<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the fiscal year ended: October 26, 1997

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from ____________ to ____________

         Commission file number: 001-12315

                               Skyline Chili, Inc.
             (Exact name of registrant as specified in its charter)

             Ohio                                       31-0717287
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

 4180 Thunderbird Lane, Fairfield, Ohio                   45014
(Address of principal executive offices)                (Zip Code)


                                 (513) 874-1188
              (Registrant's telephone number, including area code)

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

Title of each class:                       Name of exchange on which registered:

  Common Stock,                                   American Stock Exchange
  No Par Value

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

                                      None.

         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. [X] YES [ ] NO
<PAGE>   2
         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 20, 1998 was $6,174,917 based on the closing
price of such stock as reported on the American Stock Exchange on that date.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant was calculated on the basis of the following assumptions:

<TABLE>
<S>                                                                         <C>
Total shares of common stock outstanding on January 20, 1998:                3,397,773
                                                                            ----------

* Outstanding shares owned beneficially by directors, officers,
and more than 5% shareholders:                                               2,465,710
                                                                            ----------

Outstanding shares owned by persons other than directors, officers, or
more than 5% shareholders (assumed to be non-affiliates):                      932,063
                                                                            ----------

Closing price on January 20, 1998:                                          $    6.625
                                                                            ----------

Market value of outstanding shares held by persons other than directors,
officers, or more than 5% shareholders:                                     $6,174,917
                                                                            ----------
</TABLE>

* For purposes of this computation all directors, officers, and more than 5%
shareholders are included, although not all are necessarily "affiliates."

         There were 3,397,773 shares of the registrant's no par value common
stock outstanding as of January 20, 1998.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         None.


                                        2
<PAGE>   3
                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         Skyline Chili, Inc., and its wholly-owned subsidiaries (collectively
the "Company") own, operate, develop and franchise "Skyline Chili" restaurants
(the "Restaurants"). These quick-service Restaurants offer a limited, moderately
priced menu featuring unique, high quality "Cincinnati-style" chili related food
products for both dine-in and take-out consumption. The Company's commissary in
Fairfield, Ohio produces the secret recipe chili which is sold to the Company's
franchisees and is served in all Skyline Chili Restaurants.

         As of January 12, 1998, there were 104 Skyline Chili Restaurants in
operation in 4 states, 36 owned and operated by the Company and 68 owned and
operated by the Company's franchisees. The following table sets forth the number
of Company-owned and franchised Skyline Chili Restaurants in operation on the
last day of the Company's three preceding fiscal years:

<TABLE>
<CAPTION>
                        October 26, 1997    October 27, 1996    October 29, 1995
                        ----------------    ----------------    ----------------
<S>                     <C>                 <C>                 <C>
Company-Owned                  35                  33                  31
Franchised                     67                  59                  52
                              ---                 ---                 ---
System Wide                   102                  92                  83
</TABLE>

         In addition to its restaurant and franchising operations, the Company
manufactures and sells frozen grocery and canned products under its "Skyline"
trademark, which it distributes through retail outlets such as supermarkets and
grocery store chains. The Company sells additional grocery products manufactured
by third parties under its "Cincinnati Recipe" trademarks through the same
retail outlets. The Company also licenses the use of its "Skyline" trademark on
branded products, such as oyster crackers, which are manufactured and sold by
third parties.

         The Company was incorporated in the State of Ohio in 1965, as the
successor-in-interest to a family proprietorship. The predecessor
proprietorship, and subsequently the Company, have been producing Skyline's
secret recipe chili since 1949 and licensing the use of the Company's name,
identifying marks and method of restaurant operation since 1958. In December of
1986, the Company sold 1,035,000 shares of its common stock in an initial public
offering. The Company registered its common stock as a class under Section 12(g)
of the Securities Exchange Act of 1934, effective January 9, 1988. The Company
registered its common stock as a class under Section 12(b) of the Securities
Exchange Act of 1934 and listed on the American Stock Exchange effective October
28, 1996. The Company's principal executive offices are located at 4180
Thunderbird Lane, Fairfield, Ohio, 45014, and its telephone number at that
address is (513) 874-1188.


                                        3
<PAGE>   4
RESTAURANT MENU

         Skyline Chili Restaurants offer a uniform, limited menu specializing in
"Cincinnati-style" chili related food products. The Company's franchisees are
obligated to serve the food items contained on the Company-approved menu and are
prohibited from serving any other food items in their Restaurants without the
Company's consent. Two principal menu items are featured - various
chili-spaghetti dishes (chili served on spaghetti with a choice of cheese, beans
and onions as additional toppings) and "coney islands" (wieners on a bun with a
choice of chili, cheese, and onions as additional toppings). Also, all
Company-owned and some franchised Restaurants serve additional menu items such
as Greek salads and burritos. The Company believes that these additional menu
items are of high quality, are familiar to a majority of the customers, and are
compatible with the principal menu items. Other items are also served, including
chili in a bowl, oyster crackers, black beans and rice, and simple desserts.
Beverages include soft drinks, coffee, tea and milk. Alcoholic beverages are not
generally served. This limited menu allows quick-service and simplified
operational procedures.

         All Skyline Chili Restaurants serve what has come to be known as
"Cincinnati-style" chili. Based upon its experience and marketing studies, the
Company believes that "Cincinnati-style" chili in general, and the Company's
products in particular, are often perceived outside of the Greater Cincinnati
area as a different type of food, or a non-traditional chili. Traditional chili
is typically served in a bowl all by itself, has beans, has a thick, rather
stew-like consistency, and is expected to be "hot" in taste resulting from chili
powder or peppers. In comparison, Skyline chili typically is served in
combination with spaghetti or wieners and additional toppings, does not have a
thick consistency, and is not as "hot" as traditional chili.

COMPANY-OWNED RESTAURANTS

         As of January 12, 1998, the Company owned and operated 36 Skyline Chili
Restaurants. The following table summarizes the number and location of these
Company-owned Restaurants:


<TABLE>
<CAPTION>
                                                                NUMBER OF COMPANY-OWNED
CITY AND STATE                                                        RESTAURANTS
--------------                                                  -----------------------
<S>                                                             <C>
Greater Cincinnati, Ohio (Standard Metropolitan Statistical               17
Area) - includes portions of Northern Kentucky and
Southeastern Indiana

Cleveland, Ohio                                                            2

Columbus, Ohio                                                             9

Dayton, Ohio                                                               5

Indianapolis, Indiana                                                      3
                                                                          --
         Total                                                            36
</TABLE>

         While there are still opportunities for new Restaurant locations in the
greater Cincinnati area, the Company intends to concentrate its new unit growth
in the four other markets listed in the preceding table. The Company is
currently focusing its Restaurant growth in the Columbus market. During fiscal
1997, the


                                        4
<PAGE>   5
Company opened two free-standing prototype locations in the Columbus area, one
in Gahanna and one in Reynoldsburg. The Company has developed and is refining a
new prototype Restaurant building for use in this market, featuring full table
and drive-through service and unique design elements, to differentiate itself
from other quick service restaurants. An expanded menu, including gyro
sandwiches and baked potatoes with various toppings, is utilized in the Columbus
market to increase consumer trial. These changes, combined with increased
advertising expenditures, are all parts of the Company's overall growth strategy
in the Columbus market. To date, the Company has experienced losses in this
market because of high marketing expenditures targeted at increasing consumer
awareness. Although revenues have been increasing, they are still below the
levels experienced in the Cincinnati market. The Company expects Columbus
revenues to continue to improve and the market to become profitable as the
company expands its physical presence by adding new locations. During fiscal
1998, the Company expects to open three additional units in Columbus. The
Company is also looking for other locations in this market.

         The Company opened two Restaurants during fiscal 1997. Of the 35
Company-owned Restaurants in operation at the end of fiscal 1997, 12 were
purchased at various times from Company franchisees. The Company may acquire
additional franchise locations in the future. The Company did not close any
Company-owned Restaurants during fiscal 1997. The Company could close
underperforming Company-owned Restaurants in the future.

         The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from its Restaurant operations during its
last three fiscal years:


<TABLE>
<CAPTION>
FISCAL YEAR                                  REVENUES        % OF TOTAL REVENUES
-----------                                  --------        -------------------
<S>                                        <C>               <C>
Fiscal Year Ended October 26, 1997         $17,433,000               53%
Fiscal Year Ended October 27, 1996         $15,471,000               53%
Fiscal Year Ended October 29, 1995         $14,231,000               55%
</TABLE>

         The Company's Vice President - Restaurant Operations, with the
assistance of five District Managers, has primary responsibility over the
Company's Restaurant operations. The Company has developed and utilizes a
comprehensive restaurant operations control system. Each Company-owned
Restaurant is staffed by a Manager, one or more Assistant Managers, and an
average of eighteen additional employees. Restaurant Managers monitor food and
labor costs, inventory items, and sales volumes on a daily basis, and are
responsible for providing quality food and service levels in a clean
environment.

RESTAURANT FACILITIES AND OPERATIONS

         Historically, the Company has had a mixture of free-standing and
store-front locations. Because non-Cincinnati market Restaurants have tended to
have lower volumes on average compared to Cincinnati Restaurants, the Company
has historically located its non-Cincinnati Restaurants in store-front locations
because they are less costly than free-standing Restaurants. Based upon its more
recent experience and marketing studies, the Company now believes that
free-standing units with drive-through service increase the visibility of the
Restaurants and should increase market awareness and consumer trial. The Company
has developed a prototype free-standing unit, featuring full table and
drive-through service and unique design elements, which will be emphasized in
new markets to increase physical presence and consumer awareness.


                                        5
<PAGE>   6
         Store front units occupy regular retail space and provide their own
seating. Store front units generally range in size from 1,200 to 5,800 square
feet and have initial development costs, including equipment, ranging from
$100,000 to $525,000. The Company's current free-standing units range in size
from 1,800 to 3,000 square feet. Initial development costs for a free-standing
unit, including equipment, can range from $165,000 to $1,000,000 depending on
size, location and whether the land and/or Restaurant building is leased or
owned. Competition for affordable real estate sites is generally intense and can
increase the cost of development. There are currently 30 free-standing
Restaurant units in the Greater Cincinnati area and 12 in other market areas.
The remaining Restaurants are in store front locations.

         The Company believes that Skyline Chili Restaurants offer a unique
dining experience. The Restaurants offer carry-out and dine-in service, with an
average time from order placement to serving of three to five minutes. The
Restaurants are generally open seven days a week, for both lunch and dinner. The
Company requires certain common features in the Restaurants, which it feels help
provide the unique Skyline dining experience. The Greater Cincinnati area
Restaurants generally feature full table service. Some Restaurant facilities in
non-Cincinnati market areas feature counter service only. All food is prepared
in full view of customers at a central station. The Company's Restaurant
employees wear a standardized uniform. The Company has the right to review and
approve its franchisees' Restaurant plans and specifications to assure
conformity with the Skyline System.

         The Company continually strives to maintain quick service, uniformity
of products, high quality, and cleanliness throughout its Company-owned and
franchised Restaurants. To help maintain these standards, the Company has
implemented a training and quality control program, and has developed a
comprehensive Operations Manual containing detailed specifications for all
product preparation, service, procedures and policies. The Company's
representatives visit franchised and Company-owned Restaurants on an unannounced
basis to monitor compliance with the Company's operating standards.

FRANCHISE OPERATIONS

         The Company markets Restaurant franchises both on an individual
Restaurant basis and on a multiple Restaurant or "area development" basis.
Individual Restaurant franchises are generally granted in geographic areas where
it is not feasible to grant an exclusive multiple Restaurant franchise, such as
in the Greater Cincinnati area, or in smaller market areas. The Company
maintains a franchise solicitation program, involving the use of a continually
updated franchise offering circular (required by the Federal Trade Commission
and by certain states), which is provided to prospective franchisees, and which
summarizes the Company's business operations and the terms and conditions of the
franchise relationship.

         The Individual Restaurant Franchise Agreement grants a franchisee an
exclusive license to operate a Skyline Chili Restaurant at a specified location,
and to utilize the Company's trademarks, servicemarks and other rights relating
to the sale of its menu items. The term of the Individual Restaurant Franchise
Agreement is 20 years, renewable by the franchisee for an additional period
(currently 20 years) if certain conditions pertaining to the renewal are met.

         Under the Individual Restaurant Franchise Agreement, each franchisee is
required to pay an initial franchise fee, currently $15,000, for the Restaurant.
The Company's current Individual Restaurant Franchise Agreement also requires
each franchisee to pay the Company a continuing monthly license fee equal to a
percentage of the Restaurant's gross sales, ranging from 3% to 4%, and to spend
a percentage of the Restaurant's gross sales each month for advertising and
promotions, ranging from 2% to 3%. The monthly


                                        6
<PAGE>   7
advertising expenditures of Greater Cincinnati area franchisees are paid into
the Company's Advertising Trust.

         Approximately 42 of the Company's existing franchised Restaurants
(including most of the Greater Cincinnati area franchised restaurants) are
operated pursuant to an earlier version of the Individual Restaurant Franchise
Agreement, containing materially different terms and conditions from the
Company's current standard Agreement. The earlier Agreements do not obligate the
franchisees to pay a continuing monthly license fee or advertising fee based
upon a percentage of gross sales, but do obligate the franchisees to purchase
all of their chili from the Company and to pay an advertising fee to the Company
of $6.00 for every unit order of chili purchased.

         The Company does not arrange or make any provisions for financing the
development of its franchisees' Restaurants, and does not ordinarily sell or
lease any real estate or equipment to its franchisees. The fixtures,
furnishings, equipment, inventory, products, ingredients, materials and other
supplies used by franchisees in the construction and operation of their
Restaurants must meet the Company's specifications. Franchisees are required to
purchase all of their requirements of chili from the Company, and may purchase
certain other food supplies and items used in the operation of their Restaurants
from the Company at their option. Under the terms of the Individual Restaurant
Franchise Agreement, the Company reserves the right to adopt amended standards
of quality, service and food preparation. Each franchisee is required to comply
with all standards for Restaurant operation, as set forth from time to time in
the Company's Operations Manuals.

         The specific terms and conditions of each Area Franchise Agreement,
such as the development schedule and area development fee, are the subject of
negotiation between the Company and the franchisee, after review of the relevant
factors in the market area. At the time of signing an Area Franchise Agreement,
the franchisee pays an area development fee, usually $3,000 per Restaurant to be
developed in the Franchise Area. The franchisee then also pays to the Company
the standard individual Restaurant initial franchise fee and the continuing
monthly license fees under each Individual Restaurant Franchise Agreement
executed. Although there is not a requirement that the Company do so, the
Company generally credits a portion of the area development fee against the
individual Restaurant initial franchise fee, on a per Restaurant basis. The
Company is currently party to one Area Franchise Agreement in the Indianapolis
area. This Area Agreement was for three units, two of which are non-traditional
units located in combination service station/convenience stores. The third unit
was developed and began operations in late fiscal 1997.

         The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from initial franchise fees, area
development fees, and continuing monthly license fees, during its last three
fiscal years:


<TABLE>
<CAPTION>
FISCAL YEAR                                  REVENUES        % OF TOTAL REVENUES
-----------                                  --------        -------------------
<S>                                         <C>              <C>
Fiscal Year Ended October 26, 1997          $1,539,000               5%
Fiscal Year Ended October 27, 1996          $1,411,000               5%
Fiscal Year Ended October 29, 1995          $1,210,000               5%
</TABLE>


                                        7
<PAGE>   8
         As of January 12, 1998, there were 68 franchised Skyline Chili
Restaurants operating in the States of Ohio, Kentucky, Indiana, and Florida. The
following table summarizes the number and location of the Company's franchised
Restaurants:


<TABLE>
<CAPTION>
                                                                NUMBER OF COMPANY-OWNED
CITY AND STATE                                                        RESTAURANTS
--------------                                                  -----------------------
<S>                                                             <C>
Greater Cincinnati, Ohio (Standard Metropolitan Statistical               51
Area) - includes portions of Northern Kentucky and
Southeastern Indiana

Other Ohio Areas                                                           6

Other Kentucky Areas                                                       3

Other Indiana Areas                                                        3

Florida                                                                    5
                                                                          --
         Total                                                            68
</TABLE>

         Nine additional franchised Restaurants opened during the Company's 1997
fiscal year. The Company has adopted a policy relating to the granting of new
franchises, which limits such grants to applicants who have substantial
restaurant development and operations experience and financial resources. This
policy will limit the development of additional franchised Restaurants by new
franchisees. During fiscal 1998, any additional expansion of franchised
Restaurant locations will most likely be the result of existing franchisees
developing additional Restaurants within their existing or new Franchise Areas.

         The Company may terminate an Individual Restaurant Franchise Agreement
for several reasons, including default in the payment of license or advertising
fees to the Company, failure to maintain specified standards, and cessation of
business. During the Company's 1997 fiscal year, one franchised Restaurant
location closed.

MANUFACTURE, SALE AND DISTRIBUTION OF SECRET RECIPE CHILI

         The Company produces its secret recipe chili at its Fairfield, Ohio
commissary. The secret recipe chili is sold to the Company's franchisees and is
served in all franchised and Company-owned Skyline Chili Restaurants. Pursuant
to the Individual Restaurant Franchise Agreement entered into with the Company,
each of the Company's franchisees is required to purchase all of the chili and
chili-based products served in its Restaurant from the Company at the Company's
current prices. The Company also sells related food products from its
commissary, such as cheese, spaghetti, crackers and wieners, to its Greater
Cincinnati area franchisees. However, the Company's franchisees are not required
to purchase any food products other than the secret recipe chili and chili
burrito mix, or to purchase any other equipment or supplies, from the Company.

         The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from commissary sales of the Company's
chili and related food products to its franchisees during its last three fiscal
years:


                                        8
<PAGE>   9
<TABLE>
<CAPTION>
FISCAL YEAR                                  REVENUES        % OF TOTAL REVENUES
-----------                                  --------        -------------------
<S>                                         <C>              <C>
Fiscal Year Ended October 26, 1997          $7,114,000               21%
Fiscal Year Ended October 27, 1996          $6,186,000               21%
Fiscal Year Ended October 29, 1995          $5,432,000               21%
</TABLE>

         The Company has an established distribution system for its products,
involving delivery with its own trucks within the Greater Cincinnati area, and a
third-party food distributor for non-Cincinnati locations.

GROCERY PRODUCTS

         The Company has been manufacturing and selling its frozen grocery
products to wholesale and retail outlets since 1965. Management believes that
the grocery products market offers a major opportunity for the Company to
increase revenues and profitability. During fiscal 1998, the Company will
continue to concentrate its marketing efforts and expenditures in certain
current markets where the majority of the grocery divisions' revenues are
generated.

         The Company sells nine varieties of frozen grocery products and two
varieties of canned grocery products - two sizes of frozen chili, frozen chili
and spaghetti, and canned chili, and one size of frozen chili with beans, frozen
chili burrito with beans, frozen chili burrito with beans and cheese, frozen
chili with pasta spirals, and frozen chili with wieners and pasta shells. The
frozen grocery products are manufactured, packaged and frozen at the Company's
commissary, while the canned products are manufactured at the Company's
commissary and canned by a third party. These products are sold under the
"Skyline Chili" trademark and the packaging is designed to educate the consumer
by identifying the product as a "Cincinnati-style" chili, by providing
instructions on how to prepare and serve the product, and by briefly describing
the Company's heritage and its commitment to quality.

         During fiscal 1996, the Company began a program to license its
"Skyline" trademark to third-party manufacturers for use on branded products.
The first product to be developed under this program was boxed oyster crackers.
This product is manufactured and sold by a third party in the same venues as the
other grocery products manufactured by the Company's commissary. The Company is
paid a percentage of the revenues from the sale of this product as a royalty for
the use of its trademark.

         The Company also sells a line of "Cincinnati-style" chili products,
which includes a dry spice mix and a ready-to-eat chili packaged in cans and
microwaveable bowls. These products are manufactured by third parties and are
marketed under the "Cincinnati Recipe" trademarks. The Cincinnati Recipe dry
spice mix and the canned and microwaveable chili products use a different recipe
than the traditional Skyline Chili but fall into the same "Cincinnati-style"
category of chili. These items provide the Company an opportunity to place its
grocery products in additional areas at supermarkets and grocery stores.

         The following table illustrates the revenues and the percentage of its
total revenues derived by the Company from the sale of grocery products during
its last three fiscal years:


                                        9
<PAGE>   10
<TABLE>
<CAPTION>
FISCAL YEAR                                  REVENUES        % OF TOTAL REVENUES
-----------                                  --------        -------------------
<S>                                         <C>              <C>
Fiscal Year Ended October 26, 1997          $6,982,000               21%
Fiscal Year Ended October 27, 1996          $6,155,000               21%
Fiscal Year Ended October 29, 1995          $4,899,000               19%
</TABLE>

         The Company's Vice President - Grocery Sales assisted by one Regional
Sales Manager is primarily responsible for the promotion, distribution, and
expansion of the Company's grocery products line. Outside of the Greater
Cincinnati area, the Company distributes the grocery products through food
brokers, who solicit and place orders for the products with supermarkets and
grocery store chains, at prices set by the Company. All of the Company's food
brokerage arrangements are oral, at-will agreements, which may be terminated by
either party at any time. This allows the Company to constantly reevaluate its
food brokerage arrangements.

         The Company has appointed food brokers and is currently distributing
its grocery products in the following geographic areas: Cincinnati, Dayton,
Columbus, Cleveland and Toledo, Ohio; Indianapolis, Ft. Wayne and Evansville,
Indiana; Louisville and Lexington, Kentucky; Atlanta, Georgia; Grand Rapids,
Michigan; Huntington, West Virginia; Nashville, Tennessee; Dallas and Houston,
Texas; and Tampa and Jacksonville, Florida. The Company does not anticipate
expanding distribution into any other major markets during its 1998 fiscal year.

DEVELOPMENT OF COMMISSARY AND OFFICE FACILITIES -- INDUSTRIAL DEVELOPMENT
REVENUE BOND FINANCING

         The Company entered into a Loan Agreement with the City of Fairfield,
Ohio dated August 1, 1990 (the "Loan Agreement"), pursuant to which the City of
Fairfield issued $8,250,000.00 of Adjustable Rate Demand Industrial Development
Revenue Bonds (the "Bonds"). Pursuant to the provisions of the Loan Agreement
and a Trust Indenture dated August 1, 1990 (the "Trust Indenture"), the Bond
proceeds were loaned to and used by the Company to acquire, construct and equip
its commissary and office facility located in Fairfield, Butler County, Ohio
(the "Plant"). The Plant was completed in November 1991 and includes
manufacturing facilities for the manufacture and packaging of chili and other
food and food related products, and storage, distribution and office facilities.

         The Bonds have an 18 year maturity date, but are subject to mandatory
sinking fund redemption on an annual basis. Interest on the Bonds is payable
semiannually on March 1 and September 1. The Bonds bear interest at the rate of
5.0% per annum through August 31, 2000. Thereafter, the interest rate for each
succeeding five (5) year period will be adjusted pursuant to the provisions of
the Trust Indenture. In addition, the Company may, under certain circumstances,
convert the interest rate mode from a 5 year rate to a 6 month, 1 year or 10
year rate. The interest on the Bonds is generally exempt from federal and Ohio
income taxes. The Company, the City of Fairfield and the Trustee entered into a
Tax Regulatory Agreement dated August 1, 1990, which contains certain covenants
relating to the use of the Bond proceeds and the Plant, and which is intended to
protect the tax exempt status of the interest on the Bonds. In addition to the
mandatory sinking fund redemption, the Bonds are also subject to certain
optional and mandatory redemptions and tenders.


                                       10
<PAGE>   11
         The City of Fairfield's loan of the Bond proceeds to the Company is
also evidenced by a promissory note (the "Note"). Pursuant to the Loan Agreement
and the Note, the Company is obligated to pay quarterly debt service payments to
the Trustee for the Bondholders. The Company must make quarterly principal
payments on the 20th day of each February, May, August, and November, in an
amount equal to one-quarter of the principal of the Bonds due on the first day
of the next following September, by reason of the mandatory sinking fund
redemption requirements or maturity. The Company must make quarterly interest
payments on the 20th day of each February, May, August and November, in an
amount equal to one-half of the interest payable on the Bonds on the next
following interest payment date. In addition, the Note is subject to optional
and mandatory prepayment upon the same terms and conditions, on the same dates,
and at the same prepayment prices, as the Bonds are subject to optional and
mandatory redemption. The Company has made certain representations, warranties
and covenants in the Loan Agreement relating to the Plant and the operation of
its business, including covenants that the Company: (a) will not take or permit
any action which would adversely affect the exemption from federal income
taxation of the interest on the Bonds; (b) will not dispose of or transfer all
or substantially all of its assets without the prior written consent of the
Letter of Credit Bank; and (c) will indemnify the City of Fairfield and the
Trustee for any claims relating to the use of the Plant or to the Company's
breach or default under the Loan Agreement and other Bond documents.

         The payment of principal and interest on the Bonds is also secured by
an irrevocable Letter of Credit issued on behalf of the Company by The Fifth
Third Bank. The Letter of Credit secures and can be drawn upon by the Trustee to
pay all principal on the Bonds, up to 212 days interest on the Bonds, and the
amount of any discount (not to exceed 1%) at which the Bonds are remarketed. The
current Letter of Credit will expire on September 16, 1998. Unless the Letter of
Credit is renewed at the discretion of The Fifth Third Bank, or the Company
obtains an alternate Letter of Credit, all of the Bonds are subject to mandatory
redemption. Pursuant to the provisions of a Reimbursement Agreement with The
Fifth Third Bank dated August 1, 1990, as amended (the "Reimbursement
Agreement"), the Company is obligated to reimburse the Bank for all payments
made by it under the Letter of Credit within three days of payment, plus
interest at the Bank's prime rate plus 1%. The Company is obligated to pay the
Bank an annual maintenance fee for each year the Letter of Credit remains in
effect, equal to 5/8 of 1% of the amount of the Letter of Credit.

         The Company has made certain representations, warranties and covenants
in the Reimbursement Agreement relating to its current and future financial
condition, the Plant, and the operation of its business, including covenants
that the Company:(a) will not declare or pay any dividends or distributions on
its capital stock, or redeem or repurchase any shares of its capital stock,
until its ratio of debt to tangible net worth is less than 1.25:1; and (b) will
limit its capital expenditures to certain amounts, depending on its ratio of
debt to tangible net worth. In order to secure the Company's obligations to the
Bank under the Reimbursement Agreement, the Company has granted the Bank a
Mortgage on the real estate and fixtures, and a security interest in all of the
Company's accounts, equipment, inventory, intangibles, and other personal
property located at the Plant site in Fairfield, Ohio.

ADDITIONAL BANK FINANCING

         The Company has a $4,000,000 unsecured line of credit with The Fifth
Third Bank that extends through July 1, 1998.


                                       11
<PAGE>   12
OPERATIONS AND CONTROLS

         The Company currently administers all aspects of its business
operations from its principal executive offices, located at 4180 Thunderbird
Lane, Fairfield, Ohio. The Company operates on the basis of a 52 or 53 week
accounting year ending on the last Sunday in October, consisting of 13 reporting
periods. Standard operational and reporting procedures are utilized which enable
Management to monitor the financial and operational performance of each
Company-owned Restaurant and the commissary on a regular basis. The Company's
accounting system provides controls to monitor and protect Company assets.

ADVERTISING AND MARKETING

         The Company has established a separate Advertising Trust for the
benefit of its Greater Cincinnati area franchisees, for the purposes of
receiving, investing, disbursing and accounting for advertising funds paid by
those franchisees under their Individual Restaurant Franchise Agreements. The
Advertising Trust, as a legal entity separate from the Company, will itself
account for such advertising receipts and expenditures. Outside of the Greater
Cincinnati area, franchisees are currently obligated to spend 2% of monthly
gross sales for advertising, of which the Company may require up to 1% of gross
sales to be paid directly to the Company for use in advertising, as determined
by the Company. These advertising funds are not paid to the Trust, and the
Company itself accounts for these advertising receipts and subsequent
expenditures.

         The Company has developed two different marketing approaches, one for
the Greater Cincinnati area and one for new markets. The marketing approach for
the Cincinnati area is designed to reinforce the perception that the names
"Skyline" and "Cincinnati-style" chili are synonymous, and to reinforce
Skyline's position as the area's favorite chili restaurant. Outside of the
Cincinnati area, the Company currently believes that a significant educational
advertising effort is necessary to successfully market the Company's Restaurant
concept and unique food products. Based upon prior experience and marketing
studies, the Company believes that in new markets the Company and its products
are perceived as both a new Restaurant concept and a different "type" of food or
chili.

COMPETITION

         In their Restaurant operations, the Company and its franchisees compete
for locations, employees and customers against a large number of national and
regional restaurant chains, both franchised and independent, and locally-owned
restaurants offering competitively priced foods. Many of the Company's
significant competitors in operating quick-service restaurants have more
outlets, more established products, greater name recognition, and greater
financial, marketing and personnel resources than the Company and its
franchisees, and have responded to industry competition with well-financed
advertising campaigns, aggressive discounting promotions, new products, new
methods of distribution, and creative restaurant facilities approaches. The
Company believes that its development history and experience, the unique nature
and high quality of its products, the Restaurants' emphasis on quick service and
cleanliness, competitive pricing, its marketing approach, and its Restaurant
support systems, will enable the Company to compete in this environment. In
addition, with respect to the operation of "Cincinnati-style" chili restaurants
in the Greater Cincinnati area, the Company believes that it has a significant
advantage in terms of both established products and name recognition.


                                       12
<PAGE>   13
         In its franchising operations, the Company competes with a significant
number of national and regional franchisors, some of whom have greater name
recognition and financial resources than the Company, in marketing franchises
and soliciting franchisees. In its grocery products business, the Company
competes with a significant number of national and regional food manufacturers
and distributors in obtaining shelf space and retail outlets for its products,
many of whom have more established products, greater name recognition, and
greater financial and marketing resources than the Company. In addition, the
Company competes with other manufacturers and distributors in obtaining
representation by quality food brokers.

SUPPLIERS

         The Company and its franchisees have not experienced shortages of
construction materials for the construction of restaurants or shortages of food
products or supplies for the operation of restaurants. Although the Company
presently purchases its food and restaurant supplies from a limited number of
vendors, the Company does not depend upon any one of them as a sole supplier and
could purchase similar products from other vendors. Continuous negotiations with
and regular evaluations of vendors and volume purchases, have enabled the
Company to obtain high quality products at lower costs for itself and its
franchisees. However, strict adherence to the Company's product specifications
and high quality are the principal criteria for selecting vendors, not lower
prices. The Company has no written contracts with any of its vendors or
suppliers.

         One major component of the Company's food cost is the market price of
beef. Fluctuations in beef prices have an immediate impact on the Company's cost
of sales and profit margins. The Company currently purchases trimmed beef from
three suppliers and continually investigates other sources of supply. The
Company currently grinds its own beef, to improve quality and reduce costs.

GOVERNMENT REGULATION

         The Company is subject to a variety of federal, state and local laws
and regulations affecting the conduct of the Company's business. The Company is
subject to regulations of the Federal Trade Commission and of certain states
relating to disclosure requirements in the sale of franchises, and to various
state laws concerning franchise operations. The Company believes that it is in
compliance with applicable franchising laws and regulations. The Company's
franchising and restaurant operations are also subject to federal and state
anti-trust laws and regulations.

         The Company's manufacture and sale of its chili and grocery products,
and its distribution of related food products, are subject to various
sanitation, health and safety standards, including inspection by the U.S.
Department of Agriculture. In addition, the Company's Restaurants are subject to
various sanitation, health and safety standards, and to state and local building
codes and zoning restrictions. The Company believes that it is in substantial
compliance with these applicable laws and regulations. More varying or stringent
requirements of local governments with respect to zoning, building codes and
land use, if enacted or made applicable to the Company, may increase the costs
of opening and operating Restaurants.

         In general, the Company's capital expenditures, earnings and
competitive position have not been materially affected by compliance with
federal, state or local provisions enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, and the Company believes that it is in substantial compliance
with all such applicable laws and regulations.


                                       13
<PAGE>   14
         The Company is also subject to the Federal Fair Labor Standards Act
governing minimum wages, overtime, working conditions, and other matters, and to
other federal and state employment regulations governing safety measures and
standards. A significant portion of the Company's restaurant personnel is paid
at rates related to the Federal Minimum Wage. These regulations will have an
increasing impact upon the Company's business operations as the number of
Company-owned and operated Restaurants, and therefore the number of Company
employees, increases.

SEASONALITY

         In general, the Company's Restaurant sales are higher in the summer
months, and the Company's grocery products sales are higher in the fall and
winter months. Because of this sales mix, the Company does not believe that its
overall sales are seasonal to any significant degree.

COPYRIGHTS, TRADE SECRETS, TRADEMARKS AND SERVICEMARKS

         The Company claims a copyright in all of its training and operations
manuals and materials, and all revisions thereto. All of these materials remain
the property of the Company and are supplied to Company personnel and to
franchisees for their confidential and authorized use only. The Company
considers all information, whether oral or written, relating to the complete
recipe or process for the manufacture of Skyline Chili and the Company's other
food products, including the ingredients and cooking processes, to be
protectable trade secrets.

         The term "Skyline" is registered as a trademark in the United States
Patent and Trademark Office, to identify the Company's products. The terms
"Skyline Chili" and "Skyline Chili" with an oval design are registered as
servicemarks in the United States Patent and Trademark Office, for use in
connection with restaurant and food carry-out services specializing in chili and
chili-spaghetti dishes. In 1982, the Company and ARA Virginia Skyline Company
entered into a written agreement, relating to their concurrent use of the
"Skyline" servicemark to identify restaurant services, which provided that ARA
would have exclusive use of the service mark "Skyline" to identify restaurant
services in the District of Columbia, the State of Virginia and the bordering
counties of Virginia's neighboring states.

         In fiscal 1993, the Company acquired the "Cincinnati Recipe" and "Hook
& Ladder" trademarks. These trademarks are registered with the United States
Patent and Trademark Office and are used to identify certain chili-related
grocery food products sold by the Company.

EMPLOYEES

         As of October 26, 1997, the Company had approximately 146 full-time and
608 part-time employees.

PENDING CHANGE IN CONTROL OF COMPANY

         On November 26, 1997, the Company and certain of its controlling
shareholders (Lambert N. Lambrinides, Christie N. Lambrinides, William N.
Lambrinides and Kevin R. McDonnell, collectively the "Consenting Shareholders")
entered into an Agreement and Plan of Merger with Skyline Acquisition Corp., a
new, private Ohio corporation formed by certain members of Skyline's management
and Fleet Venture Resources, Inc. and certain of its affiliates ("Fleet Equity
Partners") for purposes of acquiring the Company. The acquisition would be
accomplished by the reverse merger of Skyline Acquisition Corp. into the


                                       14
<PAGE>   15
Company, with the Company remaining as the surviving corporation (the
"Transaction"). The Company's President, Chief Executive Officer and Director,
Kevin R. McDonnell, and other current members of senior management (the
"Management Group") plan to remain with the Company and would be equity
participants with Fleet Equity Partners in the Transaction. None of the
Company's other current shareholders or directors would have any equity,
financial or other interest in the Company after completion of the Transaction.
The Company's shareholders would receive $6.75 per share in cash in connection
with the Transaction. Completion of the Transaction remains subject to certain
conditions, including regulatory and third party approvals, debt financing and
approval by the Company's shareholders. The Transaction is expected to be
completed in March 1998.

         Fleet Venture Resources, Inc. is a wholly-owned, second tier subsidiary
of Fleet Financial Group, Inc. Fleet Financial Group, Inc. is a diversified
financial services concern with assets in excess of $80 billion headquartered in
Boston, Massachusetts. Fleet Venture Resources, Inc., along with various other
related entities, form the private equity group known as Fleet Equity Partners.
Fleet Equity Partners ("Fleet") has made investments in over 50 enterprises
since its inception in 1982. It specializes in private equity investments in the
following industries: telecommunications services, health care services,
business services, industrial manufacturing, media and information, and consumer
products and services.

         Completion of the Transaction would result in a change in control of
the Company. If the Transaction is completed: (i) Fleet and the Management Group
will obtain control of the Company, (ii) the Board of Directors and officers of
Skyline Acquisition Corp. will become the Board of Directors and officers of the
Company, and (iii) the Company's common stock will be delisted from the American
Stock Exchange and its registration under the Securities Exchange Act of 1934
will be terminated. In the Agreement and Plan of Merger, the Consenting
Shareholders (who collectively own 55.8% of the Company's outstanding common
stock) agreed to vote all of the shares of the Company's common stock over which
they have or exercise voting control and to take all other necessary or
desirable actions within their control in favor of the Agreement and Plan of
Merger and the Transaction.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company owns the following properties:

         (1) The Company owns its current executive office, commissary,
distribution and storage facilities, which are located on approximately 7.2
acres of land in Fairfield, Ohio. This 42,000 square foot commissary, office,
distribution and storage facility was substantially completed in November, 1991.
The facility consists primarily of a U.S.D.A. inspected food production and
distribution plant used to produce and distribute the Company's secret recipe
chili and other related food products. The Company has granted a mortgage on the
Fairfield, Ohio properties to The Fifth Third Bank to secure the Company's
repayment of all indebtedness and discharge of all obligations relating to the
Bond Financing.

         (2) The Company also owns the following additional properties acquired
prior to fiscal 1997:

                  (a) One parcel consisting of land (approximately 0.75 acres)
with a building. This property, located in the greater Cincinnati area, is being
used for the operation of a free-standing Restaurant.

                  (b) One parcel consisting of land (approximately 2.5 acres)
with a building. This property, located in Cincinnati, is being used for the
operation of a Restaurant and storage.


                                       15
<PAGE>   16
                  (c) One parcel consisting of land (approximately 1.0 acre)
with a building. This property, located in Columbus, Ohio, is being used for the
operation of a free-standing Restaurant.

                  (d) One parcel consisting of land (approximately 1.0 acre)
with a building. This property, located in the greater Cincinnati area, is being
used for the operation of a free-standing Restaurant.

         (3) During fiscal 1997 and the first part of fiscal 1998, the Company
purchased the following additional properties:

                  (a) One parcel of land (approximately 1.0 acre) in the greater
Dayton, Ohio area. This property is being developed as a Company-owned
Restaurant.

                  (b) One parcel of land (approximately 1.0 acres) in the
greater Columbus area. This property is being developed as a Company-owned
Restaurant.

         The Company currently operates 26 Skyline Chili Restaurants located in
leased facilities, and operates 4 additional Restaurants on leased ground. The
majority of the Company's leased Restaurants are store front facilities located
in shopping centers or shopping plazas. The annual base rent on the Company's
leased facilities ranges from $17,000 to $100,000 per year. The leases generally
require the Company to pay taxes and insurance, and certain of the leases
require the payment of additional percentage rents (ranging from 5% to 10% of
gross sales) if annual gross sales at the location exceed certain minimums. The
Company did not pay any material additional percentage rentals in fiscal 1997,
1996, or 1995. Most of the leases contain renewal options ranging from 3 to 15
years. Note 4 of the Notes to Consolidated Financial Statements included on Page
34 of this Form 10-K is incorporated herein by reference.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material pending legal proceedings to which the Company is
a party or of which any of its property is the subject, other than ordinary
routine litigation incidental to the business.

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

         There were no matters submitted to a vote of the Company's shareholders
during the last quarter of its 1997 fiscal year.

                                     PART II

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

         Through October 27, 1996, the end of the Company's 1996 fiscal year,
the Company's Common Stock traded on the Nasdaq Stock Market under the symbol
"SKCH." Since October 28, 1996, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol "SKC." The following table
sets forth the range of high and low closing bid quotations for each fiscal
quarter during the Company's 1996 fiscal year, and the range of high and low
sales prices for the Company's 1997 fiscal year. The high and low closing bid
quotations indicated in the table reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions.


                                       16
<PAGE>   17
<TABLE>
<CAPTION>
                                      Fiscal                      Fiscal
                                     Year 1997                   Year 1996
Quarter                          High          Low           High         Low
-------                         ------        ------        ------       ------
<S>                             <C>           <C>           <C>          <C>
First                           7             5              4 1/8        3 1/2
Second                          9 1/8         6 9/16         3 5/8        3 1/2
Third                           6 7/8         5 1/2          4            3 5/8
Fourth                          7 1/16        5 5/8          6 3/8        3 7/8
</TABLE>

         At January 23, 1998, there were approximately 1,150 record holders of
the Company's Common Stock.

         The Company did not declare or pay any cash dividends on its Common
Stock during fiscal year 1996. On December 17, 1996, the Company declared a cash
divided of $0.02 per share on its Common Stock payable to shareholders of record
at the close of business on January 8, 1997. The Company is required under its
bank letter of credit agreement to maintain certain financial ratios, and the
agreement places limitations on dividends and acquisitions of Common Stock
should the ratio of debt to tangible net worth be more than 1.25 to 1.

         The Company did not sell any equity securities during fiscal 1997 that
were not registered under the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL DATA

         The following table presents certain summary selected consolidated
financial data of the Company as of and for each of the five fiscal years in the
period ended October 26, 1997. The financial data was derived from the
historical consolidated financial statements of the Company and should be read
in conjunction with the historical consolidated financial statements of the
Company, including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained elsewhere in this
Form 10-K.


                                       17
<PAGE>   18
<TABLE>
<CAPTION>
                                                             FISCAL YEARS ENDED
                                     -------------------------------------------------------------------
Dollar amounts in thousands,         OCTOBER 26,   OCTOBER 27,   OCTOBER 29,   OCTOBER 30,   OCTOBER 31,
except per share data                   1997          1996          1995          1994          1993

<S>                                  <C>           <C>           <C>           <C>           <C>
OPERATIONS:
Commissary sales                      $14,096       $12,341       $10,331       $10,817       $ 9,809
Restaurant sales                       17,433        15,471        14,231        12,507        10,646
Franchise fees and royalties            1,539         1,411         1,210         1,172         1,171
   Total revenues                      33,068        29,223        25,772        24,496        21,626
Income from operations                  3,062         2,585         1,986         1,346         1,191
Net income                              1,695         1,415           980           532           431
Capital expenditures                    2,758         3,987         2,484         1,537         1,845

PER SHARE*:
Net income                               0.47          0.41          0.29          0.16          0.13
Book value                               3.45          3.10          2.71          2.44          2.27
Dividends                                0.02          0.00          0.00          0.00          0.00

FINANCIAL POSITION:
Working capital                         1,639         1,269         1,524         1,721         1,049
Total assets                           22,885        21,162        19,013        18,423        16,902
Property and equipment, net            16,340        15,540        13,825        12,876        13,056
Long-term debt                          5,305         5,715         6,100         6,459         6,799
Shareholders' equity                   12,453        10,792         9,264         8,284         7,642

RATIOS:
Current ratio                            1.39          1.34          1.51          1.54          1.50
Total liabilities to equity              0.84          0.96          1.05          1.22          1.21
Interest coverage                        8.79          7.23          3.83          2.43          2.15

RESTAURANT DATA:
Company-owned                              35            33            31            30            29
Franchise                                  67            59            52            50            49
  Total restaurants                       102            92            83            80            78

OTHER DATA*:

Weighted average shares                 3,610         3,478         3,419         3,390         3,363
outstanding (in thousands)
Number of employees at year-end
  Full-time                               146           150           153           167           140
  Part-time                               608           550           468           404           378
    Total                                 754           700           621           571           518
</TABLE>

*As described in Note 3 of the Notes to Consolidated Financial Statements, the
terms of the bank letter of credit that guarantees the Company's City of
Fairfield, Ohio Adjustable Rate Demand Industrial Development Revenue Bonds,
Series 1990, requires the Company to maintain certain financial ratios and
additionally places limitations on dividends and acquisitions of common stock
should the ratio of debt to tangible net worth be more than 1.25:1. Net income
and weighted average shares outstanding per share have been restated for 232,000
shares issued in fiscal 1994 for an acquisition that was treated as a pooling of
interests.


                                       18
<PAGE>   19
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                              Results of Operations

Revenues

         Total revenues for the fiscal year ended October 26, 1997 of $33.1
million increased 13% over the prior fiscal year ended October 27, 1996.

         Commissary revenues for the year of $14.1 million increased 14% over
last year due to a 15% increase in the sales of chili and related food products
to franchised Skyline Chili restaurants and a 10% increase in unit sales of the
Company's grocery products. A full year of unit sales of a canned version of
Skyline's secret recipe chili, that was introduced in the fourth quarter of
fiscal 1996, accounted for most of the increase in grocery unit sales. Unit
sales of the Company's frozen grocery products were 2% higher than the prior
year.

         Revenues from Company-owned restaurants of $17.4 million increased 13%
over the prior year due to same-store sales increases and the additional
revenues from two Company-owned restaurants opened in fiscal 1996, two opened in
fiscal 1997 and the relocation of two Company-owned restaurants in fiscal 1996
from lower volume strip center locations to free-standing locations with
drive-thrus. Same-store sales in Company-owned restaurants increased 4% over
fiscal 1996, due primarily to menu price increases implemented in the fourth
quarters of fiscal 1996 and fiscal 1997.

         There were 35 Company-owned restaurants at the end fiscal 1997, an
increase of two units compared to fiscal 1996. The Company franchised nine new
restaurants in Ohio, Kentucky and Indiana during fiscal 1997 and terminated the
franchise agreement of a closed unit in Hamilton, Ohio, bringing the total
number of franchised units to 67 at the end of fiscal 1997.

         Revenues from franchise fees and royalties for the year of $1.5 million
increased 9% over last year due to increased shipments of chili to franchisees,
which includes royalties as part of the selling price, and the initial franchise
fees from opening nine new franchised locations in fiscal 1997 compared to seven
in fiscal 1996.

         Total revenues for fiscal 1996 of $29.2 million increased 13% over the
prior fiscal year ended October 29, 1995. Commissary revenues for fiscal 1996
increased 19% over the prior year, principally due to the introduction of a
canned version of Skyline's secret recipe chili in the fourth quarter of fiscal
1996 and sales of chili and related food products to newly opened franchised
locations. Revenues from Company-owned restaurants in fiscal 1996 increased 9%
over the prior year due to a 4% same-store sales increase, new Company-owned
units opened in fiscal 1996 and 1995, and the relocation in fiscal 1996 of two
strip center units into free-standing locations. Revenues from franchise fees
and royalties in fiscal 1996 increased 17% over the prior year due to increased
shipments of chili to franchisees, which includes royalties as part of the
selling price, and the initial franchise fees from opening seven new franchised
units in fiscal 1996 compared to two in fiscal 1995.


                                       19
<PAGE>   20
Cost of Sales - Commissary

         Cost of sales for fiscal 1997 was 67% of the corresponding commissary
revenue figure compared to 70% in fiscal 1996 and 73% in fiscal 1995. The
improvement in this rate principally resulted from a decline in beef prices
which began in the second half of fiscal 1994.

         The Company's cost of sales rate is heavily influenced by beef prices
which can fluctuate significantly.

Restaurant Operating Expenses

         The cost of food and paper products for fiscal 1997 was 27% of
restaurant revenues compared to 28% for fiscal years 1996 and 1995, principally
due to lower average cheese prices. Payroll costs were 30% of restaurant
revenues for fiscal years 1997, 1996 and 1995. Occupancy and other expenses for
the year were 21% of restaurant revenues in fiscal years 1997 and 1996 compared
to 22% in fiscal 1995. Management anticipates that because of recent increases
in real estate costs, occupancy costs will likely increase as a percent of
revenues.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses in fiscal 1997 increased
20% over last year due to increased spending on training and development,
franchise relations, legal and professional fees, and higher levels of
management bonuses.

         Selling, general and administrative expenses in fiscal 1996 increased
15% over the prior year principally due to additional advertising expenditures,
higher levels of management bonuses and increased legal expenses related to
increased real estate activity.

Other Income (Expense)

         Other income (expense) primarily consisted of interest expense which
was lower in fiscal 1997 than fiscal 1996 and 1995 because of lower debt levels
from scheduled principal payments on the City of Fairfield, Ohio Adjustable Rate
Demand Industrial Development Revenue Bonds and a reduction in the interest rate
on these bonds which became effective at an interest reset date that occurred
late in fiscal 1995.

New Accounting Standard

         In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted for
interim and annual periods ending after December 15, 1997. At the time of
adoption, the Company will be required to change the method currently used to
compute income per share and to restate all prior periods. Under the new
requirements, primary income per share will be replaced with basic income per
share, which excludes the dilutive effect of stock options. Under the provisions
of the new standard, basic income per share would be $0.50 in 1997, $0.42 in
1996, and $0.29 in 1995.


                                       20
<PAGE>   21
Impact of Year 2000

         The Company has completed an assessment and will have to modify
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. With these modifications,
the Company believes that the Year 2000 Issue will not pose significant
operational problems for its computer systems. The Company does not anticipate
the project costs to be material.

Subsequent Event

         On November 26, 1997, the Company entered into a definitive merger
agreement with Skyline Acquisition Corp. ("Acquisition Co."), a new corporation
organized by Fleet Venture Resources, Inc. and certain of its affiliates ("Fleet
Equity Partners") and certain members of the Company's management. Fleet Equity
Partners, headquartered in Providence, Rhode Island, is a $750,000,000 private
equity fund with investments in a number of industries including
telecommunications services, health care services, industrial manufacturing,
media and information, and consumer products and services.

         The merger agreement contemplates a transaction in which Fleet Equity
Partners and the Management Group will acquire substantially all of the
outstanding common stock of the Company for cash through a reverse merger of
Acquisition Co. with and into the Company. Completion of the acquisition remains
subject to regulatory and third-party approvals, debt financing and approval by
the Company's shareholders. Upon completion of the merger, the Company's
existing shareholders, other than Acquisition Co., would receive $6.75 per share
in cash. Upon completion of the merger, the Company would no longer be
registered as a public company with the Securities and Exchange Commission and
would no longer be subject to public reporting requirements.

                         Liquidity and Capital Resources

         Cash levels increased $1 million over fiscal 1996 year end levels to
$2.2 million. Working capital was $1.6 million at the end of fiscal 1997 and
$1.2 million at the end of fiscal 1996.

         During fiscal 1997, the Company spent approximately $990,000 on
equipment replacements, remodels of existing locations and other ongoing
maintenance throughout its Company-owned units. The Company also spent $300,000
for new computer based point-of-sale equipment installed during the year in
Company-owned restaurants. The Company spent approximately $595,000 to construct
a free-standing unit in Columbus, Ohio which began operations early in the
fourth quarter. The Company also spent approximately $769,000 towards
development of a free-standing unit in Dayton, Ohio, which is expected to open
in the first quarter of fiscal 1998. All of these activities were funded by
existing cash and cash provided by operations. During fiscal 1998, the Company
intends to spend an additional $143,000 to complete the construction of the
free-standing unit in Dayton and an additional $50,000 to complete the
installation of point-of-sale equipment in all current Company-owned
restaurants. The Company expects to spend approximately $1.5 million in fiscal
1998 to construct four free-standing units, three in Columbus and one in Dayton.
The Company believes that cash provided by operations, its $4 million unsecured
bank line of credit, and the proceeds from two planned sale/leaseback
transactions will be adequate to fund expansion, remodels and new equipment
purchases.

         The Company maintains a compensating balance of $400,000 with the bank
that has issued a letter of credit guaranteeing payment of the principal and
related interest on the City of Fairfield, Ohio Adjustable


                                       21
<PAGE>   22
Rate Demand Industrial Development Revenue Bonds issued in 1990 to fund in part
the construction of the Company's commissary, warehouse and office facility.
There are no legal restrictions on the use of those compensating balance funds.

Impacts of Inflation

         The Company believes that its business is affected by inflation to the
same extent as the general economy. Generally, the Company has been able to
offset the inflationary impact of costs and wages through a combination of
improved productivity and price increases. As a result, operating results during
fiscal years 1997, 1996 and 1995 have not been significantly affected by
inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                        CONSOLIDATED FINANCIAL STATEMENTS

                          Years ended October 26, 1997,
                      October 27, 1996 and October 29, 1995

                                    CONTENTS

Report of Independent Auditors............................................... 23

Audited Consolidated Financial Statements

Consolidated Balance Sheets.................................................. 24
Consolidated Statements of Income............................................ 26
Consolidated Statements of Shareholders' Equity.............................. 27
Consolidated Statements of Cash Flows........................................ 28
Notes to Consolidated Financial Statements................................... 29


                                       22
<PAGE>   23
                         [ERNST & YOUNG LLP LETTERHEAD]


                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Skyline Chili, Inc.

We have audited the accompanying consolidated balance sheets of Skyline Chili,
Inc. (the Company) as of October 26, 1997, and October 27, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended October 26, 1997. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
October 26, 1997 and October 27, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 26, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



                                            /s/ ERNST & YOUNG LLP


December 10, 1997




       Ernst & Young LLP is a member of Ernst & Young International, Ltd.


                                       23
<PAGE>   24
                               Skyline Chili, Inc.

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                           OCTOBER 26,       OCTOBER 27, 
                                                              1997              1996
                                                           -----------------------------
<S>                                                        <C>               <C>
ASSETS                                                     
Current assets:                                            
    Cash and cash equivalents                              $ 2,152,000       $ 1,140,000
    Accounts receivable                                      1,873,000         1,692,000
    Inventories                                              1,411,000         1,804,000
    Prepaid expenses                                           145,000           129,000
    Deferred income taxes                                      212,000           253,000
                                                           -----------------------------
Total current assets                                         5,793,000         5,018,000
                                                           
                                                           
Property and equipment, at cost:                           
    Land                                                     1,438,000         1,046,000
    Buildings and improvements                              14,920,000        13,859,000
    Equipment and fixtures                                   9,653,000         8,702,000
                                                           -----------------------------
                                                            26,011,000        23,607,000
                                                           
Less accumulated depreciation                                9,671,000         8,067,000
                                                           -----------------------------
Net property and equipment                                  16,340,000        15,540,000
                                                           
                                                           
Intangible assets -- net                                       571,000           455,000
Other assets                                                   181,000           149,000
                                                           
                                                           -----------------------------
Total assets                                               $22,885,000       $21,162,000
                                                           =============================
</TABLE>                                                  


                                       24
<PAGE>   25
<TABLE>
<CAPTION>
                                                           OCTOBER 26,       OCTOBER 27, 
                                                               1997             1996
                                                           -----------------------------
<S>                                                        <C>               <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                       $ 1,476,000       $ 1,787,000
    Accrued salaries and wages                               1,644,000         1,020,000
    Accrued interest                                            50,000            53,000
    Income taxes payable                                       209,000           146,000
    Other accrued liabilities                                  365,000           358,000
    Long-term debt due within one year                         410,000           385,000
                                                           -----------------------------
Total current liabilities                                    4,154,000         3,749,000

Other liabilities                                              293,000           217,000
Deferred income taxes                                          680,000           689,000
Long-term debt                                               5,305,000         5,715,000

Shareholders' equity:
    Common stock, no par value:
      1997 -- 5,400,000 shares authorized; 3,397,773
        shares issued and outstanding
      1996 -- 5,400,000 shares authorized; 3,389,023
        shares issued and outstanding                        5,414,000         5,380,000
    Additional paid-in capital                                  19,000            19,000
    Retained earnings                                        7,020,000         5,393,000
                                                           -----------------------------
Total shareholders' equity                                  12,453,000        10,792,000
                                                           -----------------------------
Total liabilities and shareholders' equity                 $22,885,000       $21,162,000
                                                           =============================
</TABLE>

See accompanying notes.


                                       25
<PAGE>   26
                               Skyline Chili, Inc.

                        Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                          YEARS ENDED
                                        ----------------------------------------------
                                        OCTOBER 26,       OCTOBER 27,      OCTOBER 29,
                                           1997              1996             1995
                                        ----------------------------------------------
<S>                                     <C>              <C>              <C>         
REVENUES
Sales:
    Commissary                          $ 14,096,000     $ 12,341,000     $ 10,331,000
    Restaurants                           17,433,000       15,471,000       14,231,000
Franchise fees and royalties               1,539,000        1,411,000        1,210,000
                                        ----------------------------------------------
                                          33,068,000       29,223,000       25,772,000

OPERATING COSTS AND EXPENSES
Cost of sales -- commissary                9,467,000        8,634,000        7,497,000
Restaurant operating costs:
    Cost of food and paper                 4,736,000        4,355,000        3,945,000
    Payroll cost                           5,249,000        4,693,000        4,266,000
    Occupancy and other expenses           3,693,000        3,229,000        3,078,000
Selling, general, and administrative       6,861,000        5,727,000        5,000,000
                                        ----------------------------------------------
                                          30,006,000       26,638,000       23,786,000
                                        ----------------------------------------------
INCOME FROM OPERATIONS                     3,062,000        2,585,000        1,986,000

 OTHER INCOME (EXPENSE):
    Interest income                           85,000           76,000           92,000
    Interest expense                        (357,000)        (367,000)        (541,000)
    Other expense                             (8,000)          (6,000)          (7,000)
                                        ----------------------------------------------
                                            (280,000)        (297,000)        (456,000)
                                        ----------------------------------------------

INCOME BEFORE INCOME TAXES                 2,782,000        2,288,000        1,530,000
Provision for income taxes                 1,087,000          873,000          550,000
                                        ----------------------------------------------
NET INCOME                              $  1,695,000     $  1,415,000     $    980,000
                                        ==============================================

NET INCOME PER SHARE                    $       0.47     $       0.41     $       0.29
                                        ==============================================
Weighted-average common and common
    equivalent shares outstanding          3,610,000        3,478,000        3,419,000
                                        ==============================================
</TABLE>

See accompanying notes.


                                       26
<PAGE>   27
                               Skyline Chili, Inc.

                 Consolidated Statements of Shareholders' Equity

      Years ended October 26, 1997, October 27, 1996, and October 29, 1995


<TABLE>
<CAPTION>
                                              COMMON STOCK               
                                       ----------------------------     ADDITIONAL                         TOTAL
                                         NUMBER OF                       PAID-IN         RETAINED       SHAREHOLDERS'
                                           SHARES         AMOUNT         CAPITAL         EARNINGS          EQUITY
                                       -----------------------------------------------------------------------------
<S>                                    <C>             <C>             <C>             <C>              <C>         
Balance, October 30, 1994                 3,345,000    $  5,267,000    $     19,000    $  2,998,000     $  8,284,000
    Net income                                   --              --              --         980,000          980,000
                                       -----------------------------------------------------------------------------
Balance, October 29, 1995                 3,345,000       5,267,000          19,000       3,978,000        9,264,000
    Options exercised                        44,000         113,000              --              --          113,000
    Net income                                   --              --              --       1,415,000        1,415,000
                                       -----------------------------------------------------------------------------
Balance, October 27, 1996                 3,389,000       5,380,000          19,000       5,393,000       10,792,000
    Options exercised                         9,000          34,000              --              --           34,000
    Dividends paid ($.02 per share)              --              --              --         (68,000)         (68,000)
    Net income                                   --              --              --       1,695,000        1,695,000
                                       -----------------------------------------------------------------------------
Balance, October 26, 1997                 3,398,000    $  5,414,000    $     19,000    $  7,020,000     $ 12,453,000
                                       =============================================================================
</TABLE>

See accompanying notes.


                                       27
<PAGE>   28
                               Skyline Chili, Inc.

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                  -------------------------------------------
                                                  OCTOBER 26,     OCTOBER 27,     OCTOBER 29, 
                                                     1997            1996            1995
                                                  -------------------------------------------
<S>                                               <C>             <C>             <C>        
OPERATING ACTIVITIES
Net income                                        $ 1,695,000     $ 1,415,000     $   980,000
Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                 2,019,000       1,705,000       1,553,000
      Deferred income taxes                            33,000         173,000          74,000
      Decrease (increase) in:
        Accounts receivable                          (181,000)       (618,000)       (348,000)
        Inventories                                   393,000        (580,000)       (181,000)
        Prepaid expenses                              (16,000)         (8,000)         92,000
      Increase (decrease) in:
        Accounts payable                             (311,000)        282,000          99,000
        Income taxes payable                           63,000          45,000         101,000
        Accrued liabilities                           628,000         422,000        (333,000)
      Other -- net                                     44,000          24,000         (27,000)
                                                  -------------------------------------------
Net cash provided by operating activities           4,367,000       2,860,000       2,010,000

INVESTING ACTIVITIES
Capital expenditures                               (2,758,000)     (3,987,000)     (2,484,000)
Proceeds from sale of property and equipment            1,000         609,000          54,000
Additions to intangible assets                       (179,000)         (5,000)        (39,000)
                                                  -------------------------------------------
Net cash used by investing activities              (2,936,000)     (3,383,000)     (2,469,000)

FINANCING ACTIVITIES
Cash dividends paid                                   (68,000)             --              --
Proceeds from exercise of stock options                34,000         113,000              --
Repayments of debt                                   (385,000)       (360,000)       (340,000)
                                                  -------------------------------------------
Net cash used by financing activities                (419,000)       (247,000)       (340,000)
                                                  -------------------------------------------

Net increase (decrease) in cash and
    cash equivalents                                1,012,000        (770,000)       (799,000)
Cash and cash equivalents at beginning of year      1,140,000       1,910,000       2,709,000
                                                  -------------------------------------------
Cash and cash equivalents at end of year          $ 2,152,000     $ 1,140,000     $ 1,910,000
                                                  ===========================================
</TABLE>

See accompanying notes.


                                       28
<PAGE>   29
                               Skyline Chili, Inc.

                   Notes to Consolidated Financial Statements

            October 26, 1997, October 27, 1996, and October 29, 1995


1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Skyline Chili, Inc. (the Company) operates in only one industry segment. All
significant revenues and pre-tax earnings relate to sales of food to the general
public through Company-operated and franchised restaurants and through grocery
stores. Credit is extended to franchisees and grocery stores based upon
management's assessment of credit risk. Credit losses have historically been
minimal. The Company operates company owned and franchised units in Ohio,
Indiana, Florida, and Kentucky.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of finished goods.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated over the economic
useful lives of the related assets on the straight-line method.

INTANGIBLE ASSETS

Intangible assets consist primarily of trademarks and recipes obtained through
acquisition of businesses which are amortized on the straight-line method over
periods up to fifteen years, and debt issuance costs which are amortized over
the life of the debt using the interest method. Accumulated amortization was
$384,000 and $320,000 as of October 26, 1997 and October 27, 1996, respectively.


                                       29
<PAGE>   30
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FRANCHISE FEES AND ROYALTIES

Area franchise fees in excess of direct costs incurred and individual restaurant
franchise fees are deferred and recognized in income when the restaurant is
opened. Royalties are recorded in income on the accrual basis. Expenses
associated with franchise fees and royalties are charged to expense as incurred.
Franchise fees and royalties included in income are as follows:

<TABLE>
<CAPTION>
                                 OCTOBER 26,       OCTOBER 27,       OCTOBER 29,
                                    1997              1996              1995
                                 ----------------------------------------------
<S>                              <C>               <C>               <C>       
Franchise fees                   $  119,000        $  108,000        $   30,000
Royalties                         1,420,000         1,303,000         1,180,000
                                 ----------------------------------------------
                                 $1,539,000        $1,411,000        $1,210,000
                                 ==============================================
</TABLE>

During 1997, 9 franchised units were added and 1 franchised unit was closed
bringing the total number of franchised units to 67. During 1996, 7 franchised
units were added bringing the total number of franchised units to 59.

PRE-OPENING EXPENSES

Expenditures related to the opening of new restaurants, other than those for
capital assets, are expensed as incurred.

EARNINGS PER SHARE

Net income per common share is based on the weighted-average number of common
shares and common share equivalents outstanding.

REPORTING PERIOD

The Company's fiscal year ends on the last Sunday of October. The consolidated
financial statements for 1997, 1996, and 1995 each include 52 weeks.


                                       30
<PAGE>   31
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH FLOWS

For purposes of the statement of cash flows, the Company considers all highly
liquid investment instruments purchased with a maturity of three months or less
to be cash equivalents.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is required to be adopted for interim and
annual periods ending after December 15, 1997. At the time of adoption, the
Company will be required to change the method currently used to compute income
per share and to restate all prior periods. Under the new requirements primary
income per share will be replaced with basic income per share. Basic income per
share excludes the dilutive effect of stock options. Under the provisions of the
new standard, basic income per share would be $.50 in 1997, $.42 in 1996, and
$.29 in 1995.


                                       31
<PAGE>   32
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


2. INCOME TAXES

The components of the income tax provision are as follows:

<TABLE>
<CAPTION>
                                    OCTOBER 26,      OCTOBER 27,      OCTOBER 29,
                                       1997             1996             1995
                                    --------------------------------------------
<S>                                 <C>              <C>              <C>       
Current:
   Federal                          $  845,000       $  555,000       $  398,000
   State and city                      209,000          145,000           78,000
Deferred                                33,000          173,000           74,000
                                    --------------------------------------------
                                    $1,087,000       $  873,000       $  550,000
                                    ============================================
</TABLE>

The reasons for the difference between the amounts determined using the
statutory corporate federal income tax rate and the effective income tax rate
are as follows:

<TABLE>
<CAPTION>
                                                OCTOBER 26,   OCTOBER 27,    OCTOBER 29,
                                                   1997          1996           1995
                                                ---------------------------------------
<S>                                             <C>           <C>            <C>       
Income taxes computed at statutory federal
   income tax rates                             $  946,000    $  778,000     $  520,000
State and local income taxes, net of federal
   income tax effect                               138,000        96,000         52,000
Other -- net                                         3,000        (1,000)       (22,000)
                                                ---------------------------------------
Actual tax expense                              $1,087,000    $  873,000     $  550,000
                                                =======================================
</TABLE>

The deferred tax assets and liabilities consist of the following components:

<TABLE>
<CAPTION>
                                                       OCTOBER 26,     OCTOBER 27,
                                                          1997            1996
                                                        ------------------------
<S>                                                    <C>             <C>
Deferred tax assets:
   Employee compensation and benefits                   $ 74,000        $119,000
   Inventories                                            26,000          32,000
   Expenses not currently deductible                     112,000         102,000
                                                        ------------------------
                                                         212,000         253,000
Deferred tax liabilities:
   Accelerated tax depreciation                          680,000         689,000
                                                        ------------------------
Net deferred tax liability                              $468,000        $435,000
                                                        ========================
</TABLE>


                                       32
<PAGE>   33
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


3. LONG-TERM DEBT AND NOTES PAYABLE

Long-term debt at October 26, 1997 represents $5,715,000 City of Fairfield, Ohio
Adjustable Rate Demand Industrial Development Revenue Bonds, Series 1990, due
2008. The bonds were issued for the purpose of constructing and equipping a new
commissary, warehouse and office facility and are payable annually through
September 1, 2008. The carrying amount of the bonds approximates fair value.
Interest is payable semi-annually at a 5 percent annual rate through August 31,
2000. On September 1, 2000, and on each succeeding interest rate determination
date, the interest rate will be adjusted for an interest rate period, determined
at the Company's election, equal to six months, one year, five years, or ten
years. In no case will the interest rate exceed 12 percent. Redemption of the
bonds is dependent on the interest rate period elected by the Company.

The bonds and certain amounts of accrued interest thereon are guaranteed by a
$6,200,000 bank letter-of-credit through September 16, 1998. The bank
letter-of-credit is secured by the commissary, warehouse, office facility, and
certain equipment. The Company is required under the agreement to maintain
certain financial ratios, and the agreement places limitations on dividends and
acquisition of common stock should the ratio of debt to tangible net worth be
more than 1.25 to 1. At October 26, 1997 the ratio was .80 to 1.

The Company pays the bank a maintenance fee on the undrawn amount available to
be drawn under the letter-of-credit equal to 5/8 percent annually. The bank
agreement also provides that the Company maintain a $400,000 compensating
balance in the Company's general disbursement account.

The Company has a $4 million unsecured line-of-credit with a bank that extends
through July 1, 1998. Borrowings under the line-of-credit bear interest at prime
less 1/8 percent. There were no borrowings under the line-of-credit at October
26, 1997 or October 27, 1996.

Annual maturities of long-term debt are $410,000, $435,000, $465,000, $495,000,
and $525,000 in 1998 through 2002.


                                       33
<PAGE>   34
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


4. COMMITMENTS

The Company conducts most of its restaurant operations from leased facilities
and leases certain equipment under operating lease agreements. The leases
generally require the Company to pay taxes and insurance. Certain of the leases
require the payment of additional rents if annual sales exceed certain minimums.
Most leases contain renewal options ranging from 3 to 15 years, at lease rates
which are not materially higher than existing lease rates.

The following is a schedule of future minimum rental payments relating to these
operating leases as of October 26, 1997:

<TABLE>
<CAPTION>
             YEAR                                         AMOUNT
             -----------------------------------------------------
<S>                                                     <C>       
             1998                                       $1,012,000
             1999                                          874,000
             2000                                          766,000
             2001                                          616,000
             2002                                          503,000
             Thereafter                                  1,433,000
                                                        ----------
             Total minimum lease payments               $5,204,000
                                                        ==========
</TABLE>

Rent expense under operating leases including contingent rentals, which were not
significant, amounted to $1,224,000 in 1997, $1,161,000 in 1996, and $1,101,000
in 1995.

5. DEFINED CONTRIBUTION PLAN

The Company has two defined contribution pension plans, one with a 401(k)
feature, covering all employees who meet eligibility requirements. The Company
matches employees' tax-deferred contributions up to 3 percent of the employees'
compensation. Remaining contributions under the plan are discretionary. Total
expense under the plans amounted to $170,000 in 1997, $140,000 in 1996, and
$120,000 in 1995.


                                       34
<PAGE>   35
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


6. COMMON STOCK

The 1986 Stock Option Plan (1986 Plan) reserved 112,000 shares of common stock
for award to officers and key employees as stock options. The option price was
determined by a Stock Option Committee (the Committee), but could not be less
than 85 percent of the fair market value of the stock at the date of grant, and
the options were exercisable over a period determined by the Committee, but no
longer than ten years after the date they were granted. On September 19, 1996,
the Company's 1986 Plan terminated due to the expiration of its 10-year term.
All options granted under the 1986 Plan that were outstanding on that date may
continue to be exercised according to their terms. No further options can be
granted under the 1986 Plan.

The 1990 Stock Option and Stock Incentive Plan reserved 475,000 shares of common
stock for award to officers and key employees of the Company as incentive or
nonqualified stock options, stock appreciation rights (SARs), restricted stock,
performance units, or other stock unit awards. For stock options, the option
price is determined by a committee of the Board of Directors, but may not be
less than 85 percent and 100 percent of the fair-market value of the stock at
the date of grant for nonqualified stock options and incentive stock options,
respectively. Options are exercisable over a period determined by a committee,
but no longer than ten years after the date they are granted. SARs may be
granted in connection with stock options or separately. SARs issued in
connection with options entitle the optionee to receive the appreciation in
value of the shares (the difference between market price of a share at the time
of exercise of the SAR and option price) in cash, shares or a combination
thereof. Any exercise of a SAR or option automatically cancel the related option
or SAR.


                                       35
<PAGE>   36
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


6. COMMON STOCK (CONTINUED)

A summary of stock option activity related to the plans is as follows:

<TABLE>
<CAPTION>
                                         NUMBER        OPTION        WEIGHTED-
                                           OF           PRICE         AVERAGE
                                         SHARES       PER SHARE     OPTION PRICE
                                        ----------------------------------------
<S>                                     <C>          <C>            <C>
Outstanding at October 30, 1994                    
   (313,000 shares exercisable)          392,000     $2.19-$5.19       $ 3.38
     Granted                             131,000        $3.13          $ 3.13
     Canceled/Expired                    (30,000)    $2.25-$4.06       $ 2.85
                                        --------   
Outstanding at October 29, 1995                    
   (320,000 shares exercisable)          493,000     $2.19-$5.19       $ 3.35
     Granted                              40,000     $4.13-$4.31       $ 4.26
     Canceled/Expired                    (44,000)    $2.44-$4.50       $ 2.58
                                        --------   
Outstanding at October 27, 1996                    
   (336,000 shares exercisable)          489,000     $2.19-$5.19       $ 3.49
     Canceled/Expired                     (5,000)       $3.13          $ 3.13
     Exercised                           (12,000)    $3.125-$5.19      $ 3.64
                                        --------   
Outstanding at October 26, 1997                    
   (382,000 shares exercisable)          472,000                       $ 3.49
                                        ========   
</TABLE>
                                                  
At October 26, 1997, 59,000 shares of common stock are reserved for future grant
under the plans.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for the participants' options because the alternative fair-value
accounting provided for under FASB Statement No. 123, "Accounting for Stock
Based Compensation," requires use of option-valuation models that were not
developed for use in valuing such options. However, the effect of applying
Statement No. 123's fair-value method results in net earnings that are not
materially different from amounts reported.


                                       36
<PAGE>   37
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


7. ADVERTISING TRUST

Company stores and franchisees in the Cincinnati area pay an advertising fee to
a trust established for the benefit of Cincinnati area stores.

The trust has a line-of-credit with a bank under which it may borrow up to
$200,000 that is guaranteed by the Company. There were no borrowings under the
line-of-credit at October 26, 1997.

During the fiscal years ending 1997, 1996, and 1995 advertising cost charged
directly to expense were $986,000, $718,000, and $656,000, respectively.

8. CASH FLOWS

Supplemental disclosure with respect to cash flow information is as follows:

<TABLE>
<CAPTION>
                                       OCTOBER 26,    OCTOBER 27,    OCTOBER 29,
                                          1997           1996           1995
                                       ----------------------------------------
<S>                                    <C>            <C>            <C>
Cash paid during the year for:
   Interest                            $  360,000     $  380,000     $  593,000
   Income taxes                         1,024,000        762,000        328,000
</TABLE>


                                       37
<PAGE>   38
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


9. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                  INCOME                     NET
                                                   FROM         NET       INCOME PER 
                                    REVENUES    OPERATIONS     INCOME       SHARE
                                     ----------------------------------------------
                                         (In Thousands, Except Per Share Data)
<S>                                 <C>         <C>            <C>        <C>
YEAR ENDED OCTOBER 26, 1997
First quarter                        $9,737       $  636       $  329       $   .09
Second quarter                        6,872          455          241           .07
Third quarter                         7,547          640          350           .10
Fourth quarter                        8,912        1,331          775           .21


<CAPTION>
                                                  INCOME                     NET
                                                   FROM         NET       INCOME PER 
                                    REVENUES    OPERATIONS     INCOME       SHARE
                                     ----------------------------------------------
                                         (In Thousands, Except Per Share Data)
<S>                                 <C>         <C>            <C>        <C>
YEAR ENDED OCTOBER 27, 1996
First quarter                        $8,210       $  510       $  262       $   .08
Second quarter                        6,422          364          182           .05
Third quarter                         6,677          490          262           .08
Fourth quarter                        7,914        1,221          709           .20
</TABLE>

The first quarter of each fiscal year includes 16 weeks. All other quarters
include 12 weeks.

10. SUBSEQUENT EVENT

On November 26, 1997, the Company entered into a definitive merger agreement
which contemplates a transaction in which the shareholders of an acquisition
company will acquire substantially all of the outstanding common stock of the
Company for cash through a reverse merger of the acquisition company with and
into the Company. Completion of the acquisition remains subject to the
negotiation and execution of certain related documentation, satisfactory
completion of due diligence, regulatory and third-party approvals, debt
financing and approval by the Company's shareholders. Upon completion of the
merger, the Company will no longer be registered as a public company with the
Securities and Exchange Commission.


                                       38
<PAGE>   39
                               Skyline Chili, Inc.

             Notes to Consolidated Financial Statements (continued)


10. SUBSEQUENT EVENT (CONTINUED)

Upon approval of the merger, the Company's existing shareholders would receive
$6.75 per share in cash for a total value of $22,935,000. The transaction is
expected to be funded by existing cash and cash equivalents, debt financing,
investment by senior management, and investment by Fleet Equity Partners. Fleet
Equity Partners, headquartered in Providence, Rhode Island, is a $750,000,000
private equity fund with investments in a number of industries including
telecommunications services, health care services, industrial manufacturing,
media and information, and consumer products and services.


                                       39
<PAGE>   40
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                    BALANCE AT       ADDITIONS                    BALANCE AT
                                   BEGINNING OF      CHARGED TO     DEDUCTIONS       END
                                      PERIOD      COSTS & EXPENSES     (1)        OF PERIOD
                                     --------         --------       --------      --------
<S>                                <C>            <C>               <C>           <C>
YEAR ENDED OCTOBER 26, 1997                       
                                                  
     Allowance for doubtful          $      0         $ 17,000       $(17,000)     $      0
     trade accounts receivable                    
                                                  
YEAR ENDED OCTOBER 27, 1996                       
                                                  
     Allowance for doubtful          $      0         $      0       $      0      $      0
     trade accounts receivable                    
                                                  
YEAR ENDED OCTOBER 29, 1995                       
                                                  
     Allowance for doubtful          $      0         $      0       $      0      $      0
     trade accounts receivable                  
</TABLE>

(1)  Uncollectible accounts written off, net of recoveries.


                                       40
<PAGE>   41
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS OF THE COMPANY:

         The name, age, principal occupation, business experience and period of
previous service as a director of the Company, of each of the members of the
Company's Board of Directors are set forth below. No individual was selected as
a director or nominee pursuant to any arrangement or understanding with any
other person, except that pursuant to the provisions of certain consulting
agreements entered into between the Company and Lambert, Christie and William N.
Lambrinides, the Company has agreed to nominate them for election as directors
at each Annual Meeting of Shareholders during the consulting term. For a
description of the consulting agreements, see Item 11 "Executive Compensation -
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements" of this Form 10-K

<TABLE>
<CAPTION>
                                                                                                     YEAR FIRST
                             PRINCIPAL OCCUPATIONS, OTHER DIRECTORSHIPS AND                          ELECTED AS
NAME                  AGE    POSITIONS WITH THE COMPANY                                              A DIRECTOR
----                  ---    --------------------------                                              ----------
<S>                   <C>    <C>                                                                     <C> 
Lambert N.            74     Mr. Lambrinides has served as the Company's Chairman of the                1965
Lambrinides                  Board since October 1994 and is currently a consultant to the
                             Company. Mr. Lambrinides served as the Company's Senior
                             Chairman of the Board from November 1992 to October 1994 and
                             as its Chairman of the Board from 1984 to November 1992.  Prior
                             to that time, Mr. Lambrinides served as the Company's President.
                             
Kevin R. McDonnell    45     Mr. McDonnell has served as the Company's President and Chief              1992
                             Executive Officer since October 1994.  Mr. McDonnell served as
                             the Company's President, Chief Operating Officer and Chief
                             Financial Officer from November 1992 to October 1994 and
                             served as its Executive Vice President and Chief Financial Officer
                             from December 1991 to November 1992.  Mr. McDonnell joined
                             the Company in January 1991 as its Director of Finance and Chief
                             Financial Officer.
                             
Christie N.           70     Mr. Lambrinides is currently a consultant to the Company. Mr.              1965
Lambrinides                  Lambrinides served as a Vice President of the Company from 1965
                             to October 1994 and also served as the Company's Secretary (1981
                             to October 1994).
</TABLE>
                             
                             
                                       41
                             
<PAGE>   42
                             
                             
                             
<TABLE>
<S>                   <C>    <C>                                                                     <C> 
William N.            70     Mr. Lambrinides is currently a consultant to the Company. Mr.              1965
Lambrinides                  Lambrinides served as a Vice President of the Company from 1965
                             to October 1994 and also served as the
                             Company's Treasurer (1980 to October 1994)
                             and Assistant Secretary (1985 to October
                             1994).
                             
Lawrence R.           61     Mr. Burtschy is currently the Chairman of L.R. Burtschy &                  1985
Burtschy                     Company, an investment management firm, and has been so
                             engaged since 1969.  Mr. Burtschy is also a director of Hillenbrand
                             Industries, a diversified manufacturing corporation in the health
                             care, casket and funeral services, and consumer durables
                             industries.
                             
David A Kohnen        60     Mr. Kohnen is currently a financial and business consultant and            1990
                             has been so engaged since September 1994. Prior to that time, Mr.
                             Kohnen was a member of the law firm of Kohnen & Patton,
                             Cincinnati, Ohio.
                             
Joseph E. Madigan     65     Mr. Madigan is currently the Chairman of the Board of Directors,           1990
                             the Executive Committee and the Audit Committee of Cardinal
                             Realty Services, Inc. Mr. Madigan is also a corporate financial
                             consultant and has been so engaged since 1988.  Prior to that time,
                             Mr. Madigan served as the Executive Vice President and Chief
                             Financial Officer of Wendy's International, Inc. from 1980 to
                             1987, and as a director of Wendy's International, Inc. from 1981 to
                             1987.  Wendy's International, Inc. is primarily engaged in the
                             business of operating, developing, and franchising a system of
                             distinctive quick-service restaurants.  Mr. Madigan is also a
                             director of the Cooker Restaurant Corp.
</TABLE>
                            
Lambert N. Lambrinides, William N. Lambrinides and Christie N. Lambrinides are
brothers.

         In April 1995, in connection with a dispute over certain legal billing
practices, Mr. Kohnen plead guilty to one count of mail fraud involving a total
of $3,600. Mr. Kohnen offered to resign from the Board. The directors requested
Mr. Kohnen to remain on the Board in recognition of the value of his current and
prior services as a director.

EXECUTIVE OFFICERS OF THE COMPANY:

     The following table lists the names and ages of all of the executive
officers of the Company, and indicates all positions and offices with the
Company held by such persons. No person other than those listed below has been
chosen to become an executive officer of the Company:


NAME                      AGE    POSITION WITH THE COMPANY
----                      ---    -------------------------

Lambert N. Lambrinides    74     Chairman of the Board and Director
Kevin R. McDonnell        45     President, Chief Executive Officer and Director


                                       42
<PAGE>   43
NAME                      AGE    POSITION WITH THE COMPANY
----                      ---    -------------------------

Jeffry W. Shelton         34     Corporate Vice President - Finance, Chief 
                                 Financial Officer and Treasurer

Thomas L. Allen           35     Corporate Vice President - Marketing

Phillip M. Lewis, Jr.     55     Corporate Vice President - Real Estate and 
                                 Construction

     The Company's executive officers serve at the discretion of the Board of
Directors and are elected on an annual basis. There is no understanding between
any executive officer and the Company or any other person pursuant to which any
executive officer was or is to be elected or appointed to such position.

     The following is a brief summary of the business experience of Messrs.
Shelton, Allen, Peeples and Lewis. For a description of the business experience
of Messrs. Lambert N. Lambrinides and McDonnell, see "Directors of the Company"
above.

     Jeffry W. Shelton was elected the Company's Corporate Vice President -
Finance in October 1996, and he has served as its Chief Financial Officer and
Treasurer since December 1994. He served as Vice President from December 1994 to
October 1996. He served as the Company's Vice President/Controller from December
1992 to December 1994. He joined the Company in April 1989 and has served as its
Controller since November 1990. Mr. Shelton is a certified public accountant.

     Thomas L. Allen was elected the Company's Corporate Vice President -
Marketing in December 1991. Mr. Allen joined the Company as Director of
Marketing in January 1991. Prior to joining the Company, he was employed as an
account supervisor with Ads & Associates in Cincinnati, Ohio from May 1989 to
January 1991, and prior to that in various capacities in the areas of
advertising, sales and marketing for Sive/Young and Rubicam and the Procter &
Gamble Distributing Co.

     Phillip M. Lewis, Jr. was elected as the Company's Corporate Vice President
- Real Estate and Construction in October 1996. Mr. Lewis joined the Company in
October 1995 as its Director-Real Estate Administration and Construction. From
July 1994 to October 1995, Mr. Lewis was the principal of P.M. Lewis, Inc., a
firm providing construction consulting services. Prior thereto he served as
Corporate Director Facility Engineering for Hook-SuperX, Inc.

ITEM 11. EXECUTIVE COMPENSATION

     Summary Compensation Table

     The following Table summarizes all compensation earned by or granted to the
Company's Chief Executive Officer and certain other most highly compensated
executive officers for all services performed by them for the Company during its
last three completed fiscal years:


                                       43
<PAGE>   44
<TABLE>
<CAPTION>
                                                                                                    LONG-TERM
                                                       ANNUAL COMPENSATION                        COMPENSATION
                                                   --------------------------------------------------------------------
                                                                                              AWARDS           PAYOUTS
                                                                                         ------------------------------
                                                                           OTHER         REST-                             ALL
                                                                           ANNUAL        RICTED                            OTHER
NAME AND PRINCIPAL POSITION               FISCAL                           COMPEN-       STOCK                LTIP         COMPEN-
DURING FISCAL 1997                         YEAR    SALARY(1)   BONUS(1)    SATION        AWARDS     OPTIONS   PAYOUTS(2)   SATION(3)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>      <C>         <C>         <C>           <C>        <C>       <C>          <C>
Kevin R. McDonnell, President              1997    $155,000    $117,612         --           --          --    $145,571    $  7,190
and Chief Executive Officer                1996     140,000      85,000         --           --      10,000          --       6,612
                                           1995     130,000      48,750         --           --      20,000          --       5,796
-----------------------------------------------------------------------------------------------------------------------------------
Thomas L. Allen, Corporate                 1997      83,846      47,831         --           --          --     145,572       4,805
Vice President - Marketing                 1996      78,846      47,900         --           --          --          --       4,075
                                           1995      73,846      27,500         --           --      10,000          --       4,111
-----------------------------------------------------------------------------------------------------------------------------------
Phillip M. Lewis, Jr., Corporate           1997      65,962      47,831         --           --          --      70,572       2,646
Vice President - Real Estate               1996      50,577      25,663         --           --      15,000          --         829
and Construction (4)                       1995       2,115          --         --           --          --          --          --
-----------------------------------------------------------------------------------------------------------------------------------
Jeffry W. Shelton, Corporate               1997      68,000      47,831         --           --          --     145,571       3,816
Vice President - Finance and               1996      63,000      34,313         --           --      10,000          --       3,189
Chief Financial Officer                    1995      58,000      17,813         --           --       7,000          --         738
-----------------------------------------------------------------------------------------------------------------------------------
Victor L. Peeples, Corporate               1997      66,523      34,394         --           --          --      93,714      32,083
Vice President - Restaurant                1996      90,938      48,000         --           --          --          --       4,648
Operations (5)                             1995      85,865      28,500         --           --      10,000          --       4,472
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                 
(1)      Includes amounts deferred at the election of the named executive
         officer pursuant to the Skyline Chili, Inc. Non-Qualified Deferred
         Compensation Plan (the "Non-Qualified Plan") during fiscal 1997, 1996
         and 1995.

(2)      For fiscal 1997, consists of the total cash payout to the named
         executive officer under the Company's long-term incentive compensation
         plan covering fiscal years 1997, 1996 and 1995. For a description of
         the Company's long-term incentive compensation plan, see the discussion
         under the "Long Term Incentive Plan ("LTIP") Awards Table."

(3)      Consists of (i) the amount of the discretionary and matching
         contributions made by the Company to the Skyline Chili, Inc. Profit
         Sharing Plan (the "401(k) Plan") and Non-Qualified Plan and allocated
         to the account of the named executive officer, and (ii) with respect to
         Mr. Peeples, $27,477 in severance pay.

(4)      Mr. Lewis joined the Company in October 1995.

(5)      Mr. Peeples left the Company in July 1997.

         Stock Option Plans

         The Company's 1986 Stock Option Plan (the "1986 Plan") became effective
on September 18, 1986 and terminated on September 18, 1996 upon the expiration
of its ten-year term. No further options may be granted under the 1986 Plan.
Subject to adjustment in the case of certain changes in the capital structure of


                                       44
<PAGE>   45
the Company, as of January 12, 1998, there were outstanding non-qualified
options under the 1986 Plan to purchase a total of 101,000 shares of the
Company's common stock. These options will continue to be exercisable according
to their terms. The 1986 Plan is administered by a Committee of the Board of
Directors of the Company, consisting of not less than three "non-employee"
directors. A non-employee director is a director who is not an officer or
employee of the Company and who does not, apart from being a director, have a
material business relationship with the Company or an interest in a material
transaction with the Company. Subject to the limitations contained in the 1986
Plan, the Committee has complete authority to interpret the 1986 Plan and to
take all other actions necessary or advisable for the proper administration of
the 1986 Plan. The price per share payable by a participant on the exercise of
each option granted under the 1986 Plan was determined by the Committee;
however, the exercise price of each option cannot be less than 85% of the fair
market value of the Company's common stock on the date of the grant. The
exercise price of any option granted under the 1986 Plan may be paid in cash, or
in the discretion of the Committee in shares of common stock, or in any
combination thereof.

         The Company's 1990 Stock Option and Stock Incentive Plan (the "1990
Plan") became effective on March 7, 1990 and will terminate on March 7, 2000.
The following kinds or types of awards may be granted under the 1990 Plan: (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock, (v) performance units, and (vi)
other stock unit awards or bonuses. Subject to adjustment in the case of certain
changes in the capital structure of the Company, as of January 12, 1998, a
maximum of 429,517 shares of the Company's common stock were available for
issuance pursuant to awards granted under the 1990 Plan. The 1990 Plan is
administered by a committee of the Board of Directors of the Company, consisting
of not less than three "non-employee" directors. Subject to the limitations
contained in the 1990 Plan, the Committee has the sole and complete authority to
select participants, to grant awards, to determine the terms and conditions of
the awards, to interpret the 1990 Plan, and to take all other actions necessary
or advisable for the proper administration of the 1990 Plan. Only persons who
are officers or full-time employees of the Company are eligible to participate
in and receive awards under the 1990 Plan. Neither the members of the Committee
nor any member of the Company's Board of Directors who is not also an officer or
full-time employee may participate in the 1990 Plan. The purchase price per
share, payable by a participant upon the exercise of each option granted under
the 1990 Plan is determined by the Committee. However, the exercise price of
each non-qualified stock option cannot be less than 85% of the fair market value
of the Company's common stock on the date of the grant, and the exercise price
of each incentive stock option cannot be less than 100% of such fair market
value. The exercise price of any option granted under the 1990 Plan may be paid
in cash, or in the discretion of the Committee in shares of common stock, or in
any combination thereof.

         Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option
Values

         The following table summarizes certain information concerning the
number and the fiscal 1997 year-end value of unexercised options held by the
named executive officers. The named executive officers did not exercise any
options during fiscal 1997.


                                       45
<PAGE>   46
<TABLE>
<CAPTION>
                                                      FISCAL 1997 YEAR-END OPTION VALUES
                                --------------------------------------------------------------------------
                                   NUMBER OF SECURITIES UNDERLYING       VALUE OF UNEXERCISED IN-THE-MONEY
                                UNEXERCISED OPTIONS AT FISCAL YEAR-END     OPTIONS AT FISCAL YEAR-END(1)
NAME                                 EXERCISABLE   UNEXERCISABLE            EXERCISABLE   UNEXERCISABLE
<S>                             <C>                <C>                   <C>              <C>
Kevin R. McDonnell                      82,500         17,500                $309,493       $ 47,988
----------------------------------------------------------------------------------------------------------
Thomas L. Allen                         30,000          5,000                 110,625         16,250
----------------------------------------------------------------------------------------------------------
Phillip M. Lewis, Jr                     3,750         11,250                   7,975         23,925
----------------------------------------------------------------------------------------------------------
Jeffry W. Shelton                       14,000         11,000                  46,413         26,863
----------------------------------------------------------------------------------------------------------
Victor L. Peeples                       30,000          5,000                 112,225         16,250
----------------------------------------------------------------------------------------------------------
</TABLE>
                                                                      
         (1)      The closing price per share of the Company's common stock on
                  October 24, 1997, the last business day of the Company's 1997
                  fiscal year, was $6.375 as reported on the American Stock
                  Exchange.

         Long Term Incentive Plan ("LTIP") Awards Table

         The following table summarizes certain information regarding each award
made to a named executive officer during fiscal 1997 under any LTIP.


<TABLE>
<CAPTION>
                             LONG-TERM INCENTIVE PLANS - AWARDS/PAYOUTS IN FISCAL 1997(1)
                        ----------------------------------------------------------------------
                                                                      CASH PAYOUTS UNDER
                                                                  NON-STOCK PRICE-BASED PLANS
                        PERFORMANCE OR OTHER PERIOD OF          THRESHOLD   TARGET     MAXIMUM
NAME                    MATURATION OR PAYOUT                     ($ OR #)   ($ OR #)   ($ OR #)
<S>                     <C>                                     <C>         <C>        <C>
----------------------------------------------------------------------------------------------
Kevin R. McDonnell      3 year period ending October 26, 1997               $145,571
----------------------------------------------------------------------------------------------
Thomas L. Allen         3 year period ending October 26, 1997               $145,572
----------------------------------------------------------------------------------------------
Phillip M. Lewis, Jr.   3 year period ending October 26, 1997               $ 70,572
----------------------------------------------------------------------------------------------
Jeffry W. Shelton       3 year period ending October 26, 1997               $145,571
----------------------------------------------------------------------------------------------
Victor L. Peeples       3 year period ending October 26, 1997               $ 93,714
----------------------------------------------------------------------------------------------
</TABLE>

(1)      The Company maintained a separate long-term incentive compensation plan
         that resulted in cash bonuses being paid to the plan's participants at
         the end of the Company's 1997 fiscal year. Bonuses were paid under this
         plan based on the Company exceeding certain earnings and financial
         position targets and meeting a minimum stock price and new franchised
         unit targets (the "Target Amount"). The total amount of bonuses paid
         was equal to an increasing percentage of the actual amounts in excess
         of the Target Amount. The plan's only participants were the five
         executive officers named in the table. There was no maximum limit on
         amounts that could have been paid under this plan.


                                       46
<PAGE>   47
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         Agreements with Executive Officers

         The Company has entered into "Employment Agreements" with Kevin R.
McDonnell, its President and Chief Executive Officer, and Thomas L. Allen, its
Corporate Vice President - Marketing. These Employment Agreements provide that
if the officer's employment with the Company is terminated by the Company
without cause, including in connection with a change-in-control of the Company,
the officer will become entitled to certain severance benefits, including: (i)
the continuation of his salary and medical benefits for a period of one year,
(ii) a pro-rata share of his annual and long-term bonus, and (iii) the
continuation of the term of his stock options for a period of one year. The
officer's receipt of these severance benefits is conditioned upon the officer
providing the Company with a written general release and reaffirming or entering
into certain confidentiality and non-compete covenants. These Employment
Agreements expire in June 1998. The Company entered into a similar Employment
Agreement with Victor L. Peeples, the Company's former Corporate Vice President
- Restaurant Operations. Mr. Peeples left the Company in July 1997 and is
currently receiving the severance benefits described in the Employment
Agreement.

         Consulting Agreements with Lambrinides Brothers.

         Lambert N. Lambrinides, Christie N. Lambrinides and William N.
Lambrinides (the "Lambrinides Brothers") retired as full-time employees of the
Company, effective October 30, 1994. The Company and the Lambrinides Brothers
have entered into consulting agreements dated August 31, 1994, pursuant to which
each of the Lambrinides Brothers will provide consulting and related services to
the Company in consideration for an annual consulting fee of $125,000. As part
of these consulting services, the Lambrinides Brothers have agreed to assist the
Company in maintaining the high quality of the Company's food products, in
developing new food products, and in training designated employees of the
Company in the preparation of the Company's secret recipe chili. The initial
term of the consulting agreements expired at the end of fiscal 1996, and they
were renewed for fiscal 1997 and fiscal 1998 by mutual agreement of the parties.
The consulting agreements may be further renewed on an annual basis by mutual
agreement of the parties. The consulting agreements will terminate if there is a
change-in-control of the Company. During the term of the consulting agreements,
the Company will provide the Lambrinides Brothers with reasonable expense
reimbursements and certain insurance and other fringe benefits. During fiscal
1997, the Company paid or reimbursed the Lambrinides Brothers for such items in
the following amounts: Lambert Lambrinides - $6,579; Christie Lambrinides -
$6,663; and William Lambrinides - $4,829. The Lambrinides Brothers and their
spouses may continue to participate in the Company's health care plan in their
capacity as directors. If one of the Lambrinides Brothers dies during the term
of the consulting agreement, his annual consulting fee will be continued for a
period of six months. The consulting agreements contain confidentiality and
non-compete provisions. The Lambrinides Brothers intend to continue their
services as directors of the Company.


                                       47
<PAGE>   48
         Stock Option Agreements

         All of the Company's stock option agreements with its officers and
employees provide that the options will become 100% vested and exercisable in
the event of a change-in-control of the Company.

DIRECTORS COMPENSATION

         During fiscal 1997, each member of the Company's Board of Directors who
was not also an employee of the Company received an annual fee of $10,000 for
serving as a director. In addition, such directors received a fee of $850 for
attendance at each Board meeting, and a fee of $750 for attendance at each Board
Committee meeting. Directors who were also employees of the Company did not
receive any separate fees for serving on the Company's Board or for attending
Board or Committee meetings.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information as of January 1, 1998 with
respect to (i) all persons known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock; (ii) all executive officers of the
Company; (iii) all directors; and (iv) all directors and officers as a group.
Except as otherwise indicated in the table or the footnotes, the individual
named has sole voting and dispositive power over the shares, and the
individual's business address is 4180 Thunderbird Lane, Fairfield, Ohio 45014.


<TABLE>
<CAPTION>
                                         Shares                    Percentage
Name of Beneficial Owner            Beneficially Owned           of Ownership(1)
------------------------            ------------------           ---------------
<S>                                 <C>                          <C>   
Lambert N. Lambrinides (2)(5)           1,887,599                     55.55%

Christie N. Lambrinides (3)(5)          1,887,599                     55.55%

William N. Lambrinides (4)(5)           1,887,599                     55.55%

Lawrence R. Burtschy (6)                  269,311                      7.93%
332 East Bay Street
P.O. Box 933
Charleston, SC 29402

William G. Kagler (7)                     405,762                     11.40%
18 Hampton Court
Cincinnati, OH 45208

Kevin R. McDonnell (7)                     95,100                      2.73%

Thomas L. Allen (7)                        32,500                        **

Jeffry W. Shelton (7)                      15,750                        **

Phillip M. Lewis, Jr. (7)(8)                6,000                        **

David A. Kohnen (9)                        53,455                      1.57%
Star Bank Center, Suite 2120
Cincinnati, OH 45202
</TABLE>


                                       48
<PAGE>   49
<TABLE>
<S>                                 <C>                          <C>   
Joseph E. Madigan (10)                      2,000                        **
5517 Carnoustie Court
Dublin, OH 43017

All Directors and Officers as a         2,361,715                     66.76%
group (10 Persons) (7)
</TABLE>

NOTES:

** Less than One Percent (1)%

(1)      Assumes 3,397,773 shares of common stock outstanding as of January 1,
         1998, plus, with respect to each individual or group named, the number
         of shares of common stock subject to options held by them which are or
         will become exercisable on or before March 1, 1998.

(2)      Includes 460,333 shares owned by Mr. Lambert Lambrinides in his name
         alone, 141,000 shares owned by his spouse in her name alone, 628,033
         shares owned by Christie N. Lambrinides, and 658,233 shares owned by
         William N. Lambrinides. Nothing in this Form 10-K should be construed
         as an admission by Mr. L. Lambrinides that he beneficially owns the
         shares owned by his spouse or his brothers.

(3)      Includes 502,333 shares owned by Mr. Christie Lambrinides in his name
         alone, 120,000 shares owned by his spouse in her name alone, 5,700
         shares owned by his spouse's Individual Retirement Account, 601,333
         shares owned by Lambert N. Lambrinides and 658,233 shares owned by
         William N. Lambrinides. Nothing in this Form 10-K should be construed
         as an admission by Mr. C. Lambrinides that he beneficially owns the
         shares owned, directly or indirectly, by his spouse or his brothers.

(4)      Includes 507,333 shares owned by Mr. William Lambrinides in his name
         alone, 150,900 shares owned by his spouse in her name alone, 601,333
         shares owned by Lambert N. Lambrinides and 628,033 shares owned by
         Christie N. Lambrinides. Nothing in this Form 10-K should be construed
         as an admission by Mr. W. Lambrinides that he beneficially owns the
         shares owned by his spouse or his brothers.

(5)      The Lambrinides brothers disclaim any beneficial ownership in each
         other's shares.

(6)      Includes: (a) 51,434 shares owned by Mr. Burtschy in his name alone and
         30,000 shares held in joint tenancy with his spouse, with whom he
         shares voting and dispositive powers; (b) 67,550 shares owned by Mr.
         Burtschy's spouse in her name alone; (c) 43,027 shares held by L.R.
         Burtschy & Company, an Ohio corporation, of which Mr. Burtschy is the
         Chairman; and (d) 77,300 shares owned by the George C. Hillenbrand
         September 11, 1985 Trust, of which Mr. Burtschy is one of three
         co-trustees, with shared voting and dispositive powers. Mr. Burtschy
         disclaims any beneficial ownership in the Trust's shares, other than
         the shared voting and dispositive powers. Nothing in this Form 10-K
         should be construed as an admission by Mr. Burtschy that he
         beneficially owns the shares owned by his spouse.


                                       49
<PAGE>   50
(7)      Includes shares subject to options which are or will become exercisable
         on or before February 1, 1998 in the following amounts: Mr. Kagler,
         161,017; Mr. McDonnell, 87,500; Mr. Allen, 32,500; Mr. Shelton, 15,
         750; Mr. Lewis, 5,000; and all directors and officers as a group,
         140,750.

(8)      The 1,000 non-option shares are held jointly with his spouse, with whom
         he shares voting and dispositive power.

(9)      Includes 45,455 shares owned by Mr. Kohnen in his name alone, 2,000
         shares owned by his spouse in her name alone, and 6,000 shares owned by
         his three adult children. Nothing in this Form 10-K should be construed
         as an admission by Mr. Kohnen that he beneficially owns the shares
         owned by his spouse or children.

(10)     Consists of 2,000 shares owned indirectly by Mr. Madigan's Keogh
         Retirement Plan Trust.

ITEM 13. RELATED PARTY TRANSACTIONS

         During all or part of the Company's 1996 and 1997 fiscal years, six of
the Company's franchised restaurants were owned and operated by corporations or
other business entities which are or were owned or partially owned by directors,
executive officers, or more than 5% shareholders of the Company, or by members
of their immediate families.

         Charis, Inc. owns and operates one franchised Skyline Chili Restaurant
located in Cincinnati, pursuant to the terms and conditions of one of the
Company's standard Individual Restaurant Franchise Agreements. Charis, Inc. is
an Ohio corporation owned by John Lambrinides, who is a son of Lambert N.
Lambrinides.

         Alazo, Inc. owns and operates one franchised Skyline Chili Restaurant
located in Cincinnati, pursuant to the terms and conditions of one of the
Company's standard Individual Restaurant Franchise Agreements. Alazo, Inc. is an
Ohio corporation owned by John Lambrinides.

         JoJonco, Inc. owns and operates one franchised Skyline Chili Restaurant
located in Cincinnati, pursuant to the terms and conditions of one of the
Company's standard Individual Restaurant Franchise Agreements. JoJonco, Inc. is
an Ohio corporation owned by Joseph Lambrinides, who is a son of Lambert N.
Lambrinides.

         Ronjo Joint Venture owns and operates one franchised Skyline Chili
Restaurant located in Cincinnati, pursuant to the terms and conditions of one of
the Company's standard Individual Restaurant Franchise Agreements. Ronjo is an
Ohio partnership owned in part by an entity owned by Joseph Lambrinides.

         In fiscal 1996, Kajac, Inc. owned and operated one franchised Skyline
Chili Restaurant located in Cincinnati, pursuant to the terms and conditions of
one of the Company's standard Individual Restaurant Franchise Agreements. Kajac,
Inc. was an Ohio corporation owned by Joseph Lambrinides.

         The Company and Joseph Lambrinides were parties to a Skyline Chili
Restaurants Development Option Agreement (the "Option Agreement") dated July 30,
1991. The Option Agreement provided Joseph Lambrinides with the exclusive right
to develop up to three Skyline Chili Restaurants as franchises in three
locations in and around the greater Cincinnati, Ohio area or to exercise a right
of first refusal to develop as


                                       50
<PAGE>   51
a franchise any location that the Company intended to develop as a Skyline Chili
Restaurant within the area in and around Cincinnati, Ohio, lying west of
Interstate 75 and within the Interstate 275 beltway. In order to exercise his
right to develop a location under the Option Agreement, Joseph Lambrinides was
required to enter into one of the Company's standard Individual Restaurant
Franchise Agreements for that location. Joseph Lambrinides exercised his right
to develop two locations under the Option Agreement. The Option Agreement
expired on June 30, 1997.

         In January 1996, GaBi Enterprises, Ltd., an Ohio limited liability
company owned and managed in part by William G. Kagler, a more than 5%
shareholder and former executive officer and director of the Company, purchased
one parcel of unimproved real estate (approximately .66 acres) from the Company
for a total purchase price of $197,000, its approximate appraised value. The
Company had purchased the site in May 1995 for $186,000 and had incurred certain
additional development costs in the amount of approximately $11,000. The Company
and Buckeye Chili, Ltd., an Ohio limited liability company owned and managed in
part by William G. Kagler, entered into one of the Company's standard Individual
Restaurant Franchise Agreements, pursuant to which Buckeye Chili now operates a
franchised Skyline Chili Restaurant on the site purchased from the Company.

                                                       PART IV

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

         (a)      The following documents are filed as a part of this Report or
incorporated herein by reference:

         (1)      Financial Statements:

         The following consolidated financial statements of the Company,
together with the Report of Independent Auditors thereon, are included in this
Form 10-K:


<TABLE>
<CAPTION>
FINANCIAL STATEMENT                                            LOCATION IN THIS FORM 10-K
-------------------                                            --------------------------
<S>                                                            <C>
Report of Independent Auditors                                           Page 23

Consolidated Balance Sheets - October 26, 1997 and                       Page 24
October 27, 1996

Consolidated Statements of Income - Fiscal years ended                   Page 26 
October 26, 1997, October 27, 1996 and October 29, 1995

Consolidated Statements of Cash Flows - Fiscal years ended               Page 27
October 26, 1997, October 27, 1996 and October 29, 1995

Consolidated Statements of  Shareholders' Equity - Fiscal                Page 28
years ended October 26, 1997, October 27, 1996 and
October 29, 1995

Notes to Consolidated Financial Statements                               Page 29
</TABLE>


                                       51
<PAGE>   52
         (2)      Financial Statement Schedules:

<TABLE>
<CAPTION>
                  SCHEDULE                                          LOCATION IN THIS FORM 10-K
<S>                                                                 <C>
                  Schedule II - Valuation and Qualifying Accounts                      Page 40
</TABLE>

         (3)      Exhibits:

         The following Exhibits are filed with this Report or are incorporated
herein by reference, as indicated in the footnotes:

EXHIBIT NUMBER          DESCRIPTION OF EXHIBIT
--------------          ----------------------

     2.1                Agreement and Plan of Merger dated November 26, 1997
                        between Skyline Chili, Inc., certain consenting
                        shareholders and Skyline Acquisition Corp. (2)

     2.2                First Amendment dated January 9, 1998 to Agreement and
                        Plan of Merger dated November 26, 1997 between Skyline
                        Chili, Inc., certain consenting shareholders and Skyline
                        Acquisition Corp. (1)

     3.1                Amended Articles of Incorporation (10)

     3.2                Shareholders Code of Regulations (11)

     4.1                $4,000,000 Revolving Note signed by Skyline Chili, Inc.
                        as Maker and payable to The Fifth Third Bank (Renewed
                        and now due July 9, 1998) (14)

     4.2                Loan Agreement dated August 1, 1990 between Skyline
                        Chili, Inc. and the City of Fairfield, Ohio (6)

     4.3                Specimen Form of Promissory Note from Skyline Chili,
                        Inc. to The Fifth Third Bank, Trustee (6)

     4.4                Tax Regulatory Agreement dated August 1, 1990 between
                        Skyline Chili, Inc., the City of Fairfield, Ohio and The
                        Fifth Third Bank, Trustee (6)

     4.5                Reimbursement Agreement dated August 1, 1990 between
                        Skyline Chili, Inc. and The Fifth Third Bank (6)

     4.6                First Amendment to Reimbursement Agreement dated January
                        11, 1991, between Skyline Chili, Inc. and The Fifth
                        Third Bank (7)

     4.7                Second Amendment to Reimbursement Agreement dated
                        September 18, 1995 between Skyline Chili, Inc. and The
                        Fifth Third Bank (16)


                                       52
<PAGE>   53
     4.8                Trust Indenture dated August 1, 1990 between the City of
                        Fairfield, Ohio and The Fifth Third Bank, Trustee (6)

     9                  None

     10.1               Current Standard Individual Restaurant Franchise
                        Agreement (9)

     10.2               Old version of Individual Restaurant Franchise Agreement
                        (4)

     10.3               Current Standard Area Franchise Agreement (9)

     10.4               Skyline Chili Restaurant Development Option Agreement
                        dated July 30, 1991 between Skyline Chili, Inc. and
                        Joseph N. Lambrinides (8)

     *10.5              1986 Stock Option Plan, as amended (5)

     *10.6              Standard version Individual Stock Option Agreement under
                        1986 Stock Option Plan, with Change-in-Control provision
                        (16)

     *10.7              1990 Stock Option and Stock Incentive Plan, as amended
                        (12)

     *10.8              Standard version Individual Stock Option Agreement under
                        1990 Stock Option and Stock Incentive Plan, with
                        Change-in-Control provision (16)

     10.9               ARA Virginia Skyline Company Service Mark Contract (4)

     10.10              Advertising Trust dated March 10, 1986 (4)

     10.11              $200,000 Revolving Note signed by Advertising Trust as
                        Maker and payable to the Fifth Third Bank (Renewed, now
                        due August 17, 1998) (14)

     10.12              Company's Guaranty of Advertising Trust's Line of Credit
                        (14)

     *10.13             Written Description of Outside Directors Fee Plan (16)

     *10.14             Non-Qualified Deferred Compensation Plan (14)

     *10.15             Consulting Agreement with Lambert N. Lambrinides dated
                        August 31, 1994 (13)

     *10.16             Consulting Agreement with Christie N. Lambrinides dated
                        August 31, 1994 (13)

     *10.17             Consulting Agreement with William N. Lambrinides dated
                        August 31, 1994 (13)


                                       53
<PAGE>   54
     *10.18             First Addendum dated October 31, 1996 to Consulting
                        Agreement with Lambert N. Lambrinides (3)

     *10.19             First Addendum dated October 31, 1996 to Consulting
                        Agreement with Christie N. Lambrinides (3)

     *10.20             First Addendum dated October 31, 1996 to Consulting
                        Agreement with William N. Lambrinides (3)

     10.21              Agreement and Plan of Merger with LCW Skyline Co. dated
                        September 20, 1994 (13)

     *10.22             Employment Agreement dated June 27, 1995 between the
                        Company and Kevin R. McDonnell, President and CEO (15)

     *10.23             Employment Agreement dated June 27, 1995 between the
                        Company and Thomas L. Allen, Corporate Vice President -
                        Marketing (15)

     *10.24             Severance Agreement dated July 31, 1997 between the
                        Company and Victor L. Peeples, former Corporate Vice
                        President - Restaurant Operations (1)

     *10.25             Written description of Long-Term Incentive Compensation
                        Plan (16)

     11                 None

     12                 None

     13                 None

     16                 None

     18                 None

     21                 List of Subsidiaries of Skyline Chili, Inc. (1)

     22                 None

     23                 Consent of Ernst & Young LLP, independent auditors (1)

     24                 None

     27                 Financial Data Schedule (1)

     28                 None


                                       54
<PAGE>   55
     99                 None


----------
*        Designates certain Management contracts and compensatory plans,
         contracts or arrangements in which directors or executive officers of
         the Company participate.

NOTES:

         (1) Filed with this Report.

         (2) Filed as an Exhibit to the Company's Current Report on Form 8-K
dated December 2, 1997, and incorporated herein by reference.

         (3) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 27, 1996, and incorporated herein by
reference.

         (4) Filed as an Exhibit to the Company's Securities Act Registration
Statement No. 33-9240C on Form S-18, and incorporated herein by reference.

         (5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
its fiscal year ended October 29, 1989, and incorporated herein by reference.

         (6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the Quarter ended August 5, 1990, and incorporated herein by reference.

         (7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended February 17, 1991, and incorporated herein by reference.

         (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
its fiscal year ended October 27, 1991, and incorporated herein by reference.

         (9) Filed as an Exhibit to the Company's Annual Report on Form 10-K for
its fiscal year ended October 25, 1992, and incorporated herein by reference.

         (10) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 1, 1993, and incorporated herein by
reference.

         (11) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 31, 1993, and incorporated herein by
reference.

         (12) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 20, 1994, and incorporated herein by
reference.

         (13) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 7, 1994, and incorporated herein by
reference.


                                       55
<PAGE>   56
         (14) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 30, 1994, and incorporated herein by
reference.

         (15) Filed as an Exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended August 6, 1995, and incorporated herein by
reference.

         (16) Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for its fiscal year ended October 29, 1995, and incorporated herein by
reference.

         (b)  Reports on Form 8-K

              None.


                                       56
<PAGE>   57
                                   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.

                                    SKYLINE CHILI, INC., Registrant

                                    By: /s/ Kevin R. McDonnell
                                    Kevin R. McDonnell, President

                                    Date: January  23, 1998

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


<TABLE>
<S>                             <C>                                                    <C> 
/s/ Kevin R. McDonnell          President, Chief Executive Officer and Director        January 23, 1998
Kevin R. McDonnell              (Principal Executive Officer)

/s/ Jeffry W. Shelton           Corporate Vice President - Finance, Chief Financial    January 23, 1998
Jeffry W. Shelton               Officer and Treasurer (Principal Financial Officer)

/s/ Lambert N. Lambrinides      Chairman of the Board and Director                     January 23, 1998
Lambert N. Lambrinides
                                Director                                               January 23, 1998
/s/ William N. Lambrinides
William N. Lambrinides

/s/ Christie N. Lambrinides     Director                                               January 23, 1998
Christie N. Lambrinides

/s/ Lawrence R. Burtschy        Director                                               January 23, 1998
Lawrence R. Burtschy

/s/ Joseph E. Madigan           Director                                               January 23, 1998
Joseph E. Madigan

/s/ David A. Kohnen             Director                                               January 23, 1998
David A. Kohnen
</TABLE>