limited partnership ("BFBC"). At the time of the Loan BFBC was a
franchisee under franchise agreements with Bruegger's Franchise Corporation (the
"Franchisor"). The Company at that time was an affiliate of the Franchisor. In
connection with the Loan and as an accommodation of BFBC, the Company executed
to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company agreed
that upon maturity of the Loan by default or otherwise that it would either (1)
pay the Loan obligations or (2) buy the Loan and all of the related loan
documents (the "Loan Documents") from Texas Commerce or its successors. In
addition several principals of BFBC (the "Principal Guarantors") guaranteed
repayment of the Loan by each executing a "Principal Guaranty". On November 10,
1998, the bank (1) declared that the Loan was in default, (2) notified BFBC, the
Principal Guarantors and the Company that all of the Loan obligations were due
and payable, and (3) demanded payment.

     The Company elected to satisfy its obligations under the Guaranty by
purchasing the Loan from the bank.  On November 24, 1998, the Company bought the
Loan for $4,294,000.  Thereafter, the Company sold the Loan to its Texas
affiliate Grady's American Grill, L.P. ("Grady's").  On November 30, 1998
Grady's commenced an action seeking to recover the amount of the Loan from one
of the Principal Guarantors, Michael K. Reilly ("Reilly").  As part of this
action Grady's also seeks to enforce a Subordination Agreement that was one of
the Loan Documents against MKR Investments, L.P., a partnership ("MKR").  Reilly
is the general partner of MKR.  This action is pending in the United States
District Court for the Southern District of Texas Houston Division as Case No.
H-98-4015.  The Company believes that BFBC is likely to file suit against it and
one or more of its affiliates, officers, and Bruegger's Franchise Corporation
asserting claims arising out of BFBC's franchise relationship with Bruegger's
Franchise Corporation and the Loan.  Based upon the currently available
information, the Company does not believe that these matters will have a
materially adverse effect on the Company's financial position or results of
operations.  However, there can be no assurance that the Company will be able to
realize sufficient value from Reilly to satisfy the amount of the Loan or that
the Company will not incur any liability as a result of a suit by BFBC.

                                       13
<PAGE>
 
     The Company and certain of its executive officers are defendants in a class
action lawsuit filed in the United States District Court for the Northern
District of Indiana.  The complaint alleges, among other things, that the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 thereunder by failing to disclose various
matters in connection with the Company's acquisition, development, financing and
disposition of its bagel-related businesses.  The putative class period in such
actions is from June 7, 1996 to May 13, 1997 on which dates the price of the
Company's common stock closed at $34.25 and $6.56, respectively.  The plaintiffs
are seeking, among other things, an award of unspecified compensatory damages,
interest, costs and attorney's fees. The Company has filed a motion to dismiss
the complaint which is presently pending before the Court.  The Company believes
that it and its executive officers have meritorious defenses to the allegations
and it intends to vigorously defend against the allegations made in the
complaints. However, there can be no assurance that the ultimate outcome of this
or other actions (including other actions under federal or state securities
laws) arising out of the Company's acquisition, development, financing and
disposition of its bagel-related businesses will not have a material adverse
effect on the Company's financial position or results of operations.

     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, 1995, 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 was obligated to defend the lawsuit and indemnify the
Company and Grayling Corporation against any loss or damages resulting from the
lawsuit.  Steele settled the lawsuit on March 27, 1998 without any liability or
expense to the Company.  The Company and Grayling Corporation and their
affiliates received a general release.

     BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a former
indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond,
Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest")
commenced an action on January 30, 1997 filed in the United States District
Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality
Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an
investment banking firm retained by BruWest, alleging inter alia that the
Bruegger's Defendants breached commitments to provide financing to BruWest,
interfered with the plaintiffs' efforts to obtain financing from third parties,
violated existing franchise and development agreements between BruWest and
Bruegger's Franchise Corporation, violated certain provisions of the Minnesota
Franchise Act and breached duties and implied covenants of good faith and fair
dealing.  The Bruegger's Defendants denied all allegations in the complaint.
Without admitting any liability or obligation to do so, on March 11, 1997,
Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan was
secured by certain assets of the plaintiffs and personal guarantees of Messrs.
LeMond and Snow.  The loan provides for monthly interest payments commencing
April 11, 1997 at the rate of nine percent (9%) per annum and matured on
September 11, 1997.  On March 14, 1997, the complaint was dismissed, without
prejudice.  On May 22, 1997, BruWest refiled the complaint with additional
allegations challenging the enforceability of the loan documents and personal
guarantees.  This action was settled on August 19, 1998.

     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 1998 fiscal year.

                                       14
<PAGE>
 
EXECUTIVE OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
              Name                  Age                 Position
---------------------------------  -----  --------------------------------------
<S>                                <C>    <C>
Daniel B. Fitzpatrick                41   Chairman of the Board, President and
                                          Chief Executive Officer
                                                                               
John C. Firth                        41   Executive Vice President, General
                                          Counsel and Secretary

James K. Fitzpatrick                 43   Senior Vice President, Chief
                                          Development Officer and Director

William R. Schonsheck                48   Senior Vice President, Chief Operating
                                          Officer of Burger King Division and
                                          Director

Patrick J. Barry                     36   Senior Vice President -Administration
                                          and Information Technology

David M. Findlay                     37   Senior Vice President - Finance and
                                          Treasurer

Gerald O. Fitzpatrick                38   Senior Vice President - Burger King   
                                          Division                             
                                                                               
Scott C. Smith                       43   Senior Vice President - Full Service  
                                          Dining Division                      
                                                                               
Robert C. Hudson                     42   Vice President - Grady's American
                                          Grill Division

Martin L. Miranda                    35   Vice President, Controller and
                                          Assistant Secretary

Michael J. Wargo                     38   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 25 years of experience in
the restaurant business. Mr. Fitzpatrick also serves as a director of 1st Source
Corporation, a publicly held diversified bank holding company based in South
Bend, Indiana.

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

     James K. Fitzpatrick has served as Senior Vice President and Chief
Development Officer of the Company since August 1995. 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 27 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 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 30 years of experience in the Burger King
business.

                                       15
<PAGE>
 
     Patrick J. Barry joined the Company in October 1996 and serves as the
Company's Senior Vice President - Administration and Information Technology.
Prior to joining the Company, Mr. Barry was a management consultant with The
Keystone Group and Andersen Consulting.

     David M. Findlay has served as Senior Vice President - Finance since April
1997.  He has served as Senior Vice President - Finance and Treasurer since
February 1998. He joined the Company in May 1995 as Vice President - Director of
Planning and Investor Relations and was promoted to Vice President and Treasurer
in October 1996.  Prior to joining the Company, Mr. Findlay spent 10 years at
The Northern Trust Company of Chicago, Illinois, specializing in commercial
lending to large companies and financial institutions.

     Gerald O. Fitzpatrick serves as a Senior Vice President in the Company's
Burger King Division.  Mr. Fitzpatrick  has served in various capacities in the
Company's Burger King operations since 1983.  Prior to joining the Company, he
served as a district manager for a franchisee of Burger King Corporation.  He
has over 19 years of experience in the restaurant business.

     Scott C. Smith joined the Company in May 1994 and has served as the
Company's Senior Vice President in charge of the Company's full service dining
operations since October 1996. Prior to that, Mr. Smith served as Vice President
or Senior Vice President of the Company in charge of the Company's Chili's and
Italian Dining operations. Prior to joining the Company in June of 1994 he
served as director of franchise operations for the Chili's and Spageddies
divisions of Brinker. He has 24 years of experience in the restaurant business.

     Robert C. Hudson joined the Company in December of 1995 when the Company
acquired Grady's American Grill.  From 1992 until joining the Company, Mr.
Hudson held various operational positions at Brinker, most recently as an area
director in its Grady's American Grill division.

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

     Michael J. Wargo has served as Vice President - Director of Human Resources
since September 1995.  He joined the Company in January 1994 as Director of
Human Resources.  He was previously employed by Valley American Bank & Trust
Company as director of training and development, and prior to that he was a
human resources officer at NBD Bank.  Mr. Wargo has over 15 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 1999 Annual
Meeting of Shareholders.)

                                       16
<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 20, 1999, there were 397  holders
of record and approximately 5,450 beneficial owners.

<TABLE>
<CAPTION>
                         Calendar 1998               Calendar 1997     
                       High          Low           High          Low   
                      ------------------          ------------------   
<S>                   <C>        <C>              <C>       <C>        
First Quarter         $ 6.094    $ 3.625          $ 19.875  $ 10.250   
Second Quarter          5.500      3.625            12.750     4.563   
Third Quarter           4.000      2.625             7.000     3.375   
Fourth Quarter          5.094      1.938             5.563     3.250    
</TABLE>

     The Company does not pay cash dividends on its Common Stock. The Company
does not anticipate paying cash dividends in the foreseeable future. The
Company's revolving credit agreement prohibits the payment of cash dividends and
restricts other distributions. The agreement expires in April of 2000.

     No unregistered equity securities were sold by the Company during fiscal
1998.

                                       17
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA.

QUALITY DINING, INC.

<TABLE>
<CAPTION>
(In thousands, except unit and per share data)
------------------------------------------------------------------------------------------------------------------------------------
                                                                              Fiscal Year Ended (1)
                                                    October 25,     October 26,    October 27,     October 29,      October 30,
                                                       1998            1997           1996            1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>            <C>             <C>              <C> 
STATEMENT OF OPERATIONS DATA(2):
Revenues:
Restaurant sales:
    Grady's American Grill                           $  81,241      $  85,403       $ 85,101         $      -          $     -
    Burger King                                         80,391         74,616         70,987           57,013           49,716
    Chili's Grill & Bar                                 55,572         54,277         41,913           38,267           14,286
    Italian Dining Division                             15,040         12,973          8,388            4,741              174
    Bruegger's Bagel Bakery                                  -         64,928         25,967            5,270              191
------------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales                                 232,244        292,197        232,356          105,291           64,367
    Franchise related revenue                                -         10,055          5,274                -                -
------------------------------------------------------------------------------------------------------------------------------------
Total revenues                                         232,244        302,252        237,630          105,291           64,367
------------------------------------------------------------------------------------------------------------------------------------
Operating expenses
     Restaurant operating expenses
        Food and beverage                               69,102         88,629         72,201           31,176           18,576
        Payroll and benefits                            66,404         87,905         66,176           27,191           16,190
        Depreciation and amortization                   11,475         17,691         11,635            5,109            2,610
        Other operating expenses                        55,644         74,691         52,452           24,057           15,351
------------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses:                   202,625        268,916        202,464           87,533           52,727
    General and administrative                          15,488         28,718         11,229            5,285            3,838
    Amortization of intangibles                          1,085          3,112          2,537              682               83
    Impairment of assets                                   250        185,300              -                -                -
    Store closing costs                                      -         15,513              -                -                -
    Franchise operating partner expense                      -          2,066              -                -                -
    Restructuring and integration costs                      -              -          9,938                -                -
------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses                               219,448        503,625        226,168           93,500           56,648
------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (3)                             12,796       (201,373)        11,462           11,791            7,719
------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
    Interest expense                                   (11,962)       (10,599)        (6,340)          (2,699)          (1,314)
    Gain (loss) on sale of property and  equipment        (345)           362              4              343              (59)
    Interest income                                        190            221            206              127              155
    Other income (expense), net                            541             32            154              (12)             (14)
------------------------------------------------------------------------------------------------------------------------------------
Total other expense                                    (11,576)        (9,984)        (5,976)          (2,241)          (1,232)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                        1,220       (211,357)         5,486            9,550            6,487
Income tax provision (benefit)                           1,107        (14,869)         2,816            3,661            2,559
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                    $     113      $(196,488)      $  2,670         $  5,889          $ 3,928
------------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share                    $     .01      $  (11.68)      $   0.23         $   0.85
----------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share                  $     .01      $  (11.68)      $   0.22         $   0.84

----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
----------------------------------------------------------------------------------------------------------------
Basic                                                   12,599         16,820         11,855            6,925
----------------------------------------------------------------------------------------------------------------
Diluted                                                 12,654         16,820         11,947            6,987
----------------------------------------------------------------------------------------------------------------
Pro forma income data (unaudited):
    Net income as reported                                                                                             $ 3,928
    Pro forma provision for income taxes (4)                                                                               512
------------------------------------------------------------------------------------------------------------------------------------
    Pro forma net income                                                                                               $ 3,416
------------------------------------------------------------------------------------------------------------------------------------
    Pro forma basic net income per share                                                                               $  0.59
------------------------------------------------------------------------------------------------------------------------------------
    Pro forma diluted net income per share                                                                             $  0.59
------------------------------------------------------------------------------------------------------------------------------------
 
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares
------------------------------------------------------------------------------------------------------------------------------------
    Basic                                                                                                                5,801
------------------------------------------------------------------------------------------------------------------------------------
    Diluted                                                                                                              5,826
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                                
                                       18
<PAGE>

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------
                                                                   Fiscal Year Ended (1)
                                             October 25,  October 26, October 27,  October 29,   October 30,
                                                 1998         1997        1996         1995          1994
---------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>         <C>          <C>           <C>   
RESTAURANT DATA:
Units open at end of period:
       Grady's American Grill                     39           40          42           -              -
       Italian Dining Division                     8            8           6           5              1
       Burger King                                70           66          63          59             48                  
       Chili's Grill & Bar                        28           28          22          18              8                
       Bruegger's Bagel Bakery Division:
           Company-owned                           -            -         100          12              3              
           Franchised                              -            -         325           -              -
-----------------------------------------------------------------------------------------------------------------
                    Totals                       145          142         558          94             60
-----------------------------------------------------------------------------------------------------------------
</TABLE> 

<TABLE> 
<CAPTION> 
<S>                                             <C>           <C>          <C>         <C>             <C> 
BALANCE SHEET DATA:
       Working capital (deficiency)             $  (14,747)   $ (8,239)    $ (3,383)   $  (1,826)      $ (1,894)        
       Total assets                                196,903     215,973      388,014       99,247         43,273        
       Long-term debt, capitalized lease
       and non-competition obligations             118,605     133,111       85,046       14,298          7,492
       Total stockholders' equity                   50,926      50,813      269,123       71,401         26,582
</TABLE> 

(1) All fiscal years presented consisted of 52 weeks.
(2) The selected statement of operations data include the operations of
    Bruegger's Corporation from June 7, 1996 until October 19, 1997; the Grady's
    American Grill restaurants from December 21, 1995; SHONCO, Inc. and certain
    affiliated companies from August 14, 1995; and Grayling Corporation and
    certain affiliated companies from November 10, 1994 .
(3) Operating loss for fiscal year ended October 26, 1997 includes an impairment
    of asset charge of $185.0 million, store closing costs of $15.5 million and
    franchise operating partner expense of $2.1 million which all relate to the
    divestiture by the Company of its bagel-related companies. Operating income
    for the fiscal year ended October 27, 1996 includes restructuring and
    integration charges of $1.9 million associated with costs related to the
    acquisitions of the Grady's American Grill concept and restaurants and
    Spageddies Italian Kitchen concept and $8.0 million associated with costs
    related to the acquisition of Bruegger's Corporation .
(4) Reflects federal and state income taxes (assuming a 37% effective tax rate)
    as if the Company had been taxed as a C Corporation rather than an S
    Corporation during these entire periods.

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

QUALITY DINING, INC.

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

RESULTS OF OPERATIONS

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

<TABLE> 
<CAPTION> 
---------------------------------------------------------------------------------------------------------------
                                                                                Fiscal Year Ended
                                                                       October 25,  October 26,  October 27,
                                                                           1998         1997         1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C> 
Revenues:
Restaurant sales:
    Grady's American Grill                                                  35.0%       28.3%         35.8%  
    Burger King                                                             34.6        24.7          29.9
    Chili's Grill & Bar                                                     23.9        18.0          17.7
    Italian Dining Division                                                  6.5         4.2           3.5
    Bruegger's Bagel Bakery                                                    -        21.5          10.9
---------------------------------------------------------------------------------------------------------------
Total restaurant sales                                                     100.0        96.7          97.8
    Franchise related revenue                                                  -         3.3           2.2
---------------------------------------------------------------------------------------------------------------
Total revenues                                                             100.0       100.0         100.0
---------------------------------------------------------------------------------------------------------------
Operating expenses:
    Restaurant operating expenses (as % of restaurant sales):
       Food and beverage                                                    29.8        30.3          31.1
       Payroll and benefits                                                 28.6        30.1          28.5
       Depreciation and amortization                                         4.9         6.1           5.0
       Other operating expenses                                             24.0        25.6          22.5
---------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses:                                        87.3        92.1          87.1
    General and administrative                                               6.7         9.5           4.7
    Amortization of intangibles                                              0.5         1.0           1.1
    Restructuring and integration costs                                        -           -           4.2
    Impairment of assets                                                     0.1        61.3             -
    Store closing costs                                                        -         5.1           1.1
    Franchise operating partner expense                                        -         0.7           4.2
---------------------------------------------------------------------------------------------------------------
Total  operating expenses                                                   94.6       166.6          95.2
---------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                      5.4       (66.6)          4.8
---------------------------------------------------------------------------------------------------------------
Other income (expense):
    Interest expense                                                        (5.2)       (3.5)         (2.7)
    Gain (loss) on sale of property and equipment                           (0.1)        0.1             -
    Interest income                                                          0.1         0.1           0.1
    Other income                                                             0.2           -           0.1
---------------------------------------------------------------------------------------------------------------
Total other expense, net                                                    (5.0)       (3.3)         (2.5)
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                            0.4       (69.9)          2.3
Income tax provision (benefit)                                               0.4        (4.9)          1.2 
---------------------------------------------------------------------------------------------------------------
Net income (loss)                                                             - %      (65.0)%         1.1%
---------------------------------------------------------------------------------------------------------------
</TABLE> 

                                      20
<PAGE>
 
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

     Total revenues were $232,244,000 in fiscal 1998, a decrease of $70,008,000
or 23.2% when compared to the total revenues of $302,252,000 in fiscal 1997.
This decrease was primarily attributable to the divestiture of the Company's
bagel-related businesses on October 20, 1997.  Total revenues in fiscal 1997
included $10,055,000 of franchise related revenues from the Company's bagel-
related operations.

     Restaurant sales in fiscal 1998 decreased $59,953,000 or 20.5% to
$232,244,000, when compared to restaurant sales of  $292,197,000 in fiscal 1997.
This decrease was primarily attributable to the divestiture of the Company's
bagel-related businesses on October 20, 1997.  Restaurant sales in fiscal 1997
included $64,928,000 of revenue from the Company's bagel-related operations.
Due to the sale of the bagel-related businesses in fiscal 1997, the Company no
longer has any bagel related revenues.

     The Company's Grady's American Grill restaurants sales decreased $4,162,000
to $81,241,000 in fiscal 1998 compared to restaurant sales of $85,403,000 in
fiscal 1997.  The decrease was due to the sale of three units in fiscal 1997,
one unit during fiscal 1998 and a decrease in average weekly sales to $39,096 in
fiscal 1998 from $39,741 in fiscal 1997. The Company has implemented marketing,
operational and menu initiatives intended to stimulate sales at its Grady's
American Grill restaurants. Due to the competitive nature of the restaurant
industry, there can be no assurances that these initiatives will achieve the
intended results.

     The Company's Burger King restaurant sales increased $5,775,000 to
$80,391,000 in fiscal 1998 when compared to restaurant sales of $74,616,000 in
fiscal 1997.  The sales increase was primarily due to an increase in average
weekly sales to $22,806 in fiscal 1998 from $21,972 in fiscal 1997.  Sales also
increased due to additional sales weeks from four  new restaurants opened during
fiscal 1998 and three restaurants opened in fiscal 1997 which were open for
their first full year in fiscal 1998.

     The Company's Chili's Grill & Bar restaurant sales increased $1,295,000 to
$55,572,000 in fiscal 1998 when compared to restaurant sales of $54,277,000 in
fiscal 1997.  The increase was due to six restaurants opened in fiscal 1997
being open for their first full year in fiscal 1998. Average weekly sales were
$38,168 in fiscal 1998 versus $40,596 in fiscal 1997. The Company has
implemented marketing and operational initiatives intended to stimulate sales at
its Chili's Grill & Bar restaurants. Due to the competitive nature of the
restaurant industry, there can be no assurances that these initiatives will
achieve the intended results.

     The Company's Italian Dining Division restaurant sales increased $2,067,000
to $15,040,000 in fiscal 1998 when compared to restaurant sales of $12,973,000
in fiscal 1997.  The increase was due to an increase in average weekly sales to
$36,153 in fiscal 1998 from $34,321 in fiscal 1997 and additional sales weeks
from two restaurants opened  in fiscal 1997 being open for their first full year
in fiscal 1998.

     Total restaurant operating expenses were $202,625,000 in fiscal 1998,
compared to $268,916,000 in fiscal 1997.  As a percentage of restaurant sales,
total restaurant operating expenses decreased to 87.3% in fiscal 1998 from 92.1%
in fiscal 1997.  The following factors influenced the operating margins:

     Food and beverage costs were $69,102,000, or 29.8% of total restaurant
sales in fiscal 1998, compared to $88,629,000, or 30.3%, of total restaurant
sales in fiscal 1997. The decrease was primarily due to the sale of the bagel-
related operations, operational improvements and purchasing efficiencies which
occurred during the year.

     Payroll and benefits were $66,404,000 in fiscal 1998, compared to
$87,905,000 in fiscal 1997.   As a percentage of total restaurant sales, payroll
and benefits decreased to 28.6% in fiscal 1998 from 30.1% in fiscal 1997.
Payroll expense decreased as a percent of restaurant sales due to the sale of
the bagel-related businesses, operational improvements and increased labor
efficiencies due to the reduction in new unit development. The Company expects
to experience continued pressure to raise wages due to competition by all retail
businesses to attract qualified employees.

     Depreciation and amortization decreased $6,216,000 to $11,475,000 in fiscal
1998 compared to $17,691,000 in fiscal 1997.  As a percentage of total
restaurant sales, depreciation and amortization decreased to 4.9% in fiscal 1998
from 6.1% in fiscal 1997.  The decrease is mainly due to the sale of the bagel-
related companies.

                                       21
<PAGE>
 
     Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $55,644,000 in fiscal 1998 compared to
$74,691,000 in 1997.  Other restaurant operating expenses as a percentage of
total restaurant sales decreased in fiscal 1998 to 24.0% from 25.6% in fiscal
1997.  This decrease was primarily due to the Company's divestiture of  its
bagel-related businesses and improvements in these expense categories at the
Company's Burger King, Chili's and Italian Dining concepts.

     General and administrative expenses, which include corporate and district
management costs, were $15,488,000 in fiscal 1998, compared to $28,718,000 in
fiscal 1997.  As a percentage of total revenues, general and administrative
expenses decreased to 6.7% in fiscal 1998 from 9.5% in fiscal 1997. This
decrease was primarily  due to the Company's divestiture of its bagel-related
businesses.

     Amortization of intangibles was $1,085,000 in fiscal 1998, compared to
$3,112,000 in fiscal 1997.  The decrease was mainly due to the elimination of
Bruegger's related goodwill in connection with the Bruegger's asset impairment
charge taken during fiscal 1997.

     The Company executed an agreement during the fourth quarter of fiscal 1998
to sell one Grady's American Grill restaurant.  As a result of this agreement
the Company recorded a non-cash impairment charge of $250,000 to reduce the
carrying amounts of related assets to their estimated fair value.  The sale was
completed during the first quarter of fiscal 1999.

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

     In fiscal 1997, the Company elected not to build two Burger King
restaurants which it had acquired the development rights to as part of the
SHONCO acquisition. In conjunction with this decision the Company recorded a
non-cash impairment charge of $300,000 to write-off the capitalized development
rights associated with these two locations.

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

     In fiscal 1997, the Company recorded a $15,513,000 charge for closing 
under-performing Bruegger's units and other Bruegger's units which were at
various stages of development when the decision was made to divest the bagel-
related businesses. The charge included amounts for terminating occupancy
leases, write-offs of fixed assets and pre-opening costs, restaurant management
severance costs and other store closing costs. Through fiscal 1998 the Company
had incurred $12,916,000 of these costs, of which $2,123,000 were cash payments
and $10,793,000 were non-cash charges, primarily the write-down of assets. The
remaining costs are primarily associated with terminating occupancy leases which
the Company expects to be substantially complete by the end of fiscal 1999.

     The Company had operating income of $12,796,000 in fiscal 1998 compared to
an operating loss of $201,373,000 in fiscal 1997.  The increase in income is
mainly due to the special charges in fiscal 1997 relating to the divestiture of
the bagel-related businesses.

     Total other expenses, as a percentage of  total revenues, increased to 5.0%
in fiscal 1998 compared to 3.3% in fiscal 1997. The increase was primarily due
to an increase in interest expense resulting from increased borrowings and
higher borrowing rates under the Company's revolving credit agreement.

     Income tax expense of  $1,107,000 was recorded in fiscal 1998 compared to a
benefit of $14,869,000  in fiscal 1997.  The fiscal 1997 benefit was due to the
pre-tax loss in fiscal 1997, resulting primarily from the special 

                                       22
<PAGE>
 
charges noted above. The Company's effective income tax rate in fiscal 1998 was
90.7% compared to an income tax rate of 7.0% (benefit) in fiscal 1997. The high
effective income tax rate for fiscal 1998 was mainly due to a large portion of
state taxes being based on criteria other than income. The fiscal 1997 benefit
was primarily due to the operating losses which resulted in a federal income tax
benefit and a nominal state income tax provision. The low income tax benefit
rate is a result of a significant portion of the $185,000,000 non-cash charge
for asset impairment being non-deductible for tax purposes.

     The Company has net operating loss carryforwards of approximately $46
million as well as FICA tip credits and alternative minimum tax credits of $2.1
million.  Net operating loss carryforwards of $43 million expire in 2012 and $3
million expire in 2018.  FICA tip credits of  $1.3 million expire in 2012 and
$500,000 expire in 2013.  The alternative minimum tax credits of $300,000
carryforward indefinitely. During fiscal 1998, the Company increased its
valuation reserve against its net operating loss carryforwards to $10.5 million
leaving a net deferred tax asset of $10.0 million.  The Company's assessment of
its ability to realize the net deferred tax asset was based on the weight of
both positive and negative evidence, including the taxable income of its current
operations.  Based on this assessment, the Company's management believes it is
more likely than not that the net deferred tax benefit recorded will be
realized. Such evidence will be reviewed prospectively and should the Company's
operating performance continue to improve, the Company may recognize additional
tax benefits related to its net deferred tax asset position in the future.

     The net income in fiscal 1998 was $113,000, or $0.01 per share, compared to
a net loss of $196,488,000, or $11.68 per share, in fiscal 1997. The increase in
net income is mainly due to the lack of special charges in fiscal 1998 relating
to the divestiture of the bagel-related assets.

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

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

     Restaurant sales in fiscal 1997 increased 25.7% to $292,197,000, compared
to $232,356,000 in fiscal 1996.  This increase was primarily attributable to
sales generated by restaurants opened during fiscal 1997 and restaurants open
for the first full year in fiscal 1997. These restaurants include:  seven Burger
King restaurants; 10 Chili's Grill & Bar restaurants; three Italian Dining
restaurants; one Grady's American Grill (three Grady's American Grills were sold
during fiscal 1997) and 88 bagel bakeries. The Company divested its bagel-
related businesses on October 20, 1997. The Company experienced a significant
decline in average unit sales at its Grady's American Grill restaurants during
fiscal 1997.

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

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

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

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

                                       23
<PAGE>
 
     Other restaurant operating expenses include rent and utilities, royalties,
promotional expense, repairs and maintenance, property taxes and insurance.
Other restaurant operating expenses were $74,691,000 in fiscal 1997 compared to
$52,452,000 in 1996.  Other restaurant operating expenses as a percentage of
total restaurant sales increased in fiscal 1997 to 25.6% from 22.5% in fiscal
1996.  This increase  was primarily due to the Company's Bruegger's Bagel Bakery
and Grady's American Grill units having lower than expected sales which produced
higher costs as a percentage of sales, as well as increased promotional expenses
at these two concepts.

     General and administrative expenses, which include corporate and district
management costs, were $28,718,000 in fiscal 1997, compared to $11,229,000 in
fiscal 1996.  As a percentage of total revenues, general and administrative
expenses increased to 9.5% in fiscal 1997 from 4.7% in fiscal 1996. The
increases in fiscal 1997 were primarily due to costs associated with the
development of corporate infrastructure designed to support the anticipated
aggressive development of the Bruegger's brand. General and administrative costs
also increased due to significant professional services associated with the
successful efforts by the Company to divest itself of its bagel-related
businesses.  During the second quarter of fiscal 1997, in connection with the
decision to discontinue Bruegger's development  and divest the Company's bagel-
related businesses, a staff reduction plan was implemented.

     Amortization of intangibles was $3,112,000 in fiscal 1997, compared to
$2,537,000 in fiscal 1996.  The increase was due to the amortization of
intangible assets related to the acquisitions of Bruegger's Corporation and
Grady's American Grill.

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

     During fiscal 1997 the Company elected not to build two Burger King
restaurants which it had acquired the development rights to as part of the
SHONCO acquisition.  In conjunction with this decision the Company recorded a
non-cash impairment charge of $300,000 to write-off the capitalized  development
rights associated with these two locations.

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

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

     The Company had an operating loss of $201,373,000 in fiscal 1997 compared
to operating income of $11,462,000 in fiscal 1996.  The special charges noted
above were the primary reason for the decline in operating income.

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

     An income tax benefit of  $14,869,000 was recorded in fiscal 1997 compared
to an expense of $2,816,000  in fiscal 1996 due to the pre-tax loss in fiscal
1997, resulting primarily from the special charges noted above.  The Company's
effective income tax rate in fiscal 1997 was 7.0% (benefit) compared to an
income tax rate of 51.3% in fiscal 1996, primarily due to  the operating losses
experienced resulting in a federal income tax benefit and a 

                                       24
<PAGE>
 
nominal state income tax provision. The low income tax benefit rate is a result
of a significant portion of the $185,000,000 non-cash charge for asset
impairment being non-deductible for tax purposes.

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


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 25,  October 26,    October 27,
                                                               1998          1997          1996
-----------------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>             <C>
Net cash provided by operations                               $ 14,899      $  3,700      $  14,464
Nonoperating sources of cash:
    Proceeds from sale of common stock, net                          -             -         59,755
    Borrowings of long-term debt                                     -        62,500        218,285
    Proceeds from the sale of assets                             2,453         2,073              4
    Disposition of businesses, net of cash sold                      -        15,720              -
 Nonoperating uses of cash:
    Acquisitions of businesses, net of cash acquired                 -             -        (77,168)
    Purchase of property and equipment                          (6,205)      (32,080)       (41,135)
    Repayment of long-term debt                                (14,350)      (14,004)      (163,223)
    Advances to affiliates                                           -       (26,515)       (10,025)
</TABLE>


     In fiscal 1998 cash provided by operations increased to $14,899,000 from
$3,700,000 in fiscal 1997 due to the divestiture of the Company's bagel-related
businesses and improvements in the consolidated financial performance of the
Company's other restaurant concepts.

     The Company's primary cash requirements in fiscal 1999 will be to finance
capital expenditures in connection with the opening of new restaurants,
remodeling of existing restaurants, maintenance expenditures, point of sale
upgrades and the reduction of debt under the Company's revolving credit
agreement.  The Company's capital expenditures for fiscal 1999 are expected to
range from $9,000,000 to $11,000,000.  During the first quarter of fiscal 1999
the Company purchased a loan for $4,294,350 from Texas Commerce Bank National
Association in satisfaction of its obligations under a loan guaranty (see Note
11).  The purchase of the loan was financed through borrowings under the
Company's revolving credit agreement. During fiscal 1999, the Company
anticipates opening two to four Burger King restaurants and one full service
restaurant. The actual amount of the Company's cash requirements for capital
expenditures depends in part on the number of new restaurants opened and the
actual expense related to remodeling and maintenance of existing units.

     On September 11, 1998, the Company amended its revolving credit agreement
with Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread (8.19% at October 25, 1998). The revolving credit
agreement is collateralized by the stock of certain subsidiaries of the Company,
the $10 million junior subordinated note issued by Bruegger's Corporation,
certain interest in its franchise agreements with Brinker and Burger King
Corporation and substantially all of the Company's personal property. The
revolving credit expires on April 26, 2000, at which time all amounts are due.

     The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and fixed
charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions on
the payment of dividends (other than stock dividends) and limitations on the
purchase or redemption of shares of the Company's capital stock.  In addition,
the revolving credit agreement contains a mandatory reduction in borrowing
availability on December 31, 1999 to the lesser of $125,000,000 or an amount
based on a contractual formula. In addition, based on a contractual formula, the
borrowing availability may be reduced on June 30, 1999.

                                       25
<PAGE>
 
     The Company anticipates that its cash flows 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 1999.


RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. The Company does
not believe the reporting and display of comprehensive income will materially
impact the financial statements.

     In June 1997, the Financial Accounting Standards Board issued SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be presented. This statement
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. The Company will adopt SFAS No.131 for its
fiscal 1999 Financial Statements.

     During 1998, Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" was issued, broadly defining costs related to start-up activities
and requiring these costs be expensed as incurred. The Company has historically
capitalized these costs and expensed them over the first year of operations of
the store. The Company plans to adopt this Statement of Position for fiscal year
1999 and does not expect the resulting change to have a significant impact on
results of operations.


IMPACT OF YEAR 2000

     The term "Year 2000" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery and equipment as the
year 2000 is approached and thereafter. These problems generally arise from the
fact that most of the world's computer hardware and software has historically
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's."

     The Company's State of Readiness. The Company has established a formal plan
("Year 2000 Plan") to (i) test its information technology systems to evaluate
Year 2000 compliance, (ii) assess the Year 2000 compliance of its information
technology vendors, (iii) assess its non-information technology systems that
utilize embedded technology such as micro-controllers and (iv) determine the
readiness of third parties such as government agencies, utility companies,
telecommunication companies, suppliers and other "non-technology" third party
vendors.  The Company has completed the testing and assessment of its
information technology systems including non-information technology systems that
utilize embedded technology.  The Company has determined that 34 of its critical
systems were Year 2000 compliant by December 31, 1998 and anticipates that the
20 remaining critical systems will be Year 2000 compliant by June, 1999.

     Independent of the Company's Year 2000 Plan, the Company has previously
determined it would replace its point of sale equipment in as many as 75 of its
full service dining restaurants. This determination was part of the Company's
ongoing efforts to enhance financial controls through a centralized,
computerized, accounting system to enhance the tracking of data to enable the
Company to better manage its operations.   The Company is currently in the
process of replacing the point of sale equipment in its full service restaurants
and expects to complete this process by August, 1999. The replacement systems
will be Year 2000 compliant. The Company expects the replacement of the point of
sale equipment in its 75 full service restaurants to cost approximately $3
million.  The 

                                       26
<PAGE>
 
Company anticipates incurring non-cash charges of approximately $500,000 to
$750,000 in connection with the disposition of certain of its point of sale
equipment. The Company has determined that its point of sale equipment in its 70
Burger King restaurants is Year 2000 compliant.

     Costs to Address the Company's Year 2000 Issues. The Company expenses costs
associated with its Year 2000 Plan as the costs are incurred except for costs
that the Company would otherwise capitalize. The Company does not expect the
costs associated with its Year 2000 Plan to have a material adverse effect on
its financial position or results of operations.  The Company is unable to
estimate the costs it may incur as a result of Year 2000 problems suffered by
third parties with which it deals.  The Company has surveyed its critical
vendors, other than utilities and government agencies, and believes that each
vendor will either be Year 2000 compliant by June, 1999 or, if not, suitable
alternative suppliers that are Year 2000 compliant will be available.

     Risks Presented by Year 2000 Problems.  To operate its businesses, the
Company relies upon government agencies, utility companies, telecommunications
companies, suppliers and other third party service providers over which it can
assert little control.  The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid Year 2000 related
disruption.  If they do not adequately address their Year 2000 issues, the
Company's business may be materially affected which could result in a materially
adverse effect on the Company's results of operations and financial condition.
If the Company is not able to integrate replacement point of sale systems at its
full service restaurants, its ability to effectively operate those restaurants
could be substantially impaired.  As a result of the Company's ongoing
assessment, the Company may identify additional areas of its business that are
at risk of Year 2000 disruption.  The absence of any such determination at this
point represents only the current status of the assessment phase of the
Company's Year 2000 Plan and should not be construed to mean that there are no
other areas of the Company's business which are at risk of a Year 2000 related
disruption.

     The Company's Contingency Plans. The Company's Year 2000 Plan calls for the
development of contingency plans for areas of its business that are susceptible
to a substantial risk of a Year 2000 related disruption where the Company
determines that such disruption could be mitigated through reasonable, cost
effective contingency plans.  The Company has not yet developed detailed
contingency plans specific to Year 2000 events for any specific area of
business.  Consistent with its Year 2000 Plan, the Company will develop specific
Year 2000 contingency plans for such areas of business as and if such
determinations are made.


IMPACT OF INFLATION

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

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

     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 and cost of capital to the Company; the
ability of the Company to develop and operate its restaurants; the hiring,
training and retention of skilled corporate and restaurant management and other
restaurant personnel; the integration and assimilation of acquired concepts; the
overall success of the Company's franchisors; the ability to obtain the
necessary government approvals and third-party consents; the ability of the
Company to modify or redesign its computer systems to work properly in the year
2000; and changes in governmental regulations, including increases in the
minimum wage.


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

Not Applicable.

                                       27
<PAGE>
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

QUALITY DINING, INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------
                                                                                      October 25,            October 26,
                                                                                          1998                   1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                    <C> 
ASSETS
Current assets:
     Cash and cash equivalents                                                            $   3,351              $   7,500
     Accounts receivable                                                                      2,358                  2,637
     Inventories                                                                              1,872                  1,912
     Deferred income taxes                                                                    2,848                  5,191
     Other current assets                                                                     1,568                  5,942
--------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                         11,997                 23,182
--------------------------------------------------------------------------------------------------------------------------
Property and equipment, net                                                                 136,764                144,363
--------------------------------------------------------------------------------------------------------------------------
Other assets:
     Deferred income taxes                                                                    7,152                  4,809
     Trademarks, net                                                                         12,320                 12,651
     Franchise fees and development fees, net                                                 9,259                  9,732
     Goodwill, net                                                                            8,594                  9,135
     Notes receivable, less allowance                                                         6,000                  6,000
     Pre-opening costs and non-competition agreements, net                                      213                    888
     Liquor licenses, net                                                                     2,859                  3,217
     Other                                                                                    1,117                  1,368
--------------------------------------------------------------------------------------------------------------------------
Total other assets                                                                           47,514                 47,800
--------------------------------------------------------------------------------------------------------------------------
Total assets                                                                              $ 196,275              $ 215,345
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of capitalized lease and non-competition obligations,
      principally to related parties                                                      $     370              $     464
     Accounts payable                                                                         7,086                  8,648
     Accrued liabilities                                                                     19,288                 22,309
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                    26,744                 31,421
Long-term debt                                                                              112,756                127,106
Capitalized lease principally to related  parties, less current portion                       5,849                  6,005
--------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                           145,349                164,532
--------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 10, 11 and 13)
Stockholders' equity:
     Preferred stock, without par value: 5,000,000 shares authorized; none issued
     Common stock, without par value: 50,000,000 shares authorized;
      12,619,444 and 12,619,059 shares issued, respectively                                      28                     28
     Additional paid-in capital                                                             236,420                236,420
     Retained earnings (deficit)                                                           (185,272)              (185,385)
--------------------------------------------------------------------------------------------------------------------------
                                                                                             51,176                 51,063
     Less treasury stock, at cost, 20,000 shares                                                250                    250
--------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                   50,926                 50,813
--------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                                $ 196,275              $ 215,345
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       28
<PAGE>
 
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
(In thousands, except per share data)
----------------------------------------------------------------------------------------------------------------------
                                                                                     Fiscal Year Ended
                                                                        October 25,     October 26,     October 27,
                                                                            1998            1997            1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>                <C>   
Revenues:
Restaurant sales:
     Grady's American Grill                                              $   81,241       $    85,403     $   85,101
     Burger King                                                             80,391            74,616         70,987
     Chili's Grill & Bar                                                     55,572            54,277         41,913
     Italian Dining Division                                                 15,040            12,973          8,388
     Bruegger's Bagel Bakery                                                      -            64,928         25,967
----------------------------------------------------------------------------------------------------------------------
Total restaurant sales                                                      232,244           292,197        232,356
----------------------------------------------------------------------------------------------------------------------
     Franchise related revenue                                                    -            10,055          5,274
----------------------------------------------------------------------------------------------------------------------
Total revenues                                                              232,244           302,252        237,630
----------------------------------------------------------------------------------------------------------------------
Operating expenses:
     Restaurant operating expenses:
         Food and beverage                                                   69,102            88,629         72,201
         Payroll and benefits                                                66,404            87,905         66,176
         Depreciation and amortization                                       11,475            17,691         11,635
         Other operating expenses                                            55,644            74,691         52,452
----------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses:                                        202,625           268,916        202,464
     General and administrative                                              15,488            28,718         11,229
     Amortization of intangibles                                              1,085             3,112          2,537
     Impairment of assets                                                       250           185,300              -
     Store closing costs                                                          -            15,513              -
     Franchise operating partner expense                                          -             2,066              -
     Restructuring and integration costs                                          -                 -          9,938
----------------------------------------------------------------------------------------------------------------------
Total operating expenses                                                    219,448           503,625        226,168
----------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                      12,796          (201,373)        11,462
----------------------------------------------------------------------------------------------------------------------
Other income (expense):
        Interest expense                                                    (11,962)          (10,599)        (6,340)
        Gain (loss) on sale of property and equipment                          (345)              362              4
        Interest income                                                         190               221            206
        Other income (expense), net                                             541                32            154
----------------------------------------------------------------------------------------------------------------------
Total other expense                                                         (11,576)           (9,984)        (5,976)
----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                             1,220          (211,357)         5,486
Income tax provision (benefit)                                                1,107           (14,869)         2,816
----------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                        $      113       $  (196,488)    $    2,670
----------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share                                        $     0.01       $    (11.68)    $     0.23  
----------------------------------------------------------------------------------------------------------------------
Diluted net income (loss) per share                                      $     0.01       $    (11.68)    $     0.22 
----------------------------------------------------------------------------------------------------------------------

Weighted average shares outstanding
----------------------------------------------------------------------------------------------------------------------
     Basic                                                                   12,599            16,820         11,855
----------------------------------------------------------------------------------------------------------------------
     Diluted                                                                 12,654            16,820         11,947
----------------------------------------------------------------------------------------------------------------------
</TABLE> 

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

                                      29
<PAGE>
 
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE> 
<CAPTION> 
(Dollars and shares in thousands)
------------------------------------------------------------------------------------------------------------------------------------

                                         Shares                                 Additional     Retained                   Stock-
                                         Common     Preferred     Common          Paid-in      Earnings     Treasury      holders'
                                         Stock        Stock        Stock          Capital      (Deficit)       Stock       Equity 
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>        <C>           <C>           <C>            <C>         <C>          <C> 
Balance, October 29, 1995                 8,857     $        -    $   28        $   63,190     $   8,433   $    (250)   $   71,401
    Net income, fiscal 1996                   -              -         -                 -         2,670           -         2,670
    Bruegger's acquisition:
       Issuance of common stock           5,127              -         -           123,051                                 123,051
       Issuance of preferred stock            -         11,780         -                 -             -           -        11,780
       Exchange of preferred stock
          for common stock                  286        (10,115)        -            10,115             -           -             -
    Redemption of preferred stock             -         (1,665)        -                 -             -           -        (1,665)
    Proceeds from sale of common
       stock, net of offering expenses    2,542              -         -            59,755             -           -        59,755
    Exercise of stock options               117              -         -             1,228             -           -         1,228
    Tax benefit arising from the
       exercise of stock options              -              -         -               903             -           -           903
------------------------------------------------------------------------------------------------------------------------------------
Balance, October 27, 1996                16,929              -        28           258,242        11,103        (250)      269,123
    Net loss, fiscal 1997                     -              -         -                 -      (196,488)          -      (196,488)
    Exercise of stock options                 1              -         -                 1             -           -             1
Bruegger's Disposition:
    Redemption of shares                 (4,311)             -         -                 -             -     (21,823)      (21,823)
    Retirement of common stock                -              -         -           (21,823)            -      21,823             -
------------------------------------------------------------------------------------------------------------------------------------
Balance, October 26, 1997                12,619              -        28           236,420      (185,385)       (250)       50,813
    Net income, fiscal 1998                   -              -         -                 -           113           -           113
------------------------------------------------------------------------------------------------------------------------------------
Balance, October 25, 1998                12,619     $        -    $   28        $  236,420     $(185,272)  $    (250)   $   50,926
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

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

                                      30

<PAGE>
 
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------------
                                                                                              Fiscal Year Ended
                                                                                October 25,       October 26,      October 27,
                                                                                    1998             1997            1996
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>             <C>              <C> 
Cash flows from operating activities:
    Net  income (loss)                                                          $       113     $   (196,488)    $       2,670
    Adjustments to reconcile net income (loss) to net cash provided by 
     operating activities:
        Depreciation and amortization of property and equipment                      11,381           16,094             9,836
        Amortization of other assets                                                  2,877            7,187             5,192
        Asset impairment charge                                                         250          185,300                 - 
        Store closing reserve                                                             -           15,513                 - 
        Gain (loss) on sale of property and equipment                                   345             (362)               (4)
        Deferred income taxes                                                             -          (11,748)               42
        Changes in operating assets and liabilities, excluding effects
           of acquisitions and dispositions:
           Accounts receivable                                                          279               65            (4,609)
           Inventories                                                                   40               16              (796)
           Other current assets                                                       4,374           (4,024)           (1,319)
           Accounts payable                                                          (2,174)            (432)              603
           Accrued liabilities                                                       (2,586)          (7,421)            2,849
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                            14,899            3,700            14,464
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
    Acquisitions of  businesses, net of cash acquired                                     -                -           (77,168)
    Disposition of businesses, net of cash sold                                           -           15,720                 - 
    Proceeds from sales of property and equipment                                     2,453            2,073                 4 
    Purchase of property and equipment                                               (6,205)         (32,080)          (41,135)
    Advances to affiliates                                                                -          (26,515)          (10,025)
    Payment of other assets                                                            (235)          (3,319)           (3,960)
    Other, net                                                                          (88)            (198)           (1,147)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities                                               (4,075)         (44,319)         (133,431)
----------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
    Proceeds from sale of common stock, net                                               -                -            59,755
    Proceeds from exercise of stock options                                               -                1             1,228
    Borrowings of long-term debt                                                          -           62,500           218,285
    Repayment of long-term debt                                                     (14,350)         (14,004)         (163,223)
    Repayment of capitalized lease and non-competition obligations                     (333)            (435)             (358)
    Payment of redeemable preferred stock subscription payable                            -                -              (250)
    Loan financing fees                                                                (290)            (387)                -
    Redemption of preferred stock                                                         -                -            (1,665)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                           (14,973)          47,675           113,772
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                 (4,149)           7,056            (5,195)
Cash and cash equivalents, beginning of year                                          7,500              444             5,639
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                          $     3,351     $      7,500     $         444 
----------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
<PAGE>
 
QUALITY DINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE> 
<CAPTION> 
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------
                                                                                           Fiscal Year Ended
                                                                               October 25,  October 26,     October 27,
                                                                                  1998        1997             1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>              <C> 
Supplemental disclosures of cash flow information:
    Cash paid for interest, net of amounts capitalized                        $    11,157     $     8,367     $   6,131
    Cash paid for income taxes                                                      1,106             757         2,850
Noncash investing and financing activities:
    Common stock received in disposition                                                -          21,823             -
    Property and equipment purchased and related liability
      included in accounts payable                                                    746             136         2,075
    Common stock issued in acquisitions                                                 -               -       123,051
    Preferred stock issued in acquisitions                                              -               -        11,780
    Long-term debt assumed in acquisitions                                              -               -        16,135
    Note receivable acquired in disposition of restaurants, net                         -           6,000         3,500
</TABLE>   

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

                                      32
<PAGE>
 
QUALITY DINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NATURE OF BUSINESS - Quality Dining, Inc. and its subsidiaries (the "Company")
develop and operate both quick service and full service restaurants in 19
states. The Company owns and operates 39 Grady's American Grill restaurants,
four restaurants under the tradename of Spageddies Italian Kitchen and four
restaurants under the tradename Papa Vino's Italian Kitchen. The Company also
operates, as a franchisee, 70 Burger King restaurants and 28 Chili's Grill & Bar
restaurants.

DISPOSITION OF BAGEL-RELATED BUSINESSES - On October 20, 1997, the Company sold
its bagel-related businesses to Mr. Nordahl L. Brue, Mr. Michael J. Dressell and
an entity controlled by them and their affiliates. The sale included the stock
of Bruegger's Corporation and the stock of all of the other bagel-related
businesses. The total proceeds from the sale were $45,164,000. The consideration
included the issuance by Bruegger's Corporation of a junior subordinated note in
the amount of $10,000,000, which was recorded as $6,000,000 due to a $4,000,000
reserve for legal indemnification, the transfer of 4,310,740 shares of the
Company's common stock valued at $21,823,000, owned by Messrs. Brue and
Dressell, which were retired, a receivable for purchase price adjustment of
$500,000, and $16,841,000 in cash. The subordinated note has an annual interest
rate of 12% and will mature in seven years. Interest will be accrued and added
to the principal amount of the note for the first three years and will be paid
in cash for the remaining life of the note. The Company did not recognize any
interest income from this note in fiscal 1998. The cash component of the
proceeds included an adjustment for the calculation of the net working capital
deficit. The calculation used was subject to final adjustment and is being
disputed by Messrs. Brue and Dressel. The Company does not expect the ultimate
resolution of this dispute to have a material adverse effect on the Company's
financial position or results of operations but there can be no assurance
thereof.

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

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

{2}  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR - The Company maintains its accounts on a 52/53 week fiscal year
ending the last Sunday in October. The fiscal years ended October 25, 1998
(fiscal 1998), October 26, 1997 (fiscal 1997) and October 27, 1996 (fiscal 1996)
each contained 52 weeks.

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

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

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

                                       33
<PAGE>
 
improvements are amortized over the shorter of the estimated useful life or the
lease term of the related asset. The general ranges of original depreciable
lives are as follows:

                                                       Years
                                                       -----
          Capitalized Lease Property                   17-20
          Buildings and Leasehold Improvements         15-31 1/2
          Furniture and Equipment                       3-7
          Computer Equipment & Software                 5

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

IMPAIRMENT OF LONG-LIVED ASSETS - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets," as of the beginning of its 1997 fiscal year. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain intangibles and goodwill related to those assets. The Company reviews
long-lived assets related to each restaurant annually for impairment, or
whenever events or changes in circumstances indicate that the carrying amount of
a restaurant may not be recoverable. An impaired restaurant is written down to
its estimated fair market value based on the best information available to the
Company. Considerable management judgment is necessary to estimate the fair
market value. Accordingly, actual results could vary significantly from such
estimates.

The Company recorded a $250,000 non-cash impairment charge in fiscal 1998 in
connection with its decision to sell a Grady's American Grill Restaurant. In
fiscal 1997, the Company recorded a $185,000,000 non-cash impairment charge in
connection with its decision to sell its bagel-related businesses (see Note 12).
In fiscal 1997, the Company decided not to build two Burger King restaurants
which it had acquired the development rights to as part of the SHONCO
acquisition. In conjunction with this decision the Company recorded a non-cash
impairment charge of $300,000 to write-off the capitalized development rights
associated with these two locations.

GOODWILL AND TRADEMARKS - Goodwill arising from the excess of the purchase price
over the acquired tangible and intangible net assets acquired in acquisitions
and trademarks are being amortized on a straight-line basis, principally over 40
years. Accumulated amortization of goodwill as of October 25, 1998 and October
26, 1997 was $2,169,000 and $1,628,000, respectively. Accumulated amortization
of trademarks as of October 25, 1998 and October 26, 1997 was $943,000 and
$612,000, respectively. The Company wrote-off all of the goodwill related to its
bagel businesses as part of the $185,000,000 non-cash impairment charge recorded
during fiscal 1997 (See Note 12).

FRANCHISE FEES AND DEVELOPMENT FEES - The Company's Burger King and Chili's
franchise agreements require the payment of a franchise fee for each restaurant
opened. Franchise fees are deferred and amortized on the straight-line method
over the lives of the respective franchise agreements. Development fees paid to
the respective franchisors are deferred and expensed in the period the related
restaurants are opened. The excess of the purchase price over the acquired
tangible and intangible assets acquired in the SHONCO acquisition has been
allocated to franchise rights. The franchise agreements generally provide for a
term of 20 years with renewal options upon expiration. Franchise fees are being
amortized on a straight-line basis, principally over 20 years. Accumulated
amortization of franchise fees and development costs as of October 25, 1998 and
October 26, 1997 was $2,704,000 and $2,230,000, respectively.

FRANCHISE RELATED REVENUE RECOGNITION - Franchise related revenue includes
royalties, franchise fees, development fees, net commissary revenue, interest
income and other miscellaneous fees related to the Company's bagel business
which was divested on October 20, 1997. Franchisees were required to pay monthly
royalties, generally 4% to 5% of restaurant sales, which the Company recognized
as earned. Each franchisee also paid an initial franchise fee for each bakery
opened. Development fees, which resulted from area development agreements with
franchisees, were deferred and recognized as revenue when all material
conditions had been substantially completed by the Company, which generally
occurred when the bakeries under the related area development agreements were
opened. There were no deferred development fees at October 25, 1998 and October
26, 1997. At October 27, 1996 there were $770,000 in deferred development fees.
Net commissary revenue resulted from products sold to franchisees from Company-
owned commissaries. Interest income resulted from the Company's notes receivable
from franchisees.

                                       34
<PAGE>
 
ADVERTISING - The Company incurs advertising expense related to its 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 were $6,807,000, $7,381,000 and $4,620,000 for fiscal
years 1998, 1997 and 1996, respectively. The Company had maintained an
advertising fund for national and regional advertising for the Bruegger's Bagel
Bakery ("Bruegger's") concept. The advertising fund collected fees paid by
Company-owned and franchised bakeries, and disbursed funds relating to costs
associated with maintaining, administering and preparing advertising, marketing,
public relations and promotional programs for the Bruegger's concept.
Contributions to the fund were based on a specified percentage of sales,
generally 2%. Such contributions were recorded as earned and were reflected as a
reduction of advertising expenses.

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 $577,000, $2,953,000 and $1,848,000 for fiscal years 1998, 1997 and
1996, respectively. Effective with fiscal 1999, the Company intends to expense
pre-opening costs as incurred in accordance with SOP 98-5 "Reporting on the
Costs of Start-up Activities". The adoption of SOP 98-5 will not have a
significant effect on the Company's results of operations.

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 25, 1998 and October
26, 1997 was $618,000 and $431,000, respectively.

COMPUTER SOFTWARE COSTS - Costs of purchased and internally developed computer
software are capitalized and amortized over a five-year period using the
straight-line method. As of October 25, 1998 and October 26, 1997, capitalized
computer software costs, net of related accumulated amortization, aggregated
$1,276,000 and $1,323,000, respectively. Amortization of computer software costs
was $445,000, $411,000 and $197,000 for fiscal years 1998, 1997 and 1996
respectively.

CAPITALIZED INTEREST - Interest costs capitalized during the construction period
of new restaurants were $57,000, $125,000 and $234,000 for fiscal years 1998,
1997 and 1996 respectively.

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

NET INCOME (LOSS) PER SHARE - Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding. Diluted net income per share assumes the exercise of stock options
using the treasury stock method, if dilutive.

CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Company to credit risk, consist primarily of cash and cash equivalents and a
note receivable. Substantially all of the Company's cash and cash equivalents at
October 25, 1998 were concentrated with a bank located in Michigan City,
Indiana.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.

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

                                       35
<PAGE>
 
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. The Company does not believe the reporting
and display of comprehensive income will materially impact the financial
statements.

In June 1997, the Financial Accounting Standards Board issued SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information." SFAS
No.131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be presented. This statement
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. The Company will adopt SFAS No. 131 for its
fiscal 1999 financial statements.

During 1998, Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" was issued, broadly defining costs related to start-up activities
and requiring these costs be expensed as incurred. The Company has historically
capitalized these costs and expensed them over the first year of operations of
the store. The Company plans to adopt this Statement of Position for fiscal year
1999 and does not expect the resulting change to have a significant impact on
results of operations.

RECLASSIFICATIONS - Certain information in the consolidated financial statements
for fiscal 1997 and fiscal 1996 has been reclassified to conform with the
current reporting format. The reclassifications had no effect on total assets,
liabilities and stockholders' equity or net income as previously reported.

{3}  OTHER CURRENT ASSETS AND ACCRUED LIABILITIES

Other current assets and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------

(Dollars in thousands)                                 October 25,   October 26,
                                                          1998          1997
--------------------------------------------------------------------------------
<S>                                                    <C>           <C> 
Other current assets:
        Deposits                                         $ 1,222       $ 1,270
        Refundable income taxes                                -         4,495
        Prepaid expenses and other                           346           177
--------------------------------------------------------------------------------
                                                         $ 1,568       $ 5,942
--------------------------------------------------------------------------------
Accrued liabilities:
        Accrued salaries, wages and severance            $ 3,277       $ 3,944
        Accrued advertising and royalties                  1,314         1,376
        Accrued property taxes                             1,030           759
        Accrued sales taxes                                  664           752
        Accrued disposition costs                          2,667         4,378
        Accrued store closing costs                        1,770         4,079
        Accrued insurance costs                            1,809         2,236
        Other accrued liabilities                          6,757         4,785
--------------------------------------------------------------------------------
                                                         $19,288       $22,309
--------------------------------------------------------------------------------
</TABLE>

                                       36
<PAGE>
 
{4}  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------

                                                    October 25,      October 26,
(Dollars in thousands)                                 1998             1997
--------------------------------------------------------------------------------
<S>                                                 <C>              <C>
Land                                                $ 37,660         $ 38,071
Capitalized lease property                             7,644            7,644
Buildings and leasehold improvements                  77,646           75,040
Furniture and equipment                               59,083           58,304
Construction in progress                                 285              379
--------------------------------------------------------------------------------
                                                     182,318          179,438
--------------------------------------------------------------------------------
Less, accumulated depreciation and capitalized 
 lease amortization                                   45,554           35,075
--------------------------------------------------------------------------------
Property and equipment, net                         $136,764         $144,363
--------------------------------------------------------------------------------
</TABLE>
                                                                                

{5}  FRANCHISE AND DEVELOPMENT RIGHTS

       The Company has entered into franchise agreements with two franchisors
for the operation of two of its restaurant concepts, Burger King and Chili's.
The franchise agreements provide the franchisors with significant rights
regarding the business and operations of the Company's franchised restaurants.
The franchise agreements with Burger King Corporation require the Company to pay
royalty and advertising fees equal to 3.5% and 4.0% of Burger King restaurant
sales, respectively. The franchise agreements with Brinker International, Inc.
("Brinker") covering the Company's Chili's restaurant concept require the
Company to pay royalty and advertising fees equal to 4.0% and 0.5% of Chili's
restaurant sales, respectively. In addition, the Company is required to spend 2%
of sales from each restaurant on local advertising. As part of a system-wide
promotional effort, the Company has agreed that for the period beginning January
1, 1999 and ending June 30, 1999, it will pay additional advertising fees of
3/4% of Chili's restaurant sales.

       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.


{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.

       Employees are also eligible to participate in either a 401(k) plan or a
deferred compensation program 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 plans and provides investment choices for the
employee.

       The Company's contributions under both plans aggregated $173,000, $99,000
and $100,000 for fiscal years 1998, 1997 and 1996, respectively.


{7}  INCOME TAXES

                                       37
<PAGE>

The provision (benefit) for income taxes for the fiscal years ended October 25,
1998, October 26, 1997 and October 27, 1996 is summarized as follows:

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------
                                                                   Fiscal Year Ended
                                                        October 25,      October 26,      October 27,
(Dollars in thousands)                                     1998              1997            1996
----------------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>              <C> 
Current:
    Federal                                             $        -       $     (4,243)    $    1,736
    State                                                    1,107              1,122          1,038                     
----------------------------------------------------------------------------------------------------------
                                                             1,107             (3,121)         2,774                   
----------------------------------------------------------------------------------------------------------
Deferred:
    Provision (benefit) for the period                           -            (11,748)            42
----------------------------------------------------------------------------------------------------------
    Total                                               $    1,107       $    (14,869)    $    2,816
----------------------------------------------------------------------------------------------------------
</TABLE> 

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

<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------------------
                                                                              October 25,         October 26,
(Dollars in thousands)                                                           1998                 1997
-------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                  <C> 
Deferred tax asset:

     Net operating loss carryforwards                                       $      18,682        $     17,741
     Restructuring and integration costs                                            1,629               4,601
     FICA tip credit minimum tax credit                                             2,164               1,720
     Accrued liabilities                                                            1,557                 778
     Capitalized lease obligations                                                    771                 712
     Other                                                                            153                  26
-------------------------------------------------------------------------------------------------------------------
     Deferred tax asset                                                            24,956              25,578
     Less: Valuation allowance                                                    (10,490)            (10,239)
-------------------------------------------------------------------------------------------------------------------
                                                                                   14,466              15,339
-------------------------------------------------------------------------------------------------------------------
Deferred tax liability:
     Property and equipment                                                        (3,109)             (2,967)
     Franchise fees, trademarks and goodwill                                       (1,304)             (1,630)
     Pre-opening expense                                                              (23)               (188)
     Other                                                                            (30)               (554)
-------------------------------------------------------------------------------------------------------------------
     Deferred tax liability                                                        (4,466)             (5,339)
-------------------------------------------------------------------------------------------------------------------
     Net deferred tax asset (liability)                                     $      10,000        $     10,000
-------------------------------------------------------------------------------------------------------------------
</TABLE> 


         The Company has net operating loss carryforwards of approximately $46
million as well as FICA tip credits and alternative minimum tax credits of $2.1
million. Net operating loss carryforwards of $43 million expire in 2012 and $3
million expire in 2018. FICA tip credits of $1.3 million expire in 2012 and
$500,000 expire in 2013. The alternative minimum tax credits of $300,000
carryforward indefinitely.

         During fiscal 1998, the Company increased its valuation reserve against
its net operating loss carryforwards to $10.5 million leaving a net deferred tax
asset of $10.0 million. The Company's assessment of its ability to realize the
net deferred tax asset was based on the weight of both positive and negative
evidence, including the taxable income of its current operations. Based on this
assessment, the Company's management believes it is more likely than not that
the net deferred tax benefit recorded will be realized. Such evidence will be
reviewed prospectively and should the Company's operating performance continue
to improve, the Company may recognize additional tax benefits related to its net
deferred tax asset position in the future. Effective with the acquisition of
Bruegger's Corporation on June 7, 1996, the Company established a valuation
allowance against Bruegger's Corporation's deferred tax assets in the amount of
$4.8 million. Subsequent to the acquisition date, the Company reduced the
valuation allowance by $680,000 with a corresponding reduction in goodwill. With
the sale of Bruegger's Corporation this allowance has been eliminated.

                                      38
<PAGE>
 
Differences between the effective income tax rate and the U.S. statutory tax
rate were as follows:

<TABLE> 
<CAPTION> 
-------------------------------------------------------------------------------------------------------------------- 
                                                                                   Fiscal Year Ended
                                                                     October 25,      October 26,      October 27,
(Percent of pretax income)                                              1998             1997             1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>              <C>
Statutory tax rate                                                        34.0%          (34.0)%            34.0%
State income taxes, net of federal income tax benefit                     59.0              .5              11.6
FICA tax credit                                                          (39.8)           (0.2)             (5.9)
Write off and amortization of goodwill                                       -            22.3              10.5
Change in valuation allowance                                             20.5             4.8                 -
Other, net                                                                17.0            (0.4)              1.1
--------------------------------------------------------------------------------------------------------------------
Effective tax rate                                                        90.7%           (7.0)%            51.3%
--------------------------------------------------------------------------------------------------------------------
</TABLE>


{8} LONG-TERM DEBT AND CREDIT AGREEMENTS

       On September 11, 1998, the Company amended its revolving credit agreement
with Chase Bank of Texas, as agent for a group of seven banks, providing for
borrowings of up to $130,000,000 with interest payable at the adjusted LIBOR
rate plus a contractual spread. The weighted average interest rate of all
borrowing as of October 25, 1998 and October 26, 1997 was 8.61% and 8.76%,
respectively. The revolving credit agreement is collateralized by the stock of
certain subsidiaries of the Company, the $10 million junior subordinated note
issued by Bruegger's Corporation, certain interest in its franchise agreements
with Brinker and Burger King Corporation and substantially all of the Company's
personal property. The revolving credit agreement matures on April 26, 2000, at
which time all amounts are due.

       The revolving credit agreement contains, among other provisions, certain
restrictive covenants including maintenance of certain prescribed debt and fixed
charge coverage ratios, limitations on the incurrence of additional
indebtedness, limitations on consolidated capital expenditures, restrictions on
the payment of dividends (other than stock dividends) and limitations on the
purchase or redemption of shares of the Company's capital stock. In addition,
the revolving credit agreement contains a mandatory reduction in borrowing
availability on December 31, 1999 to the lesser of $125,000,000 or an amount
based on a contractual formula. In addition, based on a contractual formula, the
borrowing availability may be reduced on June 30, 1999. At October 25, 1998, the
fair value of the amount outstanding under the revolving credit agreement
approximated the carrying amount.

{9} STOCK OPTION PLANS

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

       On March 26, 1997 the Company's shareholders approved the 1997 Stock
Option and Incentive Plan and therefore no awards for additional shares of the
Company's common stock will be made under the 1993 Stock Option and Incentive
Plan (although the terms of options previously granted pursuant to the 1993
Stock Option and Incentive Plan may still be modified). Under the 1997 Stock
Option and Incentive Plan, shares of restricted stock and options to purchase
shares of the Company's common stock may be granted to officers and other
employees. An aggregate of 1,100,000 shares of common stock has been reserved
for issuance under the 1997 Stock Option and Incentive Plan.

       Under the Outside Directors Stock Option Plan, 40,000 shares of common
stock have been reserved for the issuance of nonqualified stock options to be
granted to non-employee directors of the Company.  On May 1, 1994 and on each
May 1 thereafter, each then non-employee director of the Company will receive an
option to purchase 2,000 shares of common stock at an exercise price equal to
the fair market value of the Company's common stock on the date of grant.  Each
option has a term of 10 years and becomes exercisable six months after the date
of grant.  As of October 25, 1998 there were 38,000 options outstanding under
the Outside Directors Stock Option Plan.

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

                                       39
<PAGE>
 
       Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value method as prescribed by SFAS 123 (see
Note 2), the Company's net earnings (loss) and net earnings (loss) per share
would have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 (in thousands, except per share amounts)                          October 25,      October 26,      October 27,
                                                                      1998             1997             1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>              <C>
 Net income (loss), as reported                                      $   113        $ (196,488)        $  2,670
 Net income (loss), pro forma                                        $  (826)       $ (197,410)        $  2,188
 Basic net income (loss) per common share, as reported               $   .01        $   (11.68)        $   0.23
 Basic net income (loss) per common share, pro forma                 $  (.07)       $   (11.74)        $   0.18

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


       The weighted average fair value at the date of grant for options granted
during  fiscal 1998, 1997 and 1996 was $1.67, $6.80 and $11.38 per share,
respectively, which, for the purposes of this  disclosure, is assumed to be
amortized over the respective vesting period of the grants.  The fair value of
each option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following  weighted average assumptions used for
grants in fiscal 1998, 1997 and 1996: dividend yield of 0% for all years;
expected volatility of 47.7%, 40.1% and 34.7%, respectively;  risk-free interest
rate of 5.7%, 6.5% and 6.3%, respectively; and expected lives of 4.98, 4.39 and
4.24 years, respectively.

       Activity with respect to the Company's stock option plans for fiscal
years 1998, 1997 and 1997 was as follows:

<TABLE> 
<CAPTION> 
             --------------------------------------------------------------------------------------------
                                                                  Number of Shares      Weighted Average
                                                                                        Exercise Price
             --------------------------------------------------------------------------------------------
             <S>                                                  <C>                   <C>
              Outstanding, October 29, 1995                               258,910           $13.31
               Granted                                                    598,184            24.40
               Canceled                                                   (35,450)           15.16
               Exercised                                                 (118,527)           10.37
             --------------------------------------------------------------------------------------------
              Outstanding, October 27, 1996                               703,117            23.24
               Granted                                                    300,795            14.46
               Canceled                                                  (237,512)           22.33
               Exercised                                                     (610)            2.66
             --------------------------------------------------------------------------------------------
              Outstanding, October 26, 1997                               765,790            20.12
               Granted                                                    526,600             3.41
               Canceled                                                  (187,005)           10.08
               Exercised                                                     (385)             .10
             --------------------------------------------------------------------------------------------
              Outstanding, October 25, 1998                             1,105,000           $13.83
             --------------------------------------------------------------------------------------------
              Exercisable, October 25, 1998                               455,870
             ---------------------------------------------------------------------------
              Available for future grants at October 25, 1998             629,440
             ---------------------------------------------------------------------------
</TABLE>

     The following table summarizes information relating to fixed-priced stock
options outstanding for all plans as of October 25, 1998.

<TABLE>
<CAPTION>
                                            Options Outstanding                                    Options Exercisable
                         ---------------------------------------------------------        ------------------------------------
                                                    Weighted
                                                     Average            Weighted                                    Weighted
                               Number              Remaining             Average                  Number             Average
 Range of Exercise Price    Outstanding     Contractual Life      Exercise Price             Exercisable      Exercise Price
------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>             <C>                   <C>                     <C>                 <C>
       $.10 - $8.50             470,855           9.19 years              $ 3.49                   9,705              $ 7.10
     $10.45 - $18.25            333,725           7.02 years              $14.88                 242,814              $14.33
     $21.25 - $32.875           300,420           7.51 years              $29.00                 203,351              $28.66
</TABLE>

                                       40
<PAGE>
 
{10} LEASES

       The Company leases its office facilities and a substantial portion of the
land and buildings used in the operation of its restaurants. The restaurant
leases generally provide for a noncancelable term of five to 20 years and
provide for additional renewal terms at the Company's option.  Most restaurant
leases contain provisions for percentage rentals on sales above specified
minimums.  Rental expense incurred under these percentage rental provisions
aggregated  $1,054,000, $1,003,000 and $1,088,000 for fiscal years 1998, 1997
and 1996, respectively.

As of October 25, 1998, future minimum lease payments related to these leases
were as follows:

<TABLE> 
<CAPTION> 
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------- 
 Fiscal Year                                                          Capital        Operating      Total
                                                                      Leases           Leases
---------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>            <C>
 1999                                                                 $ 1,152          $ 8,061      $ 9,213
 2000                                                                   1,152            7,650        8,802
 2001                                                                   1,152            7,447        8,599
 2002                                                                   1,110            7,281        8,391
 2003                                                                   1,081            7,072        8,153
 2004 and thereafter                                                    5,650           31,394       37,044
---------------------------------------------------------------------------------------------------------------
                                                                       11,297          $68,905      $80,202
                                                                                   ----------------------------
 
 Less: Amount representing interest                                     5,078
-------------------------------------------------------------------------------
 Present value of  future minimum lease payments of which
    $370 is included in current liabilities at October 25, 1998       $ 6,219
-------------------------------------------------------------------------------
</TABLE>

       Rent expense, including percentage rentals based on sales, was
$8,995,000, $14,500,000 and $9,900,000 for fiscal years 1998, 1997 and 1996,
respectively.


{11} COMMITMENTS AND CONTINGENCIES

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

       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 claims up to $2,100,000
for the three year insurance plan period beginning March 1, 1998 and ending
April 30, 2001.

       At October 25, 1998, the Company had commitments aggregating $1,052,000
for the construction of restaurants.

       The Company and certain of its officers and directors are parties to
various legal proceedings relating to the Company's purchase, operation and
financing of the Company's bagel-related businesses.

       Quality Baking, LLC, a franchisee of Bruegger's Franchise Corporation,
and Mark Ratterman, Chris Galloway and Peter Shipman, principals of Quality
Baking, LLC, commenced an action on July 9, 1997 filed in the United States
District Court, for the Eastern District of Missouri, Eastern Division, against
Bruegger's Corporation, Bruegger's Franchise Corporation, Nordahl Brue, Michael
Dressell, Daniel B. Fitzpatrick and John Firth. On April 22, 1998, the Court
granted the defendants' Motion to Transfer this matter to the United States
District Court for the Northern District of Indiana. The complaint alleges that
the plaintiffs purchased their franchises based upon financial representations
that have not materialized, that they purchased preferred stock in Bruegger's
Corporation based upon false representations, that the defendants falsely
represented their intentions with respect to repurchasing bakeries from the
plaintiffs, and that the defendants violated implied covenants of good faith and
fair dealing.

       D & K Foods, Inc., Pacific Capital Ventures, Inc., and PLB Enterprises,
Inc., franchisees of Bruegger's Franchise Corporation, and Ken Wagnon, Dan
Carney, Jay Wagnon and Patrick Beatty, principals of the foregoing franchisees,
commenced an action on July 16, 1997 filed in the United States District Court,
for the District of Maryland, against Bruegger's Corporation, Bruegger's
Franchise Corporation, Quality Dining, Inc., Daniel B. Fitzpatrick, Michael J.
Dressell and Nordahl L. Brue, alleging that the plaintiffs

                                       41
<PAGE>
 
purchased their franchises based upon financial representations that have not
materialized, that they purchased preferred stock in Bruegger's Corporation
based upon false representations, that Bruegger's Corporation falsely
represented its intentions with respect to purchasing bakeries from the
plaintiffs or providing financing to the plaintiffs, and that the defendants
violated implied covenants of good faith and fair dealing.

       Both of the above pending franchise related actions are in preliminary
stages and only limited discovery has occurred. In each of these cases, one or
more present or former officers and directors of the Company have been named as
party defendants and the Company has and is advancing defense costs on their
behalf. Pursuant to the Share Exchange Agreement by and among Quality Dining,
Inc., Bruegger's Corporation, Nordahl L. Brue and Michael J. Dressell, the
Agreement and Plan of Merger by and among Quality Dining, Inc., Bagel
Disposition Corporation and Lethe, LLC, and certain other related agreements
entered into as part of the disposition of the Company's bagel-related
businesses, the Company is responsible for 50% of the first $14 million of
franchise related litigation expenses, inclusive of attorney's fees, costs,
expenses, settlements and judgments (collectively "Franchise Damages").
Bruegger's Corporation and certain of its affiliates are obligated to indemnify
the Company from all other Franchise Damages. The Company is obligated to pay
the first $3 million of its share of Franchise Damages in cash. Through October
25, 1998, the Company has paid approximately $850,000 in cash and assigned its
$1.2 million note from BruWest to Bruegger's Corporation which together reduce
the Company's remaining obligation to pay cash in respect of Franchisee Damages
to approximately $950,000. The remaining $4 million of the Company's share of
Franchise Damages is payable by crediting amounts owed to the Company pursuant
to the $10 million junior subordinated note issued to the Company by Bruegger's
Corporation. Through October 25, 1998, the outstanding balance due under the
junior subordinated note has been reduced by $600,000 in respect of Franchisee
Damages. Based upon the currently available information, the Company does not
believe that these cases individually or in the aggregate will have a material
adverse effect on the Company's financial position and results of operations but
there can be no assurance thereof. Such assessment is based in part upon the
Company's belief that Bruegger's Corporation has and will continue to have the
ability to perform its indemnity obligations.

       James T. Bies filed a shareholder derivative action in the United States
District Court for the Southern District of Michigan on October 14, 1997. The
complaint named as defendants 12 individuals who are current or former directors
or officers of the Company. The complaint alleged that the individual defendants
as directors breached fiduciary duties to the Company by approving certain
transactions in 1997 involving loans to Bagel Acquisition Corporation that
allegedly benefited Daniel B. Fitzpatrick, the Company's Chairman, President and
Chief Executive Officer. The plaintiff also alleged that individual defendants
participated in a "conspiracy to waste, dissipate, and improperly use funds,
property and assets" of the Company for the benefit of Bagel Acquisition
Corporation and Mr. Fitzpatrick. The plaintiff alleged that the Company and its
shareholders had been damaged in an amount in excess of $28,000,000. The relief
sought also included the appointment of a receiver, an accounting and attorney's
fees. On April 27, 1998, the Court dismissed the complaint without prejudice,
for failure to make a "demand" upon the Company's board of directors. By letter
dated May 12, 1998, Mr. Bies has demanded that the Company pursue these claims
against the defendants. In accordance with the Indiana Business Corporation Law,
the board of directors has appointed a special committee to investigate the
allegations and determine whether it is in the best interests of the Company to
pursue this matter. The special committee consists of three of the Company's
outside directors, Messrs. Decio, Lewis and Murphy (named defendants in the
action) along with David T. Link, Dean of the Notre Dame Law School. Subsequent
to the establishment of the special committee, Mr. Bies refiled his action on
July 30, 1998. As a result of its investigation of Mr. Bies' demand, the special
committee has determined that the claims identified by Mr. Bies are without
merit and that it would not be in the Company's best interests to pursue them.
Therefore, on January 6, 1999, the special committee filed a motion to dismiss
or alternatively for summary judgement.

       On or about April 15, 1997, Texas Commerce Bank National Association
("Texas Commerce") made a loan of $4,200,000 (the "Loan") to BFBC Ltd., a
Florida limited partnership ("BFBC"). At the time of the Loan BFBC was a
franchisee under franchise agreements with Bruegger's Franchise Corporation (the
"Franchisor"). The Company at that time was an affiliate of the Franchisor. In
connection with the Loan and as an accommodation of BFBC, the Company executed
to Texas Commerce a "Guaranty". By the terms of the Guaranty the Company agreed
that upon maturity of the Loan by default or otherwise that it would either (1)
pay the Loan obligations or (2) buy the Loan and all of the related loan
documents (the "Loan Documents") from Texas Commerce or its successors. In
addition several principals of BFBC (the "Principal Guarantors") guaranteed
repayment of the Loan by each executing a "Principal Guaranty". On November 10,
1998, the bank (1) declared that the Loan was in default, (2) notified BFBC, the
Principal Guarantors and the Company that all of the Loan obligations were due
and payable, and (3) demanded payment.

       The Company elected to satisfy its obligations under the Guaranty by
purchasing the Loan from the bank. On November 24, 1998, the Company bought the
Loan for $4,294,000. Thereafter, the Company sold the Loan to its Texas
affiliate Grady's American Grill, L.P. ("Grady's"). On November 30, 1998 Grady's
commenced an action seeking to recover the amount of the Loan from one of the
Principal Guarantors, Michael K. Reilly ("Reilly"). As part of this action
Grady's also seeks to enforce a Subordination Agreement that was one of the Loan
Documents against MKR Investments, L.P., a partnership ("MKR"). Reilly is the
general partner of MKR. This action is pending in the United States District
Court for the Southern District of Texas Houston Division as Case No.

                                       42
<PAGE>
 
H-98-4015. The Company believes that BFBC is likely to file suit against it and
one or more of its affiliates, officers, and Bruegger's Franchise Corporation
asserting claims arising out of BFBC's franchise relationship with Bruegger's
Franchise Corporation and the Loan. Based upon the currently available
information, the Company does not believe that these matters will have a
materially adverse effect on the Company's financial position or results of
operations. However, there can be no assurance that the Company will be able to
realize sufficient value from Reilly to satisfy the amount of the Loan or that
the Company will not incur any liability as a result of a suit by BFBC.

       The Company and certain of its executive officers are defendants in a
class action lawsuit filed in the United States District Court for the Northern
District of Indiana. The complaint alleges, among other things, that the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 thereunder by failing to disclose various
matters in connection with the Company's acquisition, development, financing and
disposition of its bagel-related businesses. The putative class period in such
actions is from June 7, 1996 to May 13, 1997 on which dates the price of the
Company's common stock closed at $34.25 and $6.56, respectively. The plaintiffs
are seeking, among other things, an award of unspecified compensatory damages,
interest, costs and attorney's fees. The Company has filed a motion to dismiss
the complaint which is presently pending before the Court. The Company believes
that it and its executive officers have meritorious defenses to the allegations
and it intends to vigorously defend against the allegations made in the
complaints. However, there can be no assurance that the ultimate outcome of this
or other actions (including other actions under federal or state securities
laws) arising out of the Company's acquisition, development, financing and
disposition of its bagel-related businesses will not have a material adverse
effect on the Company's financial position or results of operations.

       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, 1995, 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 was obligated to defend the lawsuit
and indemnify the Company and Grayling Corporation against any loss or damages
resulting from the lawsuit. Steele settled the lawsuit on March 27, 1998 without
any liability or expense to the Company. The Company and Grayling Corporation
and their affiliates received a general release.

       BruWest, L.L.C., a franchisee of Bruegger's Franchise Corporation (a
former indirect subsidiary of the Company), and Timothy Johnson, Gregory LeMond,
Michael Snow and Matthew Starr, principals of BruWest (collectively "BruWest")
commenced an action on January 30, 1997 filed in the United States District
Court, District of Minnesota, against Bruegger's Franchise Corporation, Quality
Dining, Inc., Daniel B. Fitzpatrick (the "Bruegger's Defendants") and an
investment banking firm retained by BruWest, alleging inter alia that the
Bruegger's Defendants breached commitments to provide financing to BruWest,
interfered with the plaintiffs' efforts to obtain financing from third parties,
violated existing franchise and development agreements between BruWest and
Bruegger's Franchise Corporation, violated certain provisions of the Minnesota
Franchise Act and breached duties and implied covenants of good faith and fair
dealing. The Bruegger's Defendants denied all allegations in the complaint.
Without admitting any liability or obligation to do so, on March 11, 1997,
Bruegger's Corporation loaned $1.2 million to the plaintiffs. The loan was
secured by certain assets of the plaintiffs and personal guarantees of Messrs.
LeMond and Snow. The loan provides for monthly interest payments commencing
April 11, 1997 at the rate of nine percent (9%) per annum and matured on
September 11, 1997. On March 14, 1997, the complaint was dismissed, without
prejudice. On May 22, 1997, BruWest refiled the complaint with additional
allegations challenging the enforceability of the loan documents and personal
guarantees. This action was settled on August 19, 1998.

       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.

                                       43
<PAGE>
 
{12} IMPAIRMENT OF LONG-LIVED ASSETS

       The Company recorded a $250,000 non-cash impairment charge in fiscal 1998
in connection with its decision to sell a Grady's American Grill Restaurant.

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

       The store closing charge represents the estimated costs associated with
closing under-performing Bruegger's units and other Bruegger's units which were
at various stages of development when the decision was made to divest the
Bruegger's bagel-related businesses. The charge includes amounts for terminating
leases, the write-off of fixed assets and pre-opening costs, restaurant
management severance costs and other store closing costs. During the third
quarter of fiscal 1997 the Company closed a total of 22 Bruegger's units in
eight markets. As of October 25, 1998, $12,916,000 in costs related to these
activities had been incurred, of which $2,123,000 were cash payments and
$10,793,000 were non-cash charges, primarily for the write-down of fixed assets.
The remaining costs are primarily associated with terminating occupancy leases
which the Company expects to be substantially complete by the end of fiscal
1999.  The Company believes that the remaining reserve is adequate to cover all
future expenses relating to the closed stores.

{13} RELATED PARTY TRANSACTIONS

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                                  Fiscal Year Ended
                                                       October 25,    October 26,    October 27,
 (Dollars in thousands)                                   1998           1997           1996
--------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>            <C>
 Operating leases:
         Base rentals                                     $ 2,542        $ 2,542        $ 2,542
         Percentage rentals                                   485            364            350
--------------------------------------------------------------------------------------------------
                                                            3,027          2,906          2,892
--------------------------------------------------------------------------------------------------
 Capitalized leases:
         Interest                                             806            793            821
         Reduction of lease obligations                       275            232            204
         Percentage rentals                                   257            212            200
--------------------------------------------------------------------------------------------------
                                                            1,338          1,237          1,225
--------------------------------------------------------------------------------------------------
         Total                                            $ 4,365        $ 4,143        $ 4,117
--------------------------------------------------------------------------------------------------
</TABLE>
                                                                               
       In October 1996, the Company entered into an agreement with a related
party to terminate a lease for office space located in Vermont. Under the
agreement a payment of $900,000 was made in fiscal 1997. The estimated cost for
the termination of this lease was accrued as part of the cost of the purchase of
Bruegger's Corporation at the time of its acquisition.

       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 1998, 1997
and 1996 were $14,000, $14,000 and $15,000, respectively.

       During the fiscal years 1998, 1997 and 1996, the Company made payments to
companies owned by certain directors, stockholders and officers of the Company
of $185,000, $327,000 and $399,000, respectively, for air transportation
services.

       During fiscal 1997 and fiscal 1996, the Company loaned  a total of
$38,000,000 to Bagel Acquisition Corporation, a company owned by a director and
officer of the Company, which used the funds to acquire a number of Bruegger's
Bagel Bakeries from independent franchisees. Interest income recognized by the
Company  on this note in fiscal 1997 and fiscal 1996 was $1,317,000 and $119,000
respectively.  The interest income from the note was included as part of
franchise related revenue on the Consolidated Statement of Operations.  In
connection with the Company's decision to divest its bagel-related businesses,
the Company began 

                                       44
<PAGE>
 
consolidating the assets and liabilities of Bagel Acquisition Corporation as of
May 11, 1997 and Bagel Acquisition Corporation became a wholly owned subsidiary
on August 21, 1997, when the Company exercised its option to acquire the stock
of Bagel Acquisition Corporation for $1,000. The note receivable from Bagel
Acquisition Corporation was eliminated as part of the consolidation. As of May
11, 1997, the Company consolidated Bagel Acquisition Corporation into its
consolidated financial statements and recorded Bagel Acquisition Corporation's
revenues and expenses from May 11, 1997 to October 19, 1997.

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

{14} ACQUISITIONS AND DISPOSITIONS

       On October 20, 1997, the Company sold its bagel-related businesses to Mr.
Nordahl L. Brue, Mr. Michael J. Dressell and an entity controlled by them and
their affiliates. The sale included the stock of Bruegger's Corporation and the
stock of all of the other bagel-related businesses.  The total proceeds from the
sale were $45,164,000. The consideration included the issuance by Bruegger's
Corporation of a junior subordinated note in the amount of $10,000,000, which
was recorded as $6,000,000 due to a $4,000,000 reserve for legal
indemnification, the transfer of 4,310,740 shares of the Company's common stock
valued at $21,823,000, owned by Messrs. Brue and Dressell, which were retired, a
receivable for purchase price adjustment of $500,000, and $16,841,000 in cash.
The subordinated note has an annual interest rate of 12% and will mature in
seven years.  Interest will be accrued and added to the principal amount of the
note for the first three years and will be paid in cash for the remaining life
of the note. The cash component of the proceeds included an adjustment  for the
calculation of the net working capital deficit.  The calculation used was
subject to final adjustment and is being disputed by Messrs. Brue and Dressel.
The Company does not expect the ultimate resolution of this dispute to have a
material adverse effect on the Company's financial position or results of
operations but there can be no assurance therof.

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

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

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

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

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

                                       45
<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
$1,900,000 during the first quarter of fiscal 1996.  The charge reflected the
estimated costs for integration of computer systems, employee transition costs,
recruitment and relocation costs, and legal and professional fees.  At October
27, 1996, all costs related to these activities had been incurred.

       The Company has significant intangible assets in connection with the
acquisitions of 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 following unaudited pro forma results for the fiscal year ended October 27,
1996 were developed assuming Bruegger's, Grady's American Grill and SHONCO had
been acquired as of the beginning of the periods presented.  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,
 (Dollars in thousands, except per share data)                 1996
----------------------------------------------------------------------------
                                                             (Unaudited)
<S>                                                      <C>
 Total revenues                                               $ 269,555
 Pro forma net income (loss)                                     (5,776)
 Pro forma net income (loss) per share                             (.39)
----------------------------------------------------------------------------
</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.

                                       46
<PAGE>
 
{15} SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  Year ended October 25, 1998
                                                       --------------------------------------------------
                                                          First        Second       Third       Fourth
                                                         Quarter       Quarter     Quarter      Quarter
                                                       --------------------------------------------------
<S>                                                    <C>           <C>           <C>         <C>
Total revenues                                          $ 69,147      $ 55,838     $ 54,617    $ 52,642
Operating income (loss)                                    4,065         3,118        2,969       2,644
Income (loss) before income taxes                            349           386          574         (89)
Net income (loss)                                       $    122      $    154     $    230    $   (393)
                                                        ========      ========     ========    ========
Basic net income (loss) per share                       $    .01      $    .01     $    .02    $  (0.03)
                                                        ========      ========     ========    ========
Diluted net income (loss) per share                     $    .01      $    .01     $    .02    $  (0.03)
                                                        ========      ========     ========    ========
 
Weighted average shares:
Basic                                                     12,599        12,599       12,599      12,599
Diluted                                                   12,663        12,749       12,601      12,599
</TABLE>

<TABLE> 
<CAPTION>
                                                                    Year ended October 26, 1997
                                                       ----------------------------------------------------
                                                          First       Second (1)      Third       Fourth
                                                         Quarter       Quarter       Quarter      Quarter
                                                       ----------------------------------------------------
<S>                                                    <C>           <C>            <C>          <C>
Total revenues                                          $ 86,520     $   71,098     $ 73,331     $ 71,303
Operating income (loss)                                    5,489       (206,812)      (1,131)       1,081
Income (loss) before income taxes                          3,310       (208,928)      (3,563)      (2,176)
Net income (loss)                                       $  1,630     $ (201,741)    $ (3,971)    $  7,594
                                                        ========     ==========     ========     ========
Basic net income (loss) per share                       $   0.10     $   (11.93)    $  (0.23)    $   0.46
                                                        ========     ==========     ========     ========
Diluted net income (loss) per share                     $   0.10     $   (11.93)    $  (0.23)    $   0.46
                                                        ========     ==========     ========     ========
 
Weighted average shares:
Basic                                                     16,909         16,910       16,910       16,551
Diluted                                                   16,939         16,910       16,910       16,565
</TABLE>
                                                                                
(1)  During the second quarter of fiscal 1997 the Company recorded an asset
     impairment charge of $185,000,000, store closing costs of $15,513,000 and
     franchise operating partner expense of $2,066,000.

                                       47
<PAGE>
 
QUALITY DINING, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------

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

In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Quality Dining, Inc. and its
subsidiaries at October 25, 1998 and October 26, 1997 the results of their
operations and their cash flows for each of the three years in the period ended
October 25, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

 


 
PricewaterhouseCoopers LLP

Chicago, Illinois
December 18, 1998




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

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

                                       48
<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 1999 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 1999 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 1999 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 1999 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.

                                       49
<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 25, 1998 and October
               26, 1997

               Consolidated Statements of Operations for the fiscal years ended
               October 25, 1998, October 26, 1997 and October 27, 1996

               Consolidated Statements of Stockholders' Equity for the fiscal
               years ended October 25, 1998, October 26, 1997 and October 27,
               1996

               Consolidated Statements of Cash Flows for the fiscal years ended
               October 25, 1998, October 26, 1997 and October 27, 1996

               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.

                                       50
<PAGE>
 
                                  SIGNATURES

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

                                      QUALITY DINING, INC.


                                      By: /s/ Daniel B. Fitzpatrick
                                          -------------------------
                                          DANIEL B. FITZPATRICK
                                          President and Chief Executive Officer
Date:  January 22, 1999

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

<TABLE>
<CAPTION>
            Signature                                         Title                                       Date
            ---------                                         -----                                       ----          
<S>                                     <C>                                                         <C>
  /s/ Daniel B. Fitzpatrick             Chairman of the Board, President, Chief Executive           January 22, 1999
---------------------------             Officer and Director (Principal Executive Officer)
Daniel B. Fitzpatrick

  /s/ David M. Findlay                  Senior Vice President-Finance and Treasurer                 January 22, 1999
----------------------                  (Principal Financial Officer)
David M. Findlay

  /s/ Marti'n L. Miranda                Vice President, Controller and Assistant Secretary          January 22, 1999
------------------------                (Principal Accounting Officer)
Marti'n L. Miranda

  /s/ James K. Fitzpatrick              Senior Vice President, Chief Development Officer            January 22, 1999
--------------------------              and Director
James K. Fitzpatrick

  /s/ William R. Schonsheck             Senior Vice President, Chief Operating Officer of           January 22, 1999
---------------------------             Burger King Division and Director
William R. Schonsheck

  /s/ Arthur J. Decio                   Director                                                    January 22, 1999
---------------------
Arthur J. Decio

  /s/ Ezra H. Friedlander               Director                                                    January 22, 1999
-------------------------
Ezra H. Friedlander

  /s/ Steven M. Lewis                   Director                                                    January 22, 1999
---------------------
Steven M. Lewis

  /s/ Christopher J. Murphy, III        Director                                                    January 22, 1999
-------------------------------- 
Christopher J. Murphy, III
</TABLE>

                                       51
<PAGE>
 
                               INDEX TO EXHIBITS
S
<TABLE>
<CAPTION>
                                                                                                              Page No.
 Exhibit                                                                                                      --------        
                                                                                                              In This
   No.                                                 Description                                            -------         
   ---                                                 -----------                                             Filing
                                                                                                               ------         
<S>             <C>                                                                                           <C> 
2               (1)  Share Exchange and  Reorganization Agreement by and among the Registrant and
                     Burger Services, Inc., Bravokilo, Inc., Bendan Restaurant, Inc., Burger
                     Management of Muskegon, Inc., Burger Management of Fort Wayne, Inc., Best
                     Bagels, Inc., Full Service Dining, Inc., Southwest Dining, Inc., Daniel B.
                     Fitzpatrick, Gerald O. Fitzpatrick, James K. Fitzpatrick, John D. Fitzpatrick,
                     Ezra H. Friedlander, Benjamin Schulman and Michael G. Sosinski dated as of
                     December 17, 1993.............................................................

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

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

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

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

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

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

3-A            (10)  (i) Restated Articles of Incorporation of Registrant ......................... 
                     
               (10)  (ii)  Amendment to Registrant's Restated Articles of Incorporation
                     establishing the Series A Convertible Cumulative Preferred Stock of the
                     Registrant ................................................................... 
                     
               (10)  (iii)  Amendment to Registrant's Restated Articles of Incorporation
                     establishing the Series B Participating Cumulative Preferred Stock of the
                     Registrant ...................................................................

3-B                  By-Laws of the  Registrant, as amended to date ...............................
</TABLE> 
<PAGE>
 
<TABLE>
<S>                  <C>    
4-C      (17)   (i)  Second Amendment and Restated Revolving Credit Agreement, dated as of
                     September 11, 1998 between the Registrant and GAGHC, Inc., as borrowers, and
                     Chase Bank of Texas National Association, as administrative agent, NBD Bank,
                     N.A., as documentation agent and LaSalle National Bank, NationsBank, N.A.
                     (South), Sun Trust Bank, Central Florida, N.A., The Northern Trust Company and
                     Key Bank ......................................................................

               (ii)  Pledge and Security Agreement to Chase Bank of Texas, National Association, as 
                     Agent dated as of September 11, 1998...........................................

              (iii)  Reaffirmation of Subsidiary Guaranty, dated as of September 11, 1998............

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

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

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

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

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

10-H           (16)  *1997 Stock Option and Incentive Plan of the Registrant .......................

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

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

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

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

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

10-N           (16)  *  Letter Agreement between the Registrant and John C. Firth dated May 29,
                     1996 ..........................................................................

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

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

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

10-V            (4)  *Employment Agreement between the Registrant and William R. Schonsheck 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> 
<PAGE>
 
<TABLE> 
<S>             <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-AD          (11)  Priority Charter Agreement between the Registrant and Burger Management of
                     South Bend #3 Inc., dated September 1, 1994 .................................

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

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

10-AG                Amended and Restated Priority Charter Agreement between the Registrant and
                     Burger Management of South Bend #3 Inc., dated October 21, 1998 .............

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

23                   Written consent of PricewaterhouseCoopers LLP ...............................

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

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

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

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

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

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

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

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

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

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

(16) The copy of this exhibit filed as the same exhibit number to the Company's
     Report on Form 10K for the year ended October 26, 1997 is incorporated
     herein by reference.

(17) 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 2, 
     1998, is incorporated herein by reference.