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

                            FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934
             For fiscal year ended December 31, 1996


                        GIANT GROUP, LTD.

 9000 Sunset Boulevard, 16th Floor, Los Angeles, California 90069

          Registrant's telephone number  (310) 273-5678

                  Commission File Number 1-4323

        I.R.S. Employer Identification Number  23-0622690

                 State of Incorporation  Delaware


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

Title of Class      Name of Each Exchange on Which Registered
--------------      -----------------------------------------
Common Stock,       New York Stock Exchange
$.01 Par Value

Securities registered pursuant to 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] 

     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 the 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]

     As of March 24, 1997, 3,210,655 shares of the registrant's
common stock, par value $.01 per share, were outstanding, and the
aggregate market value of the registrant's common stock held by
non-affiliates based on the closing price on the New York Stock
Exchange on March 24, 1997 was $14.5 million.

             Exhibit Index located at page 42 herein.


<PAGE>
                        TABLE OF CONTENTS


PART I                                                       
Page No.

     Item 1.   Business.                                     3

     Item 2.   Properties.                                  11

     Item 3.   Legal proceedings.                           12

     Item 4.   Submission of matters to a vote 
               of security holders.                         14

PART II

     Item 5.   Market for the registrant's common 
               equity and related stockholder matters.      14

     Item 6.   Selected financial data.                     15

     Item 7.   Management's discussion and analysis 
               of financial condition and results 
               of operations.                               16

     Item 8.   Financial statements and supplementary 
               data.                                        20

     Item 9.   Changes in and disagreements with
               accountants on accounting and financial 
               disclosure.                                  42

PART III

     Item 10.  Directors and executive officers of 
               the registrant.                              42

     Item 11.  Executive compensation.                      42

     Item 12.  Security ownership of certain beneficial 
               owners and management.                       42

     Item 13.  Certain relationships and related 
               transactions.                                42

PART IV

     Item 14.  Exhibits, financial statement schedules 
               and reports on Form 8- K.                    42





<page-3>
                              PART I
                                 

ITEM 1.   BUSINESS.

NARRATIVE DESCRIPTION OF BUSINESS

     GIANT GROUP, LTD. (herein referred to as the "Company" or
"GIANT") is a corporation which was organized under the laws of
the State of Delaware in 1913.  

     GIANT MARINE GROUP, LTD. d/b/a THE OCEAN GROUP,
     LUXURY YACHT CO-OWNERSHIP PROGRAM

       FORMATION AND ORGANIZATION OF COMPANY

       GIANT MARINE, d/b/a The Ocean Group ("GIANT MARINE"), is
a corporation organized under the laws of the state of Delaware
in November 1996.  GIANT MARINE is a wholly-owned subsidiary of
the Company.  GIANT's executive officers and Board of Directors
also serve in the same capacities for GIANT MARINE.

       BUSINESS PLAN

       ACQUISITION OF YACHTS

       GIANT MARINE purchases large ocean cruising yachts for
inclusion in its Luxury Yacht Co-Ownership Program.  Once
purchased or acquired, the yachts are completely scrutinized to
determine the necessary upgrades needed to bring the yachts up to
The Ocean Group's Luxury Yacht Co-Ownership Program's standards. 
This process includes developing a scope of work that covers
every item from engine upgrade, interior renovations, exterior
upgrade, and replacement of equipment, including the possible
replacement of navigational and communication equipment.  It also
includes upgrades of china, silver, linens and other accessories. 
This scope of work is then completed, resulting in a yacht which
is newly designed and furnished to the highest standards of the
yachting community.

       The Ocean Group then markets and sells these yachts in
its Co-Ownership program.  Although no assurances can be given,
The Ocean Group's business plan is to sell these yachts at a
profit after recouping all costs and expenses relating to the
purchase and upgrade, and thereafter to derive revenues from the
operation and maintenance of the yachts on behalf of the owners.

       CO-OWNERSHIP PROGRAM

       Prior to The Ocean Group, individuals or companies, when
purchasing a luxury yacht, would assume 100% of the costs and
expenses of the yacht, even though typically the yacht is
utilized by the owners for only a small fraction of the time.  In
addition, the capital outlay and interest costs adds to the
expense burden of owning the yacht.  The day-to-day management of
the yacht and crew can be more than a full time job for the solo-
owners and their staff.

       The Ocean Group's program offers Co-Ownership in
multiples of one-fourths.  The Ocean Group believes its ownership
program will be attractive to buyers because Co-Ownership
represents a more efficient form of ownership for most users,
reducing the capital investment, interest costs, operating costs
and capital outlay for non-routine maintenance up to 75% (since
all costs are shared by co-owners) thus making large yachts more
affordable to the current market of yacht buyers.  A critical
element of the marketing plan is The Ocean Group's belief that
its program opens the luxury yacht market to a new group of
buyers, due to the reduced capital outlay, interest carrying cost
and operating costs.

       OPERATIONS

       The owners contract with The Ocean Group to perform the
day-to-day maintenance and operation of the yachts for a monthly
fee.  This includes the following services:

       -  Day to day operation and support of the vessel
       -  Inspect, service and test the vessel to keep her in
          good operating condition
       -  Maintain records, logs and other documentation
       -  Hire, manage and disburse wages and gratuities to the
          captain and crew, including applicable taxes, medical
          insurance, training costs and employment insurance
          related costs
       -  Investigate all complaints of any co-owner with regard
          to performance of any crew members, and replace them if
          necessary
       -  Pay fuel costs for the vessel at times when it is not
          being used by a co-owner
       -  Pay routine costs associated with up to two (2)
          transatlantic crossings per year 
       -  Undertake provisioning and scheduling arrangements for
          the vessel
       -  Pay routine maintenance costs
       -  Pay dockage, customs fees and port taxes at times when
          the vessel is not being used by a co-owner
       -  Pay laundry and dry-cleaning expenses for crew uniforms
          and vessel linens
       -  Pay costs of uniforms for the crew
       -  Pay communication costs (SATCOM and cellular) at times
          when the vessel is not being used by a co-owner
       -  Pay costs of provisioning for the crew, and other
          consumable vessel supplies (except the provisioning
          needs of co-owner during a specific usage of the vessel
          which remains the co-owner's responsibility)

       Under the program, for the first twelve months of
operation, The Ocean Group guarantees the monthly operating costs
for these services.  The Ocean Group believes that based on
industry research and investigation, an average yearly operating
expense can be estimated.  After the first twelve months of
operation, The Ocean Group has reserved the right to adjust this
fee for the following twelve months.  These operating costs will
be adjusted based upon the previous year's experience and a
projection of the next twelve months expenses.

       All non-routine maintenance (as determined and defined by
The Ocean Group) will be allocated among the owners according to
their ownership interest percentage and the owner will be
responsible for such cost.  While the yachts are being marketed
and until 100% ownership has been sold, The Ocean Group will pay
the cost of operation and maintenance for the unsold interest. 
The Ocean Group anticipates that this cost will be recovered upon
the complete sale of the yacht.

       In addition to the on-going operating costs, under the
program, owners pay to The Ocean Group a "per day Usage Fee"
while they are actually using the yacht.  This Usage Fee will
provide seasonal bonuses and tips for the captain and crew and
additional revenue to The Ocean Group.  Each twenty-five percent
owner will be allocated a minimum of six weeks usage and it is,
therefore, to the benefit of The Ocean Group to provide the most
number of useable days possible to the owners.

       The Ocean Group has contracted with Bob Saxon Associates,
an established yacht charter and management company in Fort
Lauderdale, Florida, to assist The Ocean Group in the daily
management and maintenance of the yachts.  The Ocean Group pays
Bob Saxon an annual fee for its services.

       Each yacht has a captain and crew consisting of up to 12
people.  The Company is currently developing and managing the
business with existing staff.  It is expected that additional
staff will be required in 1997 as the business develops.

       YACHT DESCRIPTION, AVAILABILITY AND MARKETING

       DESCRIPTION

       The Ocean Group has purchased two yachts to date for this
program:

       The first yacht that was purchased in October 1996 for
The Ocean Group program was BRAVEHEART.  This 163-foot (49.38
meters) 1989 jet-drive motor yacht was started in Sweden by the
Oskarshamn yard and completed at the Hakvoort yard in Holland to
Det Norske Veritas class.  It has a cruising speed of 12 knots
and a top speed of 14 knots and a range of 3,900 nautical miles. 
BRAVEHEART is currently undergoing a refit at Palmer Johnson's
Savannah shipyard and is being thoroughly updated mechanically,
and receiving a dramatic facelift inside and out to attain a
classical style.  This yacht is expected to be available in late
June for sale and use in the Mediterranean this summer.

       KAHALANI is a 141-foot (43 meters) oceangoing motor yacht
built in Holland by de Vries Feadship in 1993.  This yacht was
purchased in November 1996.  KAHALANI cruises at 12 knots and has
a maximum speed of 14 knots.  At 11 knots, she has a range of
3,800 nautical miles.  The yacht is classed to Lloyd's Maltese
Cross 100A1+LMC.  The yacht was given a new exterior look with a
new paint scheme and new fashion plates at Palmer Johnson's
Savannah shipyard in January 1997.

       AVAILABILITY

       The Ocean Group believes that the success of the program
will be based on its ability to make available luxury yachts of
the highest quality at a fraction of the cost.  The Ocean Group
believes that between the yachts generally in the market for sale
and its ability to contract with large luxury yacht builders that
a sufficient supply of yachts will continue to be available for
the program.

       PROMOTION AND ADVERTISING

       On February 6, 1997, The Ocean Group launched its new
Luxury Yacht Co-Ownership Program in Fort Lauderdale, Florida
with a presentation of the program to the luxury-yacht brokerage
community.  The program offers brokers the chance to present
buying opportunities to current yacht owners who can move up to a
larger yacht without increasing (and possibly reducing) their
costs and to attract new yacht owners to the program.

       In addition to using the luxury-yacht brokerage community
to promote the Co-Ownership program, The Ocean Group will run
print advertisements in such magazines as YACHTING, SHOWBOATS
INTERNATIONAL, ROBB REPORT, and in newspapers and trade magazines
such as DAILY VARIETY and the WALL STREET JOURNAL.  Through both
the brokerage community and direct marketing, The Ocean Group
believes it will attract qualified buyers to the program.

       COMPETITION

       The competition for the Co-Ownership program is from both
the charter market and the ability of a buyer to purchase 100% of
a yacht in the general market.  The Ocean Group believes that the
Co-Ownership program will be an attractive alternative to both
charter and solo-ownership.  The Ocean Group believes its program
opens yacht ownership to a wider range of customers than are
currently active in the yachting community.  This is due to the
lower investment and expense requirement in the Co-Ownership
program.

       In conjunction with the benefit of stepping up to a
larger, more luxurious yacht, The Ocean Group believes it will
attract customers who, prior to the program, would not have
considered the purchase of a yacht due to the financial and
operational burden of solo-ownership.  The Ocean Group believes
that Co-Ownership with the benefit of The Ocean Group's yacht
scheduling process and the certainty of "their personal yacht"
being available to them for cruising, has significant advantages
compared to the uncertainty of yacht chartering.  Yacht
chartering can result in the unavailability of the requested
yacht and uncertainty of the quality and acceptability of the
crew and yacht.

       FINANCING

       The Ocean Group will either pay cash or negotiate terms
for each yacht placed into the program.  Once the yacht is 100%
sold, all debt on the yacht incurred by The Ocean Group, if any,
will be paid in full.  The Ocean Group currently has a $10
million financing commitment on KAHALANI with a major marine
lender who is also willing to finance, under its credit criteria,
potential buyers of the Co-Ownership program.

       CONTRACTS

       The Co-Ownership program requires the execution of five
separate agreements with each co-owner, which work together to
document the terms of the purchase from The Ocean Group, the 
Co-Ownership arrangements among the owners and the maintenance of
the yacht by The Ocean Group.  The Purchase Agreement provides
for a buy-back by The Ocean Group of the Co-Ownership interest,
upon the written request of the owner, after the first 24 months
of ownership based on the yacht's fair market value less a 10%
remarketing fee.

       RISKS

       The Company believes that there are certain factors that
affect the purchase of luxury yachts.  Owners will primarily
consist of companies and individuals.  Their decision to purchase
an interest in a yacht will be affected by, among other things,
the economy's effect on their business and the fluctuation of
interest rates.  However, because of the lower cash outflow
required for the Co-Ownership purchase as compared to solo-
ownership, the importance of these factors should be mitigated. 
In recent years, the Arab oil embargo, the United States luxury
tax and the Gulf war have slowed the interest in the ownership of
the luxury yachts.  Because this is a new program, The Ocean
Group is unable to determine if there is sufficient interest in
Co-Ownership of luxury yachts to fully develop the business. 
Since The Ocean Group has no operating performance or sales
experience, it cannot determine whether the program will prove to
be viable or profitable.  If the market does not develop as
anticipated, The Ocean Group may sell the yachts to recoup its
costs.  The Ocean Group can not be certain of its ability to
recover all the costs of the program or the yacht investments. 
The total start-up, development and marketing costs are not yet
quantifiable and it is unknown at this time how long before the
program will become profitable, if at all.

       As of March 25, 1997, the Company has not sold any
interests in the Co-Ownership program and there can be no
assurance that the Company will be able to do so in the future. 
Also, the effect of the buyback cannot be totally assessed at
this time.  The Ocean Group believes that in the case of a
repurchase of a Co-Ownership interest, it will have sufficient
liquidity and capital resources to enable it to satisfy its
obligations and continue the program.

       Currently, the yachts carry $20 million each in liability
insurance with hull insurance covering what The Ocean Group
estimates to be the current market value of the yachts.

     RALLY'S HAMBURGERS, INC.

     GIANT, through its equity investment in Rally's Hamburgers,
Inc. ("Rally's") (NASDAQ:RLLY), is involved in the operation and
franchising of double drive-thru hamburger restaurants.  Rally's
is one of the largest chains of double drive-thru restaurants in
the United States.  At February 24, 1997, the Rally's system
included 471 restaurants in 19 states, primarily in the Midwest
and the Sunbelt, comprised of 214 Company-owned restaurants, 230
franchised restaurants and 27 company-owned restaurants in
Western markets which are operated as Rally's restaurants by CKE
Restaurants, Inc. ("CKE"), an owner of Carl's Jr., a competing
fast-food restaurant chain (see page 8 of this Form 10-K).  One
additional company-owned restaurant has been converted to a Carl
Jr.'s format and is not included in the restaurant count. 
Rally's restaurants offer high quality fast food served quickly
and at everyday prices generally below the regular prices of the
four largest hamburger chains.  Rally's serves the drive-thru and
take-out segments of the quick-service restaurant market. 
Rally's opened its first restaurant in January 1985 and began
offering franchises in November 1986.

     GIANT's investment in Rally's of $2,926,000 and $3,423,000
at December 31, 1996 and 1995, represents approximately 15% and
48%, respectively, of Rally's outstanding common stock.  At
December 31, 1996 and 1995, the Company owned approximately
3,137,000 and 7,430,000 shares of Rally's outstanding common
stock, the quoted market price of which was approximately
$14,313,000 and $7,198,000.  On March 24, 1997, the market price
of the Company's investment in Rally's outstanding common stock
was $10,195,000.  The Company's equity investment percentage in
Rally's decreased because GIANT did not elect to participate in
Rally's Shareholder Rights Offering and because of the acquisi-
tion of 4,293,000 shares by CKE and Fidelity National Financial,
Inc. ("Fidelity") from the Company.  The Company will continue to
account for the investment under the equity method of accounting
because of the Company's ability to exercise significant
influence over operating and financial policies of Rally's, due
to the Company's representation on the Rally's Board of
Directors, including GIANT's Chief Executive Officer as Chairman
of Rally's Board of Directors. 

     On January 22, 1996, the Company disclosed that it intended
to offer to exchange a new series of GIANT participating, non-
voting preferred stock for Rally's outstanding common stock (the
"Exchange Offer").  Upon successful completion of the Exchange
Offer, GIANT would have owned 79.9% of Rally's outstanding common
stock.  On April 22, 1996, Rally's Board of Directors, after
discussions between a special committee of the Rally's Board of
Directors and Donald E. Doyle, President and Chief Executive
Officer of Rally's, requested that GIANT terminate the Exchange
Offer.  The termination was requested to retain sufficient market
capitalization to allow Rally's easier access to the capital
markets in order to raise capital in the future.  GIANT agreed to
the request and terminated the proposed Exchange Offer. 

     On January 29, 1996, Rally's purchased $22 million principal
amount of its 9.875% senior notes ("Senior Notes") directly from
GIANT for $14,932,000.  The Company had purchased a total of
$26,424,000 in principal during 1995 for $14,051,000 and recorded
these Senior Notes as investments available-for-sale.  The
Company recognized a gain of $2,958,000 on the sale of these
Senior Notes.  In addition, during the second quarter of 1996,
GIANT sold an additional principal amount of $3,500,000 of its
investment in Rally's Senior Notes through the open market,
recognizing a pre-tax gain of $478,000.

     On February 1, 1996, GIANT agreed to provide Rally's with a
short-term credit facility of up to $2 million to provide for
certain seasonal financing requirements.  The interest on this
facility was calculated at prime and accrued interest was payable
on a monthly basis.  As of March 31, 1996, $500,000 was advanced
to Rally's under this credit facility.  This $500,000 advance was
repaid in the second quarter of 1996 and no other advances have
been made.  This facility has now been canceled.

     On February 23, 1996, GIANT entered into two letters of
credit, on behalf of Rally's, with a major bank.  The balance of
the outstanding letters of credit could not exceed $793,000.  The
letters of credit had a maximum maturity date of 365 days but
could not extend beyond the agreement's expiration date of
February 28, 1997.  The letters of credit were secured by certain
cash equivalents of GIANT.  The Company was reimbursed by Rally's
for costs related to issuance of these letters of credit.  In
October 1996, these letters of credit, on behalf of Rally's, were
canceled and the cash equivalents were reinvested by GIANT.

     On May 3, 1996, pursuant to a Purchase and Standstill
Agreement between GIANT and Fidelity (see page 9 of Form 10-K),
GIANT sold approximately 768,000 shares of Rally's common stock
to Fidelity and approximately 2,350,000 shares of Rally's common
stock to CKE.  The Company received cash of $4,751,000 and
recognized a pre-tax gain of $3,197,000.  As part of this
transaction, GIANT granted irrevocable options to Fidelity and
CKE to each purchase an additional 1,175,000 shares of Rally's
common stock from GIANT, at exercise prices ranging from $3.00 to
$4.00 per share, through April 1998.  In March 1997, 1,175,000
options granted to CKE and Fidelity by GIANT to purchase Rally's
common stock at $4.00 per share were canceled.

     On July 1, 1996 Rally's and CKE entered into a ten-year
agreement ("Operating Agreement") pursuant to which 28 Rally's
owned restaurants, located in California and Arizona, are being
operated by Carl's Jr.  At the discretion of CKE, certain
restaurants will be converted to Carl's Jr.  At February 24,
1997, one restaurant has been converted.  Under the Operating
Agreement, Carl's Jr. will be responsible for the conversion
expenses, as well as the operating expenses for all the
restaurants.  Rally's will retain ownership of all the
restaurants and receive a percentage of gross revenues generated
by each restaurant.  The Operating Agreement is cancelable, at
the discretion of CKE, after an initial five-year period.

     On September 5, 1996, by prospectus, Rally's distributed
transferable subscription rights to holders of record of Rally's
common stock on July 31, 1996.  For each 3.25 rights held, a
holder was entitled to purchase one unit for $2.25.  A unit
consisted of one share of Rally's common stock and one warrant to
purchase an additional share of Rally's common stock for $2.25. 
On September 16, 1996, GIANT elected to transfer its 4,312,000
available subscription rights to an unaffiliated third party,
which has subsequently exercised the rights.  GIANT's increase in
Rally's shareholders' equity due to the Shareholder Rights
Offering has been reflected as an increase of $1,699,000 in
GIANT's investment in affiliate and an increase in capital in
excess of par value.  

     During the fourth quarter of 1996, CKE and Fidelity, in
total, exercised its option to purchase 1,175,000 shares of
Rally's common stock at the option price of $3.00 per share.  The
Company received cash of $3,526,000 and recognized a pre-tax gain
of $2,518,000.  The Company, because of this sale, recognized
$462,000 in income that was previously shown as an increase in
capital in excess of par value.  This income is included in gain
on the sale of investment in affiliate.  

     On December 20, 1996, Rally's announced that it has issued
warrants ("Rally's Warrants") to CKE and Fidelity to purchase an
aggregate 1,500,000 restricted shares of its common stock at an
exercise price of $4.375 per share.  The Rally's Warrants have a
3-year term and are not exercisable until December 20, 1997.  If
all the warrants are exercised by CKE and Fidelity to purchase
Rally's common stock, the Company's equity ownership in Rally's
will be reduced to approximately 12%.

     The Company's sale of Rally's common stock to CKE and
Fidelity, during 1996, generated a capital loss which was carried
back to prior years and was used to reduce capital gains taxes
paid on the sale of the cement operations.  As of December 31,
1996, the Company recorded a tax benefit of $10,285,000 for this
carryback and refund of taxes paid in prior years.  In January
1997, the Company received this refund in full. 

     CHECKERS DRIVE-IN RESTAURANTS, INC.     

     During 1996, the Company made several investments in debt
and equity securities of Checkers Drive-In Restaurants, Inc.
(NASDAQ:CHKR) ("Checkers").  At December 31, 1996, the Company
had investments of 200,000 shares of Checkers common stock valued
at $.4 million and 2,849,000 warrants valued at $1.2 million.  In
addition, the Company had an investment in Checkers senior
subordinated debt valued at $5.1 million and an advance of $.5
million, both investments earning 13%.  This $.5 million advance
was paid back in February 1997.

     Checkers develops, produces, owns, operates and franchises
quick-service "double drive-thru" restaurants.  The restaurants
are designed to provide fast and efficient automobile-oriented
service incorporating a 1950's diner and art deco theme with a
highly visible, distinctive and uniform look that is intended to
appeal to customers of all ages.  The restaurants feature a
limited menu of high quality hamburgers, cheeseburgers and bacon
cheeseburgers, specially seasoned french fries, hot dogs, chicken
sandwiches, as well as related items such as soft drinks and old
fashioned premium milk shakes, at everyday low prices.  At
December 31, 1996, the Checkers system included 478 restaurants
in 23 states and the District of Columbia and Puerto Rico,
comprised of 232 company-owned and 246 franchised restaurants.  

RALLY'S AND CHECKERS PROPOSED MERGER

     On March 25, 1997, Rally's and Checkers announced that they
have agreed in principle to a merger between the two companies. 
Under the terms of the letter of intent signed by the parties,
each share of Rally's common stock will be converted on
completion of the merger into three shares of Checkers common
stock.  Upon completion of the merger, Rally's will become a
wholly-owned subsidiary of Checkers.  The transaction is subject
to negotiation of definitive agreements, receipt of opinions of
Rally's and Checker's investment bankers as to the fairness of
the transaction to Rally's and Checker's respective shareholders,
stockholder approvals and other customary conditions.  The merger
is expected to close in the second or third quarter of 1997.

GENERAL DEVELOPMENT OF BUSINESS    

     From 1985 through October 1994, GIANT's major operating
subsidiaries were Giant Cement Company ("Giant Cement") and
Keystone Cement Company, which manufactured portland and masonry
cements sold to ready-mix concrete plants, concrete product
manufacturers, building material dealers, construction
contractors and state and local government agencies.  From 1987
through October 1994, GIANT also owned Giant Resource Recovery
Company, Inc., which was a marketing agent for resource recovery
services for Giant Cement.  On October 6, 1994, KCC Delaware
Company, Inc., a wholly-owned subsidiary of GIANT ("KCC"), sold
100% of the stock of it's wholly-owned subsidiary Giant Cement
Holding, Inc. through an initial public offering.  The Company
received net proceeds of $125.8 million which resulted in a gain
of $77 million before income taxes of $28.8 million.  As a result
of the transaction, GIANT has fully divested its cement and
resource recovery operations.

     From October 1994 to October 1996, GIANT's assets consisted
primarily of cash and cash equivalents, short-term liquid
investments, which consisted of corporate stocks and corporate
bonds and its investment in the outstanding common stock of its
affiliate, Rally's.  In addition, GIANT's management was actively
pursuing long-term investment opportunities to deploy the cash
GIANT generated through the sale of the cement operations. 

     In December 1995, GIANT filed an action against Fidelity,
CKE, an affiliate of Fidelity, and William P. Foley ("Foley"),
among others, arising from an attempted hostile takeover of
Rally's and GIANT, by Fidelity and Foley, which indirectly owns
and/or controls Carl's Jr., a competing fast-food restaurant
chain.  In January 1996, Fidelity and Foley filed a counterclaim
against GIANT and its Board of Directors alleging, among other
claims, that GIANT's directors breached their fiduciary duties in
conjunction with certain enumerated transactions.  On February
14, 1996, Fidelity made an offer to acquire the Company in a
merger by which the Company's stockholders would acquire Fidelity
common stock valued by Fidelity at $12.00 for each outstanding
share of GIANT Common Stock.  The Company's Board of Directors
determined that the Company was not for sale and unconditionally
rejected the merger offer.  In April, the parties settled their
disputes, pursuant to a Purchase and Standstill Agreement (the
"Agreement").  As a result, Fidelity sold its investment of
705,000 shares in GIANT to the Company for $6.1 million; Fidelity
and CKE acquired an aggregate of approximately 3,118,000 shares
of Rally's common stock from GIANT for $4.8 million and GIANT
recognized a pre-tax gain of $3.2 million; GIANT granted Fidelity
and CKE options to each purchase 1,175,000 shares of Rally's
common stock at prices ranging from $3.00 to $4.00 per share; two
designees of CKE and Fidelity were elected to Rally's Board and
Fidelity agreed to a 10 year standstill with respect to GIANT and
its Common Stock.  In March 1997, 1,175,000 options granted to
CKE and Fidelity by GIANT to purchase Rally's common stock at
$4.00 per share were canceled.

     On January 22, 1996, the Company announced that it intended
to offer to exchange a new series of GIANT participating, non-
voting preferred stock for Rally's outstanding common stock. 
Upon successful completion of the Exchange Offer, GIANT would
have owned 79.9% of Rally's outstanding common stock.  On April
22, 1996, Rally's Board of Directors, after discussions between a
special committee of the Rally's Board and Donald E. Doyle,
President and Chief Executive Officer of Rally's, requested that
GIANT terminate the Exchange Offer.  The termination was
requested to retain sufficient market capitalization to allow
Rally's easier access to the capital markets to raise capital in
the future.  GIANT agreed to the request and terminated the
proposed Exchange Offer. 

     During the period May 1996 thru November 1996, GIANT's
investment in Rally's outstanding common stock decreased to
approximately 15% from 48% at December 31, 1995.  The investment
percentage decreased because of the following three reasons: the
sale by GIANT, on May 3, 1996, of approximately 768,000 shares of
Rally's common stock to Fidelity and approximately 2,350,000
shares of Rally's common stock to CKE; GIANT did not elect to
participate in Rally's Shareholder Rights Offering, completed in
September 1996, and transferred its 4,312,000 available
subscription rights to purchase Rally's common stock to an
unaffiliated third party, which subsequently exercised the
subscription rights; and during the fourth quarter of 1996, the
election by CKE and Fidelity to exercise its options previously
granted by GIANT pursuant to the Agreement to purchase 1,175,000
shares of Rally's common stock at the option price of $3.00 per
share.  

     In July 1996, KCC entered into an agreement ("NeoGen
Agreement") with Joe Pike and his company, NeoGen Investors, L.P.
("NeoGen"), to participate in the development, manufacturing and
marketing of Mifepristone, an abortion inducing drug with other
significant potential uses, in the United States and other parts
of the world.  The Federal Drug Administration had recently
approved Mifepristone as a safe and effective abortifacient. 
Under the NeoGen Agreement, KCC for a cash payment of $6 million,
would have obtained a 26% interest in NeoGen, the entity which
held the sublicenses for all potential uses of Mifepristone. 
Subsequent to the signing of this contract, on October 31, 1996,
KCC filed suit against Mr. Pike and NeoGen for fraud and breach
of the NeoGen Agreement.  On November 4, 1996, the Population
Council and Advances in Health Technology, the licensors of this
drug, filed suit against Mr. Pike and NeoGen.  The suit claimed
Mr. Pike had concealed information that he had been, among other
things, convicted of forgery.  Under a recent settlement with the
Population Council, Mr. Pike has agreed to sell most of his
financial stake in Mifepristone and relinquish his management of
the distribution company that was set up to sell and distribute
this drug.  In February 1997, a new company called Advances for
Choice was established to oversee the manufacturing and distri-
bution of Mifepristone.  The Company's lawsuit against Mr. Pike
and his affiliates, as well as his claim against the Company for
defamation is still pending (see Item 3, "Legal Proceedings").

     On October 31, 1996, the Company started a new business and
formed a new subsidiary, GIANT MARINE GROUP, LTD., which is
offering the world's first Luxury Yacht Co-Ownership Program of
this type.  The Luxury Yacht Co-Ownership Program provides
individuals and companies the opportunity for a Co-Ownership of a
minimum of one-fourth interest in large ocean cruising yachts. 
In addition, a 100% ownership in the luxury yacht is also
available.  This program also provides for the management of
these yachts by The Ocean Group resulting in a practical,
economical and hassle-free way to own these mega-yachts.  In
1996, in furtherance of this program, the Company purchased two
yachts. 

     On November 14, 1996, KCC, along with CKE and others
purchased an aggregate principal amount of $29.9 million of
Checkers $36.1 million 13.75% senior subordinated debt, due July
31, 1998, from certain current debt holders.  These holders
retained approximately $6.2 million of the principal amount.  The
total purchase price for the senior subordinated debt was $29.1
million.  KCC purchased $5.1 million principal amount of this
senior subordinated debt for $5.0 million.  On November 22, 1996,
the senior subordinated debt was restructured.  As part of the
restructuring, the aggregate principal amount was reduced to
$35.8 million, the interest rate was reduced to 13%, the term of
the restructured credit agreement was extended one year,
scheduled principal payments were deferred to May 1997, certain
financial covenants were modified and, in return, Checkers issued
warrants ("Checkers Warrants") to all holders of the senior
subordinated debt, to purchase an aggregate of 20,000,000 shares
of Checkers common stock at an exercise price of $.75 per share. 
KCC received 2,849,000 Checkers Warrants, which are currently
unregistered and are exercisable at any time until November 22,
2002.  Checkers is obligated to register the common stock to be
issued under the Checkers Warrants by May 22, 1997.  The new
lenders also agreed to provide a short-term revolving line of
credit up to $2.5 million to Checkers.  As of December 31, 1996,
KCC advanced $.5 million.  The interest rate on the advance was
13%.  In February 1997, the Checkers Advance was  subsequently
paid.

<page-11>

     At December 31, 1996, the Company's assets consisted of two
yachts, 3,137,000 shares (approximately 15% of the amount
outstanding) of Rally's common stock, 200,000 shares of Checkers
common stock and 2,849,000 warrants to purchase Checkers common
stock, the Checkers Debt and Checkers Advance, investments in
U.S. Government short-term obligations and investments in debt
and other equity securities.

     SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
     LITIGATION REFORM ACT OF 1995

     The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements: Certain
information included in this document (as well as information
included in oral statements or other written statements made or
to be made by the Company) contains statements that are forward-
looking, such as statements relating to plans for future
activities.  Such forward-looking information involves important
risks and uncertainties that could significantly affect antici-
pated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements
made by or on behalf of the Company.  These risks and uncertain-
ties include, but are not limited to, those relating to the
development and implementation of the Company's new business
plan, the acceptance of the Company's Luxury Yacht Co-Ownership
Program, conditions affecting the luxury yacht business
generally, domestic and global economic conditions, activities of
competitors, changes in federal or state tax laws and of the
administration of such laws.

EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the executive officers of the Company,
together with their ages, their positions with the Company and
the year in which they first became an executive officer of the
Company.

     Burt Sugarman, 58, Chairman of the Board, President and
Chief Executive Officer.  Mr. Sugarman has been Chairman of the
Board of the Company since 1983, and President and Chief
Executive Officer since May 1985.  Mr. Sugarman has been Chairman
of Rally's Board of Directors since November 1994, having served
as its Chairman of the Board and Chief Executive Officer from
1990 through February 1994. 

     David Gotterer, 68, Vice Chairman and Director.  Mr.
Gotterer has been Vice Chairman of the Company since May 1986 and
Director of the Company since 1984.  Mr. Gotterer is a senior
partner in the accounting firm of Mason & Company, LLP, New York,
New York.  Mr. Gotterer is also a Director of Rally's.

     Cathy L. Wood, 47, Vice President, Chief Financial Officer,
Secretary and Treasurer.  Ms. Wood joined the Company in January
1995.  From 1989, Ms. Wood served in various capacities for
Wherehouse Entertainment, Inc., a specialty retail chain,
including Senior Vice President and Chief Financial Officer from
1993 to 1994.

ITEM 2.   PROPERTIES.

     GIANT presently leases 4,500 square feet of executive office
space in Beverly Hills, California, at a monthly payment of
approximately $13,000.  In addition, the Company leases approxi-
mately 5,500 square feet of hangar space at a local airport at a
monthly payment of approximately $5,000. 

     In April 1997, due to the lease expiration on the Company's
current office space and the start-up of The Ocean Group, the
Company will move its corporate headquarters to 9000 Sunset
Boulevard, 16th floor, Los Angeles, CA 90069.  The Company will
lease approximately 9,800 square feet at a monthly payment of
approximately $21,000.  The lease term is 60 months and the
Company has two, three-year renewal options.

<page-12>

ITEM 3.   LEGAL PROCEEDINGS.

     Jonathan Mittman, Steven Horowitz, Dina Horowitz and John
Hannan v. Rally's Hamburgers, Inc., GIANT GROUP, LTD., Burt
Sugarman, Wayne M. Albritton, Donald C. Moore, Edward C. Binzel,
Gena L. Morris, Patricia L. Glaser and Arthur Andersen LLP, a
purported class action alleging certain violations of the
Securities Exchange Act of 1934, as amended, was filed in the
United States Western District Court of Kentucky on January 24,
1994 (Civ. No. C94-0039-L(CS)) against the Company, certain of
its officers, directors and shareholders, a former officer of
Rally's and the Rally's auditors.  In the action, plaintiffs seek
an unspecified amount of damages, including punitive damages.  On
February 14, 1994, a related lawsuit was filed by two other
shareholders making the same allegations before the same court,
known as Edward L. Davidson and Rick Sweeney v. Rally's
Hamburgers, Inc.,GIANT GROUP, LTD., Burt Sugarman, Wayne M.
Albritton, Donald C. Moore, Edward C. Binzel, Gena L. Morris,
Patricia L. Glaser and Arthur Andersen LLP, (Civ. No. C-93-0087-
L-S).  On March 23, 1994, all plaintiffs filed a consolidated
lawsuit known as Mittman, et al. v. Rally's Hamburgers, Inc., et
al., (Civ. No. C-94-0039-L(CS).

     On April 15, 1994, Ms. Glaser and GIANT filed a motion to
dismiss the consolidated lawsuit for lack of personal jurisdic-
tion.  The remaining defendants filed motions to dismiss for
failure to state a claim upon which relief can be granted.  On
April 5, 1995, the court denied these motions.  (The court struck
plaintiffs' punitive damages allegations and required plaintiffs
to amend their claims under section 20 of the Securities Exchange
Act of 1934, but otherwise the court let stand the most recent
version of plaintiffs' complaint at this juncture.)  The court
granted GIANT's motion to strike certain scurrilous and
irrelevant allegations, and directed plaintiffs to amend their
complaint to conform to the court's order.  Finally, the court
denied plaintiffs' motion for class certification, "until such
time as the issue of typicality of claims is further developed
and clarified."

     Plaintiffs filed their second amended complaint on June 29,
1995, joining additional plaintiffs pursuant to stipulation of
the parties. 

     Plaintiffs renewed their motion for class certification on
July 31, 1995.  Defendants filed their opposition on or about
October 31, 1995.  On April 16, 1996, the court granted the
motion and certified a class period from July 20, 1992 to
September 29, 1993.

     On October 3, 1995, plaintiffs filed a motion to disqualify
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
("Christensen Miller") as counsel for defendants based on a
purported conflict of interest allegedly arising from the
representation of multiple defendants, as well as Ms. Glaser's
association with Christensen Miller.  The court recently denied
the motion and refused to disqualify Christensen Miller.

     Fact discovery is set to close on March 31, 1997.  No trial
date has been scheduled yet.

     The Company denies all wrongdoing and intends to vigorously
defend itself in this action.  It is not possible to predict the
outcome of this action at this time.

     HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD., ET AL.

     On February 13, 1996, Harbor Finance Partners ("Harbor")
commenced a derivative action, purportedly on behalf of Rally's,
against GIANT, Burt Sugarman, Mary Hart, Michael M. Fleishman,
David Gotterer, Patricia L. Glaser, Willie D. Davis and John A.
Roschman before the Delaware Chancery Courts.  Harbor named
Rally's as a nominal defendant.  Harbor claims that the directors
and officers of both Rally's and GIANT, along with GIANT,
breached their fiduciary duties to the public stockholders of the
Company by repurchasing certain of Rally's 9.875% Senior Notes at
an inflated price.  Harbor seeks "millions of dollars in
damages," along with rescission of the repurchase transaction. 
In the fall of 1996, all defendants moved to dismiss this action. 
The Chancery Court conducted a hearing before the end of the
year, but has not yet ruled on the pending motions.

     The Company denies all wrongdoing and intends to vigorously
defend itself in this action.  It is not possible to predict the
outcome of this action at this time.

     MICHAEL SHORES, ET AL. V. GIANT GROUP, LTD., ET AL.

     On February 27, 1996, Michael Shores on behalf of himself
and all other purported stockholders of the Company commenced a
putative class action against the Company, and the Company's
directors, Burt Sugarman, David Gotterer, Terry Christensen and
Robert Wynn.  The complaint, filed in the Los Angeles County
Superior Courts, alleges that these directors breached their
fiduciary duty by adopting a stockholder rights plan, selling
Rally's Senior Notes back to Rally's, agreeing to the Exchange
Offer, and engaging in an ongoing stock repurchase program.  The
complaint claims that these actions were undertaken to entrench
management rather than for the benefit of the Company and its
stockholders.  The complaint seeks unspecified damages,
injunctive relief and a recovery of attorneys' fees and costs.

     In February 1997, defendants filed a motion to dismiss for
failure to make a pre-litigation demand on the Board of Directors
to investigate the plaintiffs' claim.  The motion asks the court,
in the alternative, to stay the litigation to permit the Company
to address plaintiffs' claims internally.  Argument on this
motion is set for early April 1997.

     The Company denies all wrongdoing and intends to vigorously
defend itself in this action.  It is not possible to predict the
outcome of this action at this time.

     KCC DELAWARE V. JOSEPH D. PIKE, ET AL. 

     KCC filed this action on October 31, 1996.  The complaint
states causes of action for fraud, breach of fiduciary duty,
fraudulent concealment, breach of contract, unfair business
practices, permanent and preliminary injunctive relief, and
declaratory relief.  The complaint is seeking damages for the
breach by Mr. Pike and related entities of the July 24, 1996
NeoGen Agreement by which KCC agreed to contribute $6 million, in
return for a 26% equity interest in the entity producing the
abortion inducing drug, Mifepristone, in the United States and
other parts of the world.  KCC has also sued the licensors of
Mifepristone, the Population Council, Inc. and Advances in Health
Technology, Inc., on a declaratory relief claim.  The licensors
claim that their prior approval was necessary for the July 24,
1996 NeoGen Agreement between KCC and the Pike defendants.

     On February 19, 1997, the Pike defendants filed an answer to
the complaint, denying its material allegations and raising
affirmative defenses.  On that date, the Pike defendants filed a
cross-complaint against KCC, GIANT, Burt Sugarman, Terry
Christensen and David Malcolm alleging causes of action for
fraud, breach of contract, intentional interference with
prospective economic advantage, negligent interference with
prospective economic advantage and unfair business practices.

     No discovery has yet been conducted.  A status conference in
this matter is set for July 3, 1997.  No trial date has been set.

     JOSEPH D. PIKE V. GIANT GROUP, LTD., KCC DELAWARE, BURT
SUGARMAN, TERRY CHRISTENSEN, DAVID MALCOLM AND DOES 1 THROUGH 50. 

     Mr. Pike filed this complaint for defamation on November 12,
1996.  The complaint seeks an unspecified amount of general,
special and exemplary damages.

     The court denied KCC's motion to dismiss the complaint on
the grounds that it is a compulsory counterclaim to the Los
Angeles action, and the other defendants' motion to transfer the
matter to Los Angeles Superior Court.  All defendants (except
KCC) have answered the complaint, denying its material allega-
tions and raising several affirmative defenses.  KCC has filed a
demurrer to the complaint.  KCC and the other defendants have
also filed a motion to stay certain and/or to reconsider ruling
on motion to strike the complaint.  Both motions are scheduled to
be ruled upon on April 4, 1997.

     The Company denies all wrongdoing and intends to vigorously
defend itself in this action.  It is not possible to predict the
outcome of this action at this time.


<page-14>

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

       Not applicable.


                             PART II

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

     The Company's Common Stock is traded on the New York Stock
Exchange (Symbol: GPO).  On March 25, 1997, the approximate
number of record holders of the Company's Common Stock was 2,000. 
The high and low sale prices for such stock during each fiscal
quarter in 1996 and 1995 are set forth below.  No dividends were
paid on the Common Stock in either year.  The Company expects
that earnings will be retained in its business, and no cash
dividends will be paid on its Common Stock for the foreseeable
future. 

                              SALE PRICES OF COMMON STOCK         
                                   
                                   1996                1995
CALENDAR QUARTER              High      Low        High     Low

First................         $10 3/8   8 1/8     $ 7 1/4   6
Second...............           9 5/8   7 3/8       7 3/4   5 3/4
Third................           8 1/4   7 1/4       7 1/2   6 1/2
Fourth...............           9 1/2   7 5/8       9 1/8   6 3/8

<page-15>
<TABLE>

ITEM 6.   SELECTED FINANCIAL DATA.

<CAPTION>
                     FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
                     (Dollars in thousands, except per share amounts)

For the fiscal years ended (Note 3)      1992       1993       1994       1995       1996
------------------------------------------------------------------------------------------
<S>                                 <C>        <C>        <C>       <C>         <C>  
Operating results:
  Investment income                    $1,887     $1,377     $1,507    $ 3,947     $2,736 
  Gain (loss) on sale of investments      841        542     (1,065)        41      5,234 
  General and administrative expenses  (4,799)    (3,574)    (4,628)    (4,123)    (4,598)
  Proxy contest and related legal          -          -          -          -        (752)
  Exchange Offer and related expenses      -          -          -          -        (518)
  Interest expense                     (4,948)    (4,854)    (4,007)      (149)       (34)
  Loss on extinguishment of debt           -          -      (1,343)        -          -
  Gain on sale of investment in 
    affiliate                              -          -          -          -       6,177
  Equity in earnings (loss) of 
    affiliate                           3,121     (3,855)    (8,898)   (22,074)       367
  Write-down in carrying value of
   investment affiliate                    -          -     (19,396)        -          -
  Income (loss) from continuing
   operations                          (2,127)    (7,161)   (34,350)   (22,332)    17,912
  Income (loss) from discontinued
   operations, net                     (3,971)     4,522      6,598         -          -
  Gain on sale of discontinued 
   operations, net                         -          -      48,223         -          -
  Net income (loss)                    (6,098)    (2,639)    20,471    (22,332)    17,912

Per common share: (Note 1)
  Income (loss) from continuing
   operations                          ($0.41)    ($1.38)    ($5.26)    ($4.37)     $3.48

   Net income (loss)                    (1.18)     (0.51)      3.22      (4.37)      3.48

Weighted average common shares,
  including common stock
  equivalents (Notes 1 and 2)       5,189,000  5,180,000  6,463,000  5,110,000  5,209,000

Financial position as of 
  December 31:      
  Total assets                       $113,683   $110,616   $100,895   $ 51,681   $ 69,047

  Long-term debt                       44,532     44,489      1,816         -          -

  Total shareholders' equity           50,313     47,467     69,942     45,145     52,815

Note 1:   Earnings (loss) per common share are based upon the weighted average common
          shares outstanding, adjusted for the dilutive effect of outstanding stock
          options in 1996 and 1994.
Note 2:   On March 24, 1997, there were 3,210,655 shares of GIANT common stock
          outstanding.
Note 3:   Certain prior year amounts have been reclassified to conform to the 1996 
          presentation.
</TABLE>
<page-16>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS.
          (Dollars in thousands, except per share amounts)

RESULTS OF OPERATIONS FOR 1996 VERSUS 1995
  
     Investment income decreased $1,211 to $2,736 in 1996
compared to $3,947 in 1995 primarily due to lower income of $859
earned on the reduced levels of investments in short-term U.S.
government obligations.  Despite lower investment income, total
revenue increased $3,922 to $8,018 in 1996 compared to $4,096 in
1995 primarily due to gains of $5,234 on the sale of equity and
debt investments, previously classified as investments available-
for-sale.

     General and administrative expenses increased $475 to $4,598
in 1996 compared to $4,123 in 1995 primarily due to higher legal
fees of $193, other professional fees of $132 and travel expenses
of $170.  The increase in these expenses related primarily to the
Company's activities reviewing possible acquisitions.  During the
fourth quarter of 1996, the Company incurred expenses of $23
related to its Luxury Yacht Co-Ownership Program. 

     The Company's results from operations for 1996 were impacted
by certain one-time expenses.  The Company incurred legal and
administrative expenses of $752 consisting of proxy and related
legal fees in connection with the Fidelity/Foley litigation which
has now been settled.  In addition, the Company incurred $518 in
legal, accounting and administrative expenses due to the Exchange
Offer which was terminated on April 22, 1996. 

     Interest expense decreased $115 to $34 in 1996 compared to
$149 in 1995 as a result of the prepayment in February 1996 of
the Company's 9.25% Term-Note, due December 18, 1996.

     GIANT's investment in Rally's at December 31, 1996 and 1995,
represents approximately 15% and 48%, respectively, of Rally's
outstanding common stock.  The investment percentage decreased
because of the following three reasons: the sale by GIANT, on May
3, 1996, of approximately 768,000 shares of Rally's common stock
to Fidelity and approximately 2,350,000 shares of Rally's common
stock to CKE; GIANT did not elect to participate in Rally's
Shareholder Rights Offering, completed in September 1996, and
transferred its 4,312,000 available subscription rights to
purchase Rally's common stock to an unaffiliated third party,
which subsequently exercised the subscription rights and CKE and
Fidelity, in total, exercised its option to purchase 1,175,000
shares of Rally's common stock at the option price of $3.00
previously granted to them by GIANT.  The Company's non-cash
equity income was $367 in 1996 compared to a non-cash equity loss
of $22,074 in 1995.  Rally's income from operations for 1996 was
$4,090 compared to a loss from operations of $36,470 in 1995. 
This increase in operating income resulted primarily from
significant reductions in expenses across all major categories in
1996 and in 1995, non-cash charges of approximately $31,000
related to asset write-downs and costs  for closed stores and the
adoption of Statement of Financial Accounting Standards ("SFAS")
No.121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS 121").  Rally's
reported net income of $1,988 in 1996 compared with a net loss of
$46,919 in 1995.  Rally's net income for 1996 included an extra-
ordinary gain of $5,280, net of tax of $1,350, related primarily
to the early retirement of $22,000 principal amount of their
Senior Notes.

     The Company's net income was $17,912 for 1996 compared to a
loss of $22,332 in 1995.  This increase in net income resulted
primarily from the following: gains of $11,411 from the sale of
marketable securities previously classified as available-for-sale
and from the sale of Rally's common stock; non-cash equity income
in Rally's of $367 in 1996 compared to a loss of $22,074 in 1995
and an income tax benefit of $9,649 primarily related to the
realization of capital losses on sale of Rally's common stock. 
These components of net income were lowered by one-time expenses
of the Fidelity/Foley litigation and terminated Exchange Offer of
$1,270, slightly higher general and administrative expenses of
$475 and lower income earned on the reduced levels of investments
in short-term U.S. government obligations of $859.

     The Company's consolidated financial statements include
valuation allowances of $4,796 and $17,356, at December 31, 1996
and 1995, respectively, as it is not likely, as defined in SFAS
No. 109 "Accounting for Income Taxes" ("SFAS 109") that these tax
benefits will be realized in the near future.  The decrease in
the allowance during 1996 relates primarily to the sale of
Rally's common stock.  

RESULTS OF OPERATIONS FOR 1995 VERSUS 1994

     Investment income increased $2,440 to $3,947 in 1995
compared to $1,507 in 1994 as a result of higher average levels
of investments in marketable securities in 1995 versus 1994.

     General and administrative expenses decreased $505 to $4,123
in 1995 compared to $4,628 in 1994.  This resulted primarily from
a decrease in compensation including bonuses of $650, travel
expenses of $100 and consulting fees of $60 due to the divesti-
ture of the cement operations partially offset by the increase in
insurance expense of $125 and professional fees of $123 incurred
in 1995.

     Interest costs decreased $3,858 to $149 in 1995 compared to
$4,007 in 1994.  The decrease was the result of the prepayment in
November 1994 of the Company's 7% Convertible Subordinated
Debentures, due April 15, 2006 and 14.5% Subordinated Notes, due
April 15, 1995.

     Non-cash equity loss in GIANT's 48% owned investment,
Rally's, increased to $22,074 in 1995 from $8,898 in 1994. 
Rally's reported a net loss of $46,919 in 1995 compared with a
net loss of $19,273 in 1994.  Rally's results of operations for
1995 included charges of approximately $12,900 related to certain
management actions and decisions recorded in the third quarter
consisting of asset write-downs, disposals and occupancy costs
for closed stores.  Additionally, Rally's 1995 results include
approximately $18,100 of certain non-cash charges recorded in the
fourth quarter related to (1) the adoption of SFAS No. 121; (2)
other charges taken in the fourth quarter related to the disposal
and planned disposal of certain excess properties.  Rally's
results in 1994 include non-cash charges of approximately $17,300
primarily related to asset write-downs and costs of slowing
previously expected development.  

     The Company had a net loss of $22,332 in 1995 compared to
net income of $20,471 in 1994.  The 1995 net loss was primarily
the result of the non-cash equity loss in GIANT's investment in
Rally's.  In 1994, the Company earned $6,598, net of income
taxes, from the discontinued cement operations and recorded a
gain of $48,223, net of income taxes, on the October 1994 sale of
the cement operations.  These earnings were partially offset by
the 1994 write-down of the carrying value of Rally's and higher
general and administrative expenses. 

     In December 1994, as a result of market declines in the
value of Rally's outstanding common stock and Rally's continuing
operating losses, GIANT recognized a pre-tax loss of $19,396 on
this investment.  The amount of the non-cash write-down
represented GIANT's investment in excess of its share of the
underlying net assets of Rally's.

     The income tax benefits recorded for 1995 and 1994 were $286
and $3,661, respectively, and primarily related to federal income
taxes.  The Company's consolidated financial statements reflected
valuation allowances of $17,356 and $9,070, at December 31, 1995
and 1994, respectively, as it is not likely, as defined in SFAS
No. 109 that these tax benefits will be realized in the near
future.

     GIANT's loss from operations for 1995 excluding the effect
of Rally's losses was $544.  Of this amount, approximately $200
represents additional expenses related to the 1994 sale of the
cement operations in which GIANT recognized an after-tax gain of
$48,223. 

LIQUIDITY AND CAPITAL RESOURCES

     The Company's liquidity, consisting of cash and cash
equivalents and marketable securities of $23,227 at December 31,
1996, decreased $19,414 from $42,641 at December 31, 1995.  At
December 31, 1996, the Company's current assets include income
tax receivables of $10,928 primarily related to the realization
of capital losses on sale of Rally's common  stock and net
operating loss carryback claims.  In January 1997, the Company
received refunds of $10,716 related to these income tax
receivables.  At December 31, 1996 and 1995, the Company had
working capital of $45,419 and $39,125 with current ratios of 4.0
and 7.7 to 1, respectively. 

     Net cash used by operating activities for the year ended
December 31, 1996 was $3,386 compared to net cash used by
operating activities of $1,699 for the comparable period in 1995
and cash provided by operations of $3,419 for 1994, which
included cash provided by the discontinued cement operations of
$11,186.  In 1996 and 1995, cash was primarily used to fund the
daily operations of the Company and, in 1995, to pay expenses
which were accrued from the 1994 sale of the cement operations. 

     Net cash provided by investing activities for the year ended
December 31, 1996 was $13,721 compared to net cash used by
investing activities of $1,583 for the comparable period in 1995
and net cash provided by investing activities of $75,942 in 1994. 
On January 29, 1996, Rally's purchased directly from GIANT
$22,000 principal amount of its Senior Notes.  GIANT received
cash of $11,053, including accrued interest of $266, and a $4,145
short-term note bearing interest, which was paid in full.  During
the second quarter of 1996, the Company sold an additional $3,500
face value Senior Notes, through the open market, and received
proceeds of $2,760.  In addition during 1996, the Company sold
marketable securities receiving proceeds of $21,391 and also
purchased marketable securities at a cost of $15,867.  In
November 1996, the Company purchased Checkers Debt for $5,000 and
advanced $500 to Checkers.  In 1996, the Company purchased
assets, including improvements, for $21,485.  The Ocean Group
incurred $598 related to the start-up of the Luxury Yacht 
Co-Ownership Program.  The Company paid cash of $11,583 and
financed the remaining balance of $10,500, which was paid in full
in March 1997.  In May and November of 1996, the Company received
proceeds of $8,277 from the purchase of Rally's stock by CKE and
Fidelity.  In 1995, the Company received $20,720 from the sales
and maturities, net of purchases, of marketable securities and
paid income taxes in the amount of $22,238 related to the profit
on the sale of the Company's cement business.  In 1994, the
Company purchased marketable securities, net of sales of $31,343,
received proceeds of $125,822 from the sale of the cement
business, purchased property and equipment for $6,501, which
included $5,845 related to the discontinued cement operations and
invested $10,085 in Rally's. 

     Net cash used by financing activities for the year ended
December 31, 1996 was $14,682 compared to $3,199 and $60,012 for
the comparable periods in 1995 and 1994, respectively.  In 1996,
the Company pre-paid in full its 9.25% Term-Note.  The Company
incurred no additional expenses in connection with this
prepayment.  On February 7, 1996, the Chairman of the Board of
GIANT exercised 300,000 options to purchase GIANT Common Stock at
an exercise price of $6.75 per share.  As a result of this
transaction, the Company received cash of $2,025.  Additionally,
the Company's Board of Directors has reaffirmed its commitment to
its ongoing stock repurchase program through the open market and
private purchases of its common stock.  During 1996, the Company
acquired 1,674,000 shares of its common stock at an aggregate
cost of $15,079.  Included in these shares are 200,000 shares
acquired from the Company's Chairman of the Board in the third
quarter of 1996 at an aggregate cost of $1,652 and 705,000 shares
of its Common Stock, purchased directly from Fidelity, for an
aggregate price of $6,085.  In 1995 and 1994, the Company repaid
debt, related to continuing operations, of $2,062 and $58,782
respectively, and purchased treasury stock for $1,137 in 1995.

     The Company has adopted SFAS No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") in 1996 and elected to continue
to measure compensation cost under Accounting Principles Board
Opinion No.25 ("APB 25") and show pro forma disclosures of net
income and earnings per share as if the fair value based method
of accounting had been applied.

     Under the Internal Revenue Code, in addition to the regular
corporate income tax, an additional tax may be levied upon an
entity that is classified as a "personal holding company".  In
general, this tax is imposed on corporations which are more than
50% owned, directly or indirectly, by 5 or fewer individuals (the
"Ownership Test") and which derive 60% or more of their income
from "personal holding company" sources, generally defined to be
passive income (the "Income Test)".  If a corporation falls
within the Ownership Test and the Income Test, it is classified
as a personal holding company, and will be taxed on its
"undistributed personal holding company income" at a rate of
39.6%.  The Company currently meets the stock ownership test. 
The Company has not met the income requirement in recent years,
therefore is not subject to this additional tax; however no
assurance can be given that the income test will not be satisfied
in the future.

     The Company's current liquidity is provided by investment
income, the liquidation of marketable securities and cash
received from income tax receivables.  The Company's luxury yacht
business will have ongoing operating and overhead costs which
will be absorbed by the Company until the Co-Ownership program is
fully implemented for both yachts.  Management believes that this
liquidity, plus the Company's capital resources and its ability
to obtain financing at favorable rates are sufficient for the
Company to properly capitalize its current and future business
operations, as well as fund its on-going operating expenses.

SUBSEQUENT EVENT

     During the first quarter of 1997, the Company, with the
approval of the Board of Directors, acquired 429,000 shares of
its Common Stock for an aggregate cost of $3,431.

<PAGE>
<page-20>
<TABLE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<CAPTION>
                                     GIANT GROUP, LTD.
                           CONSOLIDATED STATEMENTS OF OPERATIONS
                   For the years ended December 31, 1994, 1995 and 1996
                     (Dollars in thousands, except per share amounts)

                                                 1994             1995           1996
                                              ---------        ---------      ---------
<S>                                           <C>              <C>             <C>
Income:
   Investment income                          $  1,507         $  3,947       $  2,736
   Gain (loss) on sale of investments           (1,065)              41          5,234
   Other                                           209              108             48
                                              ---------        ---------      ---------
                                                   651            4,096          8,018

Costs and expenses:
   General and administrative expenses           4,628            4,123          4,598
   Proxy contest and related legal                  -                -             752
   Exchange Offer and related legal                 -                -             518
   Interest expense                              4,007              149             34
   Loss on extinguishment of debt                1,343               -              -
   Depreciation                                    390              368            397
                                              ---------        ---------      ---------
                                                10,368            4,640          6,299
                                              ---------        ---------      ---------

Affiliate transactions:
   Gain on sale of investment in affiliate          -                -           6,177
   Equity in earnings (loss) of affiliate       (8,898)         (22,074)           367
   Write-down in carrying value 
     of investment in affiliate                (19,396)              -              -
                                              ---------        ---------      ---------
                                               (28,294)         (22,074)         6,544

Income (loss) from continuing operations
   before benefit for income taxes             (38,011)         (22,618)         8,263
Benefit for income taxes                        (3,661)            (286)        (9,649)
                                              ---------        ---------      ---------
Income (loss) from continuing operations       (34,350)         (22,332)        17,912

Income from discontinued operations,
   net of income taxes                           6,598               -              -
Gain on sale of discontinued operations,
   net of income taxes                          48,223               -              -
                                              ---------        ---------      ---------
Net income (loss)                             $ 20,471         $(22,332)      $ 17,912
                                              =========        =========      =========

Earnings per common share:
   Income (loss) from continuing operations   $  (5.26)        $  (4.37)      $   3.48
   Income from discontinued operations, net       1.02               -              -
   Gain on sale of discontinued operations,
     net                                          7.46               -              -
                                              ---------        ---------      ---------
   Net income (loss)                          $   3.22         $  (4.37)      $   3.48
                                         =========        =========      =========

   The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                     GIANT GROUP, LTD.
                                CONSOLIDATED BALANCE SHEETS
                             As of December 31, 1995 and 1996
                     (Dollars in thousands, except per share amounts)

                                                 1995                1996
                                               ---------           ---------
<C>                                            <S>                 <S>
ASSETS
Current assets:
   Cash and cash equivalents                   $ 16,991            $ 12,644
   Marketable securities                         25,650              10,583
   Income tax receivables                           593              10,928
   Note and other receivables                       298               3,825
   Deferred income taxes                            885                  -
   Assets held-for-sale                              -               21,485
   Prepaid expenses and other current assets        554               1,013
                                               ---------           ---------
       Total current assets                      44,971              60,478

Property and equipment, net                       3,267               3,559
Investment in affiliate                           3,423               2,926
Note receivable and other assets                     20               2,084
                                               ---------           ---------
         Total assets                          $ 51,681            $ 69,047
                                               =========           =========

LIABILITIES
Current liabilities:
   Note payable                                $     -             $ 10,500
   Accounts payable and accrued expenses            706                 990
   Income taxes payable                           3,469               3,362
   Deferred income taxes                             -                  164
   Current maturities of long-term debt           1,671                  43
                                               ---------           ---------
       Total current liabilities                  5,846              15,059

Deferred income taxes                               690               1,173
                                               ---------           ---------
         Total liabilities                        6,536              16,232

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
   2,000,000 shares, none issued                     -                   -
Class A Common stock, $.01 par value;
   authorized 5,000,000 shares, none issued          -                   - 
Common stock, $.01 par value; authorized
   12,500,000 shares; issued 7,266,000 in
   1996 and 6,966,000 shares in 1995                 69                  73
Capital in excess of par value                   33,508              36,767
Unrealized gains (losses) on investments         (1,328)                246
Retained earnings                                29,796              47,708
                                               ---------           ---------
                                                 62,045              84,794

Less common stock in treasury; 3,626,000
   shares in 1996 and 1,952,000 shares 
   in 1995, at cost                              16,900              31,979
                                               ---------           ---------
       Total stockholders' equity                45,145              52,815
                                               ---------           ---------
         Total liabilities and 
         stockholders' equity                  $ 51,681            $ 69,047
                                               =========           =========

      The accompanying notes are an integral part of the consolidated balance sheets.
</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                     GIANT GROUP, LTD.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                     For the years ended December 1994, 1995 and 1996
                                  (Dollars in thousands)


                                                     1994           1995           1996
                                                 ----------     ----------      ----------
<S>                                              <C>            <C>             <C>
Operations:
   Net income (loss)                             $  20,471      $ (22,332)      $  17,912
   Adjustments to reconcile net income (loss) 
     to net cash provided (used) by operations:
   Discontinued operations                          (6,598)            -               -
   Gain on sale of discontinued operations         (48,223)            -               -
   Loss on extinguishment of debt                    1,343             -               -
   Depreciation                                        390            368             397
   (Gain) loss on sale of investments                1,065            (41)         (5,234)
   Gain on sale of investment in affiliate              -              -           (6,177)
   Equity in loss (earnings) of affiliate            8,898         22,074            (367)
   Write-down in carrying value of investment in 
     affiliate                                      19,396             -               -
   Provision (benefit) for deferred taxes             (242)           156             483
   Amortization of deferred charges and other          249             -               -
   Accretion of discounts on marketable securities    (571)        (1,063)           (318)
   
Changes in operating assets and liabilities:
   Income tax receivables                               -              -          (10,335)
   Other assets and liabilities                       (375)          (316)            (31)
   Accounts payable and accrued expenses            (3,570)          (545)            284
                                                  ----------     ----------     ----------
 Net cash used by continuing operations             (7,767)        (1,699)         (3,386)
 Net cash provided by discontinued operations       11,186             -               -
                                                  ----------     ----------     ----------
    Net cash provided (used) by operations           3,419         (1,699)         (3,386)
                                                  ----------     ----------     ----------

Investing activities:
   Proceeds from sale of affiliates debt securities     -              -           17,692
   Sales of marketable securities                   26,740         48,022          21,391
   Purchases of marketable securities              (58,083)       (27,302)        (15,867)
   Debt investment and short-term advance               -              -           (5,500)
   Purchase of assets held-for-sale and related
     costs (A)                                          -              -          (11,583)
   Proceeds from sale of discontinued operations   125,822             -               -
   Tax payments related to sale of discontinued
    operations                                          -         (22,238)             -
   Purchase of property and equipment:
    Continuing operations                             (656)           (65)           (689)
    Discontinued operations                         (5,845)            -               -
   (Investment in) proceeds from sale of 
    investment in affiliate                        (10,085)            -            8,277
   Restricted investments - discontinued 
     operations                                     (1,951)            -               -
                                                  ----------     ----------     ----------
   Net cash provided (used) by investing 
     activities                                     75,942         (1,583)         13,721
                                                  ----------     ----------     ----------

Financing activities:
   Repayment of short-term borrowings              (14,825)        (1,917)         (1,682)
   Proceeds from the exercise of stock options          -              -            2,025
   Repayment of long-term debt                     (43,957)          (145)             -
   Repayment of debt - discontinued operations      (1,230)            -               -
   Purchase of treasury stock                           -          (1,137)        (15,079)
                                                  ----------     ----------     ----------
     Net cash used by financing activities         (60,012)        (3,199)        (14,682)
                                                  ----------     ----------     ----------

     Increase (decrease) in cash and cash
       equivalents                                  19,349         (6,481)         (4,347)

Cash and cash equivalents:
   Beginning of period                               4,123         23,472          16,991
                                                  ----------     ----------     ----------
   End of period                                  $ 23,472       $ 16,991       $  12,644
                                                  ==========     ==========     ==========
Supplemental disclosure of cash paid:
    Income taxes                                  $ (2,585)      $(22,364)      $    (310)
    Interest, net                                   (4,606)          (138)            (34)

(A)  In 1996, the Company purchased assets, including improvements, at a cost of $21,485. 
     The Ocean Group incurred $598 for pre-launching and organization costs.  The Company
     paid cash of $10,500 for these assets and financed the balance of $11,583 which was
     paid in full in March 1997.

   The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                     GIANT GROUP, LTD.
                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   For the years ended December 31, 1994, 1995 and 1996
                                  (Dollars in thousands)

                                    Capital                                     Reduction
                                      In     Unrealized                            for
                                    Excess    Losses on               Common    Additional
                          Common    of Par   Investments  Retained   Stock in    Pension
                          Stock     Value        Net      Earnings   Treasury   Liability 
                         ------    -------  -----------  --------   --------   ----------
<S>                      <C>       <C>      <C>          <C>        <C>        <C> 
Balance as of 
December 31, 1993          $69     $33,508           $0   $31,657   $(15,763)   $(2,004)

Net income for 1994                                        20,471
Reversal of reduction 
in equity to reflect 
additional minimum
pension liability as a
result of the sale of
the cement company                                                                2,004
                         ------    -------  -----------  --------   ---------   ----------
Balance as of 
December 31, 1994           69      33,508           0    52,128     (15,763)         0

Net loss for 1995                                        (22,332)
Purchase of treasury
stock                                                                 (1,137)
Unrealized losses on
investments, net                                (1,328)
                         ------    -------  -----------  --------   ---------   ----------
Balance as of
December 31, 1995            69     33,508      (1,328)   29,796     (16,900)          0

Net income for 1996                                       17,912
Exercise of stock options     4      2,022
Company's share of 
increase in affiliate's
equity due to sale of 
rights, net                          1,237
Purchase of treasury stock                                           (15,079)
Unrealized gains on 
investments, net                                 1,574
                         ------    -------  -----------  --------   ---------   ----------
Balance as of
December 31, 1996           $73    $36,767        $246   $47,708    $(31,979)          $0
                         ======    =======  ===========  ========   =========   ==========
   The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

<PAGE>
                        GIANT GROUP, LTD.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (Dollars in thousands, except per share amounts)


1.   SIGNIFICANT ACCOUNTING POLICIES 
     
     PRINCIPLES OF CONSOLIDATION 

     The consolidated financial statements include the accounts
of GIANT GROUP, LTD. (the "Company" or "GIANT") and its wholly-
owned subsidiaries, KCC Delaware Company, Inc. ("KCC") and GIANT
MARINE GROUP, LTD., d/b/a as The Ocean Group ("GIANT MARINE").

     The investment in affiliate is accounted for by the equity
method.  The effects of changes in the Company's equity in the
net assets of its affiliate resulting from the issuance of
capital stock are charged or credited to capital in excess of par
value.  All significant intercompany accounts and transactions
have been eliminated.

     REVENUE RECOGNITION AND PRE-LAUNCHING AND ORGANIZATION COSTS

     Revenue, on the sale of co-interests in the yachts, will be
recognized over the term of the purchase contract.

     Certain costs, related directly to and that are incurred in
preparing the yachts for use or sale, are deferred and are
amortized to income over a period of not more than one year,
beginning with the start of operations or will be charged to
expense on the sale of the yachts.  Costs related to improvements
that increase the life of the yachts are capitalized.  Organiza-
tional costs, including legal and professional fees, are deferred
and are amortized to income, over a period of not more than one
year, beginning with the start of operations or sale of the
yachts.  

     MARKETABLE SECURITIES 

     In 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".  No adjustment was
required to reflect the adoption of the new standard.  Invest-
ments in marketable equity securities and corporate bonds are
considered available-for-sale and trading securities.  Invest-
ments available-for-sale are carried at market and adjustments
for unrealized gains and losses are reported as a separate
component of stockholders' equity, net of deferred income taxes. 
Trading securities are carried at market and net realized and
unrealized gains and losses on trading securities are included in
net earnings or loss. 

     The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts through
maturity.  Such amortization and interest are included in
investment income.  

     The cost of securities sold is based on the specific identi-
fication method.  

     PROPERTY AND EQUIPMENT

     Depreciation for financial reporting purposes is provided by
the straight-line method over the estimated useful lives of the
assets, ranging from three to fifteen years.  

     SUPPLEMENTAL CASH FLOW INFORMATION

     For purposes of the consolidated statements of cash flows,
short-term investments purchased with an original maturity date
of three months or less are considered to be cash equivalents. 
Cash equivalents are recorded at market value and consist of
short-term U.S. Government obligations.

     EARNINGS PER SHARE

     Primary earnings per share is based upon the weighted
average common shares outstanding during the respective periods,
adjusted for the dilutive effect of outstanding common stock
options.  For the years ended December 31, 1994, 1995 and 1996,
the weighted average common shares outstanding were 6,463,000,
5,110,000 and 5,209,000, respectively.  Fully diluted earnings
per share is not presented as it approximates primary earnings
per share.

     USE OF ACCOUNTING ESTIMATES

     The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those estimates.  In
management's opinion, these estimates and assumptions are
reasonable and result in the fair presentation of the financial
statements.

     RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform
to the 1996 presentation.

2.   THE OCEAN GROUP LUXURY YACHT CO-OWNERSHIP PROGRAM

     On October 31, 1996, the Company formed a new subsidiary,
GIANT MARINE, and started a new business.  The Company purchased
assets, including improvements, which are reflected as assets
held-for-sale.  The Company paid cash for these assets and
financed the balance of $10,500 which was paid in full in March
1997.  In addition, GIANT MARINE incurred $598 in pre-launching
and organization costs which are included in prepaid expenses and
other current assets.  These costs will be amortized to income,
over a period of not more than 1 year, beginning with the start
of operations or charged to expense upon the sale of the luxury
yachts.  

     The Luxury Yacht Co-Ownership Program provides individuals
and companies the opportunity for a Co-Ownership of a minimum of
one-fourth interest in large ocean cruising yachts.  In addition,
a 100% ownership in the luxury yacht is also available.  Under
the Luxury Yacht Co-Ownership Program, the purchasers of 
co-interests are able to sell back their co-interest in their
yacht to The Ocean Group, following 2 years from the signing of
the purchase agreement, at the then fair market value, as
defined, less a ten percent re-marketing fee.

3.   DISCONTINUED OPERATIONS

     On October 6, 1994, KCC sold 100% of the stock of its
wholly-owned subsidiary Giant Cement Holding, Inc. ("GCHI")
through an initial public offering.  The net proceeds of this
transaction of $125,822 (net of $2,000 contributed to GCHI on the
date of sale) resulted in a gain of $76,990 before income taxes
of $28,767.

     GCHI was engaged in the manufacture and sale of portland and
masonry cements and construction aggregates.  Its operating
results through the date of sale have been included as discon-
tinued operations in the accompanying consolidated statements of
operations for 1994.

     The condensed statements of operations related to the
discontinued operations through the date of sale are as follows:
                                     1994
                                   --------                           

Total operating revenues           $69,352

Less: costs and expenses            59,355
                                   --------
Income before income taxes           9,997

Less: income tax expense             3,399
                                   --------
Net income                         $ 6,598
                                   ========

     The effective tax rate for the discontinued operations varied
from the federal tax rate primarily due to state income tax offset by
percentage depletion in 1994.

<TABLE>
4.   MARKETABLE SECURITIES

     At December 31, 1995 and 1996, investments classified as available-for-sale and trading
securities are as follows:

<CAPTION>

Available
for Sale                                       Unrealized      Deferred       Decrease
(1995)               Fair Value       Cost       Loss         Tax Asset       In Equity
-----------------    ----------    ---------   ----------   -------------     ---------
<S>                  <C>           <C>         <C>          <C>               <C>
Equity securities     $ 9,218       $10,273     $  1,055      $   422          $   633 
Corporate bonds        16,432        17,590        1,158          463              695 
                     ----------    ---------   ----------   -------------     ---------
Total                 $25,650       $27,863     $  2,213      $   885          $ 1,328 
                     ==========    =========   ==========   =============     =========

Available
for Sale                                       Unrealized      Deferred       Increase
(1996)               Fair Value       Cost       Gain       Tax Liability     In Equity
-----------------    ----------    ---------   ----------   -------------     ---------
Equity securities     $ 3,186       $ 3,043     $    143      $    57          $    86
Corporate bonds         1,386         1,119          267          107              160
                     ----------    ---------   ----------   -------------     ---------
Total                 $ 4,572       $ 4,162     $    410      $   164          $   246
                     ==========    =========   ==========   =============     =========

Trading Securities                          
(1996)               Fair Value       Cost
------------------   ----------    ---------
U.S. Government
   Bonds              $ 1,011       $   933
Corporate bonds         5,000         5,000
                     ==========    =========
Total                 $ 6,011       $ 5,933
                     ==========    =========

     The maturities for corporate and government bonds at December 31, 1995 and 1996 are as
follows:
</TABLE>

<TABLE>
<CAPTION>
                                              1995                      1996
                                       Fair        Amortized       Fair      Amortized
                                      Value           Cost        Value        Cost
                                    ---------      ---------    ---------    ---------
<S>                                 <C>            <C>          <C>          <C>
Due in one through five years       $ 13,509       $ 14,598     $  6,618     $  6,302
Due after five through ten years       2,923          2,992          779          750
                                    ---------      ---------    ---------    ---------
                                    $ 16,432       $ 17,590     $  7,397     $  7,052  
                                    ---------      ---------    ---------    ---------

      Proceeds from the sale of marketable securities totaled approximately $26,740, $48,022
and $21,391 in 1994, 1995, and 1996, respectively. 
</TABLE>

5.   INVESTMENT IN AFFILIATE 

     GIANT's investment in Rally's Hamburgers, Inc. ("Rally's") of
$3,423 and $2,926 at December 31, 1995 and 1996, represents
approximately 48% and 15%, respectively, of Rally's outstanding
common stock.  At December 31, 1995 and 1996, the Company owned
approximately 7,430,000 and 3,137,000 shares of Rally's outstanding
common stock, the quoted market price of which was approximately
$7,198 and $14,313.  On March 24, 1997, the market price of the
Company's investment in Rally's outstanding common stock was $10,195. 
The Company's equity investment percentage in Rally's decreased
because GIANT did not elect to participate in Rally's Subscription
Rights Offering and because of the acquisition of 4,293,000 shares by
Fidelity National Financial, Inc. ("Fidelity") and CKE Restaurants,
Inc. ("CKE"), an affiliate of Fidelity, from the Company.  The
Company will continue to account for the investment under the equity
method of accounting because of the Company's ability to exercise
significant influence over operating and financial policies of
Rally's, due to the Company's representation on the Rally's Board of
Directors, including GIANT's Chief Executive Officer as Chairman of
the Rally's Board of Directors. 

     On January 22, 1996, the Company disclosed that it intended to
offer to exchange a new series of GIANT participating, non-voting
preferred stock for Rally's outstanding common stock (the "Exchange
Offer").  Upon successful completion of the Exchange Offer, GIANT
would have owned 79.9% of Rally's outstanding common stock.  On April
22, 1996, Rally's Board of Directors, after discussions between a
special committee of the Rally's Board of Directors and Donald E.
Doyle, President and Chief Executive Officer of Rally's, requested
that GIANT terminate the Exchange Offer.  The termination was
requested to retain sufficient market capitalization to allow Rally's
easier access to the capital markets to raise capital in the future. 
GIANT agreed to the request and terminated the proposed Exchange
Offer. 

     On January 29, 1996, Rally's purchased $22,000 principal amount
of its 9.875% senior notes ("Senior Notes") directly from GIANT for
$14,932.  The Company had purchased a total of $26,424 in principal
during 1995 for $14,051 and recorded these Senior Notes as invest-
ments available-for-sale.  The Company recognized a gain of $2,958 on
the sale of these Senior Notes.  In addition, during the second
quarter of 1996, GIANT sold an additional principal amount of $3,500
of its investment in Rally's Senior Notes through the open market,
and recognized a pre-tax gain of $478.

     On February 1, 1996, GIANT agreed to provide Rally's with a
short-term credit facility of up to $2,000 to provide for certain
seasonal financing requirements.  The interest on this facility was
calculated at prime and accrued interest was payable on a monthly
basis.  As of March 31, 1996, $500 was advanced to Rally's under this
credit facility.  This $500 advance was repaid in the second quarter
of 1996 and no other advances have been made.  This facility has now
been canceled.

     On February 23, 1996, GIANT entered into two letters of credit,
on behalf of Rally's, with a major bank.  The balance of the
outstanding letters of credit could not exceed $793.  The letters of
credit had a maximum maturity date of 365 days but could not extend
beyond the agreement's expiration date of February 28, 1997.  The
letters of credit were secured by certain cash equivalents of GIANT. 
The Company was reimbursed by Rally's for costs related to issuance
of these letters of credit.  In October 1996, these letters of
credit, on behalf of Rally's, were canceled and the cash equivalents
were reinvested by GIANT.

     On May 3, 1996, pursuant to a Purchase and Standstill Agreement
between GIANT and Fidelity, GIANT sold approximately 768,000 shares
of Rally's common stock to Fidelity and approximately 2,350,000
shares of Rally's common stock to CKE.  The Company received cash of
$4,751 and recognized a pre-tax gain of $3,197.  As part of this
transaction, GIANT granted irrevocable options to Fidelity and CKE to
each purchase an additional 1,175,000 shares of Rally's common stock
from GIANT, at exercise prices ranging from $3.00 to $4.00 per share,
through April 1998.  In March 1997, 1,175,000 options granted to CKE
and Fidelity by GIANT to purchase Rally's common stock at $4.00 per
share were canceled.

     On July 1, 1996, Rally's and CKE entered into a ten-year
agreement ("Operating Agreement") pursuant to which 28 Rally's owned
restaurants, located in California and Arizona, are being operated by
Carl's Jr.  At  the discretion of CKE, certain restaurants will be
converted to Carl's Jr.  At February 24, 1997, one restaurant has
been converted.  Under the Operating Agreement, Carl's Jr. will be
responsible for the conversion expenses, as well as the operating
expenses for all the restaurants.  Rally's will retain ownership of
all the restaurants and receive a percentage of gross revenues
generated by each restaurant.  The Operating Agreement is cancelable,
at the discretion of CKE, after an initial five-year period.

     On September 5, 1996, by prospectus, Rally's distributed
transferable subscription rights to holders of record of Rally's
common stock on July 31, 1996.  For each 3.25 rights held, a holder
was entitled to purchase one unit for $2.25.  A unit consisted of one
share of Rally's common stock and one warrant to purchase an
additional share of Rally's common stock for $2.25.  On September 16,
1996, GIANT elected to transfer its 4,312,000 subscription rights to
an unaffiliated third party, which has subsequently exercised the
rights.  GIANT's increase in Rally's shareholders' equity due to the
Shareholder Rights Offering has been reflected as an increase of
$1,699 in GIANT's investment in affiliate and an increase in capital
in excess of par value.  

     During the fourth quarter of 1996, CKE and Fidelity, in total,
exercised its option to purchase 1,175,000 shares of Rally's common
stock at the option price of $3.00 per share.  The Company received
cash of $3,526 and recognized a pre-tax gain of $2,518.  The Company,
because of this sale, recognized $462 in income that was previously
shown as an increase in capital in excess of par.  This income is
included in gain on the sale of investment in affiliate.  

     On December 20, 1996, Rally's announced that it has issued
warrants ("Rally's Warrants") to CKE and Fidelity to purchase an
aggregate 1,500,000 restricted shares of its common stock at an
exercise price of $4.375 per share.  The Rally's Warrants have a 
3-year term and are not exercisable until December 20, 1997.  If all
the warrants are exercised by CKE and Fidelity to purchase Rally's
common stock, the Company's equity ownership in Rally's will be
reduced to approximately 12%.

     The Company's sale of Rally's common stock to CKE and Fidelity,
during 1996, generated a capital loss which was carried back to prior
years and was used to reduce capital gains taxes paid on the sale of
the cement operations.  As of December 31, 1996, the Company recorded
a tax benefit of $10,285 for this carryback and refund of taxes paid
in prior years.  In January 1997, the Company received this refund in
full. 

<TABLE>
     Summarized financial information for Rally's is as follows:

<CAPTION>
Financial Position as of December 31,                             1995            1996
-------------------------------------                          ----------      ---------- 
<S>                                               <C>           <C>             <C>        
Current assets                                                 $  22,069       $  10,416
Less: current liabilities                                         42,276          19,968
                                                               ----------      ----------
Working capital deficiency                                       (20,207)         (9,552)
Noncurrent assets                                                115,323         101,842
Less: long-term debt and other noncurrent 
  liabilities                                                    (88,444)        (72,925)
                                                               ----------      ----------
Stockholders' equity                                           $   6,672       $  19,365
                                                               ----------      ----------
GIANT's investment in Rally's                                  $   3,423       $   2,926
                                                               ----------      ----------
Operating results for the year ended
December 31,                                       1994            1995          1996
------------------------------------            ----------      ----------     ---------
Revenues                                        $ 186,318      $ 188,859       $ 162,752
Less: operating costs                             200,954        225,329         158,662
                                                ----------     ----------      ----------
Income (loss) from operations                   $ (14,636)     $ (36,470)      $   4,090
                                                ==========     ==========      ==========
Net (loss) income                               $ (19,273)     $ (46,919)      $   1,988
                                                ==========     ==========      ==========
GIANT's share on non-cash equity income (loss)  $  (8,898)     $ (22,074)      $     367
                                                ==========     ==========      ==========
</TABLE>
     In 1995, Rally's adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of ("SFAS 121") and recorded a non-cash impairment loss of
approximately $13,700.

     In December 1994, as a result of the decline in the quoted
market value of Rally's common stock and Rally's continued operating
losses, GIANT recognized an impairment loss on this investment
through a charge to operations of $19,396.  The amount of this 
non-cash write-down represented the unamortized portion of GIANT's
investment in excess of its equity in the underlying net assets of
Rally's.  

     In 1994, the non-cash equity loss in Rally's includes amortiza-
tion of $435 of the excess cost of the investment over underlying
equity in net assets.

     On March 25, 1997, Rally's and Checkers announced that they have
agreed in principle to a merger between the two companies.  Under the
terms of the letter of intent signed by the parties, each share of
Rally's common stock will be converted on completion of the merger
into three shares of Checkers common stock.  Upon completion of the
merger, Rally's will become a wholly-owned subsidiary of Checkers. 
The transaction is subject to negotiation of definitive agreements,
receipt of opinions of Rally's and Checker's investment bankers as to
the fairness of the transaction to Rally's and Checker's respective
shareholders, stockholder approvals and other customary conditions. 
The merger is expected to close in the second or third quarter of
1997.

6.   CHECKERS DRIVE-IN RESTAURANTS, INC.

     On November 14, 1996, KCC, along with CKE and others purchased
an aggregate principal amount of $29,900 of Checkers Drive-In
Restaurants, Inc. (NASDAQ:CHKR) ("Checkers") $36,100 13.75% senior
subordinated debt ("Checkers Debt"), due July 31, 1998, from certain
current debt holders.  These holders retained approximately $6,200 of
the principal amount.  The total purchase price for the senior
subordinated debt was $29,100.  KCC purchased $5,100 principal amount
of this senior subordinated debt for $5,000.  On November 22, 1996,
the senior subordinated debt was restructured.  As part of the
restructuring, the aggregate principal amount was reduced to $35,800,
the interest rate was reduced to 13%, the term of the restructured
credit agreement was extended one year, scheduled principal payments
were deferred to May 1997, certain financial covenants were modified
and, in return, Checkers issued warrants ("Checkers Warrants") to all
holders of the senior subordinated debt, to purchase an aggregate of
20,000,000 shares of Checkers common stock at an exercise price of
$.75 per share.  KCC received 2,849,000 Checkers Warrants, which are
currently unregistered and are exercisable at any time until November
22, 2002.  Checkers is obligated to register the common stock to be
issued under the Checkers Warrants by May 22, 1997.  The new lenders
also agreed to provide a short-term revolving line of credit up to
$2,500 to Checkers.  As of December 31, 1996, KCC advanced $500
("Checkers Advance").  The interest rate on this advance was 13%.  At
December 31, 1996, KCC recorded the Checkers Warrants at $1,168 equal
to the difference between the ending market price of the common stock
on November 22, 1996 and the exercise price of $.75 per share
multiplied by the number of Checkers Warrants.  At December 31, 1996,
KCC recorded the Checkers Debt at $3,832 and a related discount of
$1,270.  This discount will be amortized to income using the
effective interest method.  In addition, the Company had an
investment of 200,000 shares of Checkers common stock valued at $350. 
In 1997, in addition to interest, Checkers expects to pay KCC
approximately $3,446 related to the Checkers Note and Advance.  

     The Checkers Advance of $500 was subsequently paid in February
1997.

7.   PROPERTY AND EQUIPMENT

     As of December 31,                  1995           1996
     ------------------                 ------         ------
     Land                               $  120         $  120
     Leasehold improvements                175            175
     Equipment and furnishings           4,773          5,462
                                        ------         ------
                                         5,068          5,757
     Less: accumulated depreciation      1,801          2,198
                                        ------         ------
                                        $3,267         $3,559
                                        ======         ======

8.   DEBT

     In November of 1994, the Company prepaid its 7% Convertible
Subordinated Debentures, due April 15, 2006 and 14.5% Subordinated
Notes, due April 15, 1995.  The early retirement of the debt required
the use of approximately $44,000 of the proceeds of the sale of the
Company's cement operations and resulted in a loss on extinguishment
of debt of $1,343 in 1994.

     On February 29, 1996, the Company prepaid in full its 9.25% Term
Note.  The Company incurred no additional expenses in connection with
this prepayment.

9.   TREASURY STOCK

     During 1995, the Company, with the approval of the Board of
Directors, acquired 166,000 shares of its Common Stock for an
aggregate cost of $1,137.

     During 1996, the Company, with the approval of the Board of
Directors, acquired 1,674,000 shares of its Common Stock at an
aggregate cost of $15,079.  Included in these totals are 200,000
shares acquired from the Company's Chairman of the Board at an
aggregate cost of $1,652 and 705,000 shares purchased at an aggregate
cost of $6,085 directly from Fidelity. 

     During the first quarter of 1997, the Company, with the approval
of the Board of Directors, acquired 429,000 shares of its Common
Stock for an aggregate cost of $3,431.
     
10.  COMMON STOCK OPTIONS

     Under the 1996 Employee Stock Option Plan (the "1996 Plan"),
250,000 shares of the Company's $.01 par value Common Stock are
reserved for future options.  The options, in general, can be issued
as either incentive or non-qualified options in accordance with the
1996 Plan.  The options, in general, may be exercised in whole or in
part any time after the date of grant and terminate 10 years from the
grant date.  In most cases, options shall have an exercise price
equal to the fair market value of the Common Stock on the date of
grant.  In 1996, 200,000 options were granted to GIANT's Chairman of
the Board at an exercise price of $8.25 and terminate five years from
the grant date.  No other options have been granted under the 1996
Plan.

     Under the 1996 Stock Option Plan for Non-Employee Directors (the
"Director Plan"), 250,000 shares of the Company's $.01 par value
Common Stock are reserved for future options.  Pursuant to the
Director Plan, each Non-Employee director is entitled to receive an
option to purchase 10,000 shares on May 20, 1996 (the adoption date),
10,000 shares upon the initial appointment to the Board of Directors,
and an option to purchase 10,000 shares upon subsequent reelection to
the Board.  Upon election to the Executive Committee, the Non-
Employee director will receive an additional option to purchase
10,000 shares.  The options may be exercised in whole or in part any
time after the date of grant and terminate five years from the grant
date.  All options shall have an exercise price equal to the fair
market value of the Common Stock on the date of grant.  As of
December 31, 1996, 50,000 options were granted to the three Non-
Employee members of the current Board of Directors.  The exercise
prices are $7.625 for 20,000 options and $7.75 for 30,000 options. 

     Prior to August 1995, the Company had a 1985 Incentive Stock
Option Plan (the "Incentive Plan") and a 1985 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan").  The Incentive Plan had
provided for the grant of options to purchase an aggregate of 750,000
shares of GIANT Common Stock, of which no options are presently
outstanding and options for 6,000 shares have been exercised as of
December 31, 1995.  The Non-Qualified Plan provided for the granting
of options to purchase 3,000,000 shares of GIANT Common Stock and
options for 307,500 shares have been exercised as of December 31,
1996.  In 1996, the Chairman of the Board of the Company exercised
300,000 options, issued under the Non-Qualified Plan to purchase
GIANT Common Stock at an exercise price of $6.75 per share.  As a
result of this transaction, the Company received cash of $2,025.  No
options were exercised during 1995 under either plan.

     In March 1995, 2,026,000 outstanding options held by certain
officers of the Company exercisable at $6.33 per share and expiring
in 1996, were canceled and an identical number of new options were
issued to such persons.  Such new options have an exercise price of
$6.75 per share, which was the fair market value of the shares at the
time of the grant, and will expire in 2005.  The new options (like
the canceled options) are fully vested. 

     In 1995 and 1996, the Company purchased 164,000 and 7,000
options at the difference between the fair market value and the
exercise price, from former Company officers and directors for an
aggregate cost of $110 and $7 which is included in general and
administrative expenses.

     The Company measures compensation expense for all stock option
plans under Accounting Principles Board Opinion No. 25 ("APB 25"). 
The Company has not recognized compensation expense because the
exercise price of the options issued is equal to the fair market
value of the options on the date of the grant.  If the Company
recognized compensation expense under SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), net income (loss) would have
been impacted as shown in the following pro forma amounts: 

                                             Year ended
                                     ---------------------------
                                     December 31,   December 31,
                                        1995           1996
                                     ----------     ----------
Net income (loss)    As reported      $(22,332)      $ 17,912
                     Proforma          (27,007)        17,452

Primary earnings     As reported      $  (4.37)      $   3.48
(loss) per share     Proforma         $  (5.29)      $   3.35

    The fair value of each option grant is estimated using the Black-
Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: no
dividend yield; expected volatility of 20 percent; risk-free rate of
return 7.1% percent; and expected lives of 5 years.  The SFAS No. 123
method of accounting has not been applied to options granted prior to
January 1, 1995, therefore, the resulting pro forma compensation
costs may not be representative of that to be expected in future
years.


<PAGE>
<TABLE>
A summary of options is as follows:
 
                                    Weighted               Weighted               Weighted
                                    Average                Average                Average
                         1994       Exercise     1995      Exercise    1996       Exercise
                        Shares      Price       Shares     Price      Shares      Price
                        ---------   --------    ---------  --------   ---------   --------
<S>                     <C>         <C>         <C>        <C>        <C>         <C>
Beginning balance       2,289,000    $ 6.43     2,319,000  $ 6.48     2,126,000    $ 6.76
Granted or issued          30,000     11.00     2,126,000    6.76       250,000      8.14
Exercised                                                              (300,000)     6.75
Canceled                                       (2,319,000)   6.48       (20,000)     6.75
                        ---------               ---------             ---------

Ending balance          2,319,000    $ 6.48     2,126,000  $ 6.76     2,056,000    $ 6.93
                        =========               =========             =========
Options exercisable at
 end of year            2,319,000               2,054,000             2,024,000
                        =========               =========             =========
Weighted average of
 fair value of options
 granted                             N/A                  $ 2.28                  $ 2.75

</TABLE>


<TABLE>
    The following table summarizes information about stock options outstanding and exercisable
at December 31, 1996:

<CAPTION>
                  Options Outstanding                              Options Exercisable
------------------------------------------------------------   -------------------------
                                        Wtd. Avg.
                     Outstanding       Remaining    Wtd. Avg.   Exercisable    Wtd. Avg.
   Range of             as of         Contractual   Exercise      as of        Exercise
Exercise Price      Dec 31., 1996        Life        Price     Dec. 31, 1996    Price
--------------      -------------     -----------   ---------  -------------   ---------
<S>                   <C>              <C>            <C>        <C>             <C>
$6.75 to $6.88        1,756,000        9.2 years      $6.75      1,742,000       $6.75
 7.00 to 7.55           100,000        6.7             7.37         82,000        7.44
 8.25                   200,000        4.7             8.25        200,000        8.25
                     -----------                                -----------     
$6.75 to $8.25        2,056,000        8.7 years      $6.93      2,024,000       $6.93
                     ===========                                ===========

</TABLE>


<PAGE>
11. CLASS A COMMON STOCK, $.01 PAR VALUE

    On July 12, 1996, GIANT's stockholders approved an amendment to
the Company's Certificate of Incorporation which authorized 5,000,000
shares of Class A Common Stock, $.01 par value per share.  This Class
A Common Stock is identical in all respects to the $.01 par value
Common Stock except that the Class A Common Stock, except in limited
situations, have no voting rights.  Presently, there are no plans or
commitments for this Class A Common Stock.

12. PREFERRED STOCK

    Authorized preferred stock consists of 2,000,000 shares, $.01 par
value, issuable in one or more series with such dividend rates,
liquidation preferences and redemption, conversion and voting right
restrictions as may be determined by the Company's Board of
Directors.  No preferred stock was issued during 1995 and 1996.

13. STOCKHOLDERS RIGHTS PLAN

    On January 4, 1996, GIANT declared a dividend of one preferred
share purchase right ("Right") for each share of GIANT Common Stock
outstanding on January 16, 1996 and authorized the issuance of
additional Rights for GIANT Common Stock issued after that date.

    Each Right entitles the holder to buy 1/1,000th of a share of
Series A Junior Participating Preferred Stock at an exercise price of
$30 for each 1/1,000th share.  The Rights will be exercisable and
will trade separately from the GIANT Common Stock (1) ten days after
a public announcement that a person or group of persons has become
the beneficial owner of 15% or more of the GIANT Common Stock (an
"Acquiring Person"), or (2) ten business days (or such later date as
may be determined by the Board of Directors) after commencement or
announcement of an intention to make a tender or exchange offer, the
consummation of which would result in such person or group of persons
becoming the beneficial owner of 15% or more of GIANT Common Stock;
provided however, because Mr. Sugarman, Chairman and Chief Executive
Officer of the Company, beneficially owned in excess of 15% of GIANT
Common Stock on the date the Stockholders Rights Plan was adopted,
Mr. Sugarman will become an Acquiring Person only upon the acquisi-
tion by Mr. Sugarman of additional shares of GIANT Common Stock,
other than acquisitions through stock dividends, stock option plans,
GIANT compensation or employee benefit plans and other similar
arrangements.

    If any person does become an Acquiring Person (subject to certain
exceptions), the other holders of GIANT Common Stock will be able to
exercise the Rights and buy GIANT Common Stock having twice the value
of the exercise price of the Rights.  GIANT may, at its option,
substitute fractional interests of a share of Series A Junior Parti-
cipating Preferred Stock for each share of GIANT Common Stock to be
issued upon exercise of the Rights.  Additionally, if GIANT is
involved in certain mergers where its shares are exchanged or certain
major sales of its assets occur, holders of GIANT Common Stock will
be able to purchase for the exercise price, shares of stock of the
Acquiring Person having twice the value of the exercise price of the
Rights.

    The Rights may be redeemed by GIANT at any time prior to the time
any person becomes an Acquiring Person for a price of $.01 per Right. 
Unless exercised, the Rights expire on January 4, 2006.

    The Rights could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control
of GIANT.  In addition, because the Rights may discourage accumula-
tions of large blocks of GIANT Common Stock by purchasers whose
objective is to take control of GIANT, the Rights could tend to
reduce the likelihood of fluctuations in the market price of GIANT
Common Stock that might result from accumulations of large blocks of
stocks.

14.  INCOME TAXES

    The benefit for income taxes is comprised of the following:
    
For the year ended 
December 31,                       1994        1995        1996
------------------               --------   ---------    --------
Current federal income
tax benefit                      $ 3,419    $    413     $ 8,611

Deferred federal income tax
benefit (provision)                  242        (156)       (483)

Current state income tax
benefit                                -          29       1,521
                                 --------   ---------    --------

Benefit for income taxes         $ 3,661    $    286     $ 9,649
                                 ========   =========    ========

     The following is a reconciliation between the credits for income
taxes and the amounts computed by applying the Federal statutory rate
of 34% to pre-tax loss from continuing operations:

For the year ended 
December 31,                       1994        1995        1996
------------------               --------    --------    --------
Statutory federal tax
(provision) benefit on
pre-tax (income) loss            $12,924     $ 7,690     $(2,809)

State tax benefit (provision),
net of federal taxes                  -        1,388        (507)

(Increase) decrease in 
valuation allowance               (9,070)     (8,898)     12,560

Other, net                          (193)        106         405
                                 --------    --------    --------

Benefit for income taxes         $ 3,661     $   286     $ 9,649
                                 ========    ========    ========

     Deferred tax assets and (liabilities) of the Company consist of
the following:

As of December 31,                         1995          1996
------------------                       ---------     ---------
Investment in Rally's                    $ 17,288      $  2,341
State capital loss carryforward                -          2,430
Depreciation                                 (690)       (1,056)
Unrealized investment losses (gains)          885          (164)
Other, net                                     68           (92)
Valuation allowance                       (17,356)       (4,796)
                                         ---------     ---------
Net deferred tax assets 
(liabilities)                            $    195      $ (1,337)
                                         =========     =========

     The valuation allowance at December 31, 1995 and 1996 is
provided because it is not likely, as defined in SFAS 109, that the
deferred tax benefits will be realized through operations.  The
valuation allowances recorded against deferred tax assets are based
on management's estimates related to the Company's ability to realize
these benefits.  Appropriate adjustments will be made to the
valuation allowance if circumstances warrant in future periods.  Such
adjustments may have a significant impact on the Company's
consolidated financial statements.  As of December 31, 1995, a
deferred tax asset of $885 related to unrealized losses on certain
investments classified as available-for-sale are not provided for in
the valuation allowance of $17,356 as the related investments were
sold at a net gain, subsequent to year-end, and the associated
deferred tax benefit was recognized.  Gross realized losses on
marketable securities classified as investments available-for-sale in
1995, net of deferred tax of $885, are included as reduction of
equity at December 31, 1995.  Certain amounts in 1995 have been
reclassified to reflect the results of the actual tax return filings. 

     At December 31, 1996 and 1995, the Company's consolidated
balance sheets included a liability related to a proposed assessment
by the State of California, made as a result of their audit of the
tax years 1989 through 1991.  GIANT has disputed this assessment and
has provided documents to support the Company's position during
meetings with the New York office of the California State Franchise
Tax Board during 1995 and 1996.  The Company has received a
preliminary proposed adjustment from the New York office which
indicates that the assessment will be reduced.  The Company made
payments of $259 during 1996 as a result of this preliminary proposed
adjustment.  The ultimate resolution will be based on the final
review and official notice from the California office of the
Franchise Tax Board, which has not yet been received.

     Under the Internal Revenue Code, in addition to the regular
corporate income tax, an additional tax may be levied upon an entity
that is classified as a "personal holding company".  In general, this
tax is imposed on corporations which are more than 50% owned,
directly or indirectly, by 5 or fewer individuals (the "Ownership
Test") and which derive 60% or more of their income from "personal
holding company" sources, generally defined to be passive income (the
"Income Test)".  If a corporation falls within the Ownership Test and
the Income Test, it is classified as a personal holding company, and
will be taxed on its "undistributed personal holding company income"
at a rate of 39.6%.  The Company currently meets the stock ownership
test.  The Company has not met the income requirement in recent
years, therefore is not subject to this additional tax; however no
assurance can be given that the income test will not be satisfied in
the future.

15.  LEASES

     The Company leases office and hangar space under operating
leases with variable terms.  The leases generally include renewal
options.  Total rental expense for the years 1994, 1995 and 1996
amounted to $271, $231 and $186, respectively.

     Future minimum rental commitments under noncancelable leases
with a remaining term in excess of one year as of December 31, 1996
are as follows:

                         1997            $ 60

     In April 1997, the Company will move its corporate headquarters. 
The new lease term for the corporate office is 60 months at $21 per
month.  The Company has two, three-year renewal options. 

16.  COMMITMENTS AND CONTINGENCIES

     In January and February 1994, two putative class action lawsuits
were filed, purportedly on behalf of the shareholders of Rally's in
the United States District Court for the Western District of
Kentucky, against Rally's, GIANT, Burt Sugarman, certain Rally's
present and former officers and directors and its auditors.  The
complaints allege defendants violated the Securities Exchange Act of
1934, as amended, among other claims, by issuing inaccurate public
statements about Rally's in order to arbitrarily inflate the price of
Rally's common stock, and seek unspecified damages, including
punitive damages.  On April 15, 1994, Rally's filed a motion to
dismiss and a motion to strike.  On April 5, 1995, the Court struck
certain provisions of the complaint but otherwise denied Rally's
motion to dismiss.  In addition, the Court denied plaintiffs' motion
for class certification; the plaintiffs' renewed this motion, and, on
April 16, 1996, the Court certified the class.  In October 1995, the
plaintiffs filed a motion to disqualify Christensen, Miller, Fink,
Jacobs, Glaser & Shapiro, LLP ("Christensen Miller") as counsel for
defendants based on a purported conflict of interest allegedly
arising from the representation of multiple defendants, as well as
Ms. Glaser's association with Christensen Miller.  That motion was
denied on September 19, 1996.  The action briefly was stayed between
May 30 and June 21, 1996 to facilitate settlement discussions.  One
settlement conference has been conducted; no others are currently
scheduled.  Fact discovery is set to close on March 31, 1997.  No
trial date has been scheduled yet.  Management is unable to predict
the outcome of this matter at the present time or whether or not
certain available insurance coverages will apply.  Rally's and the
Company deny all wrong-doing and intend to defend themselves
vigorously in this matter.

     In February 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's, against GIANT,
Burt Sugarman, David Gotterer, and certain of Rally's other officers
and directors before the Delaware Chancery Courts.  Harbor named
Rally's as a nominal defendant.  Harbor claims that the directors and
officers of both Rally's and GIANT, along with GIANT, breached their
fiduciary duties to the public shareholders of Rally's by causing
Rally's to repurchase certain Rally's Senior Notes at an inflated
price.  Harbor seeks "millions of dollars" in damages, along with
rescission of the repurchase transaction.  In the fall of 1996, all
defendants moved to dismiss this action.  The Chancery Court
conducted a hearing before the end of the year, but has not yet ruled
on the pending notions.  GIANT denies all wrongdoing and intends to
vigorously defend itself in this action.  It is not possible to
predict the outcome of this action at this time.

     In February 1996, Michael Shores on behalf of himself and
purportedly all other stockholders of the Company commenced a
putative class action against the Company, and the Company's
directors, Burt Sugarman, David Gotterer, Terry Christensen and
Robert Wynn.  The complaint, filed before the Los Angeles County
Superior Court, alleges that these directors breached their fiduciary
duties by adopting a stockholder rights plan, by causing GIANT to
sell certain Rally's Senior Notes back to Rally's, by causing GIANT
to repurchase certain amounts of its own Common Stock pursuant to its
stock repurchase program and by agreeing to the Exchange Offer.  The
complaint claims that these actions were undertaken to entrench
management rather than for the benefit of the Company and its
stockholders.  The complaint seeks unspecified damages, injunctive
relief and a recovery of attorneys' fees and costs.  In February
1997, defendants filed a motion to dismiss for failure to make a 
pre-litigation demand on the Board of Directors to investigate the
plaintiffs' claim.  The motion asks the court, in the alternative, to
stay the litigation to permit the Company to address plaintiffs'
claims internally.  Argument on this motion is set for early April
1997.  The Company denies all wrongdoing and intends to vigorously
defend itself in this action.  It is not possible to predict the
outcome of the action at this time.

     In October 1996, KCC filed a complaint, in the Los Angeles
County Superior Court, that states causes of action for fraud, breach
of fiduciary duty, fraudulent concealment, breach of contract, unfair
business practices, permanent and preliminary injunctive relief, and
declaratory relief.  The complaint seeks damages for the breach by
Mr. Joseph Pike and related entities of a July 24, 1996 agreement by
which KCC agreed to contribute $6,000, in return for a 26% equity
interest in the entity producing the abortion inducing drug,
Mifepristone, in the United States and other parts of the world
("NeoGen Agreement").  KCC has also sued the licensors of
Mifepristone, the Population Council, Inc. and Advances in Health
Technology, Inc., on a declaratory relief claim.  The licensors claim
that their prior approval was necessary for the July 24, 1996 NeoGen
Agreement between KCC and Joseph Pike and the other defendants.  On
February 19, 1997, the Pike defendants filed an answer to the
complaint, denying its material allegations and raising affirmative
defenses.  On that date, Joseph Pike and the other defendants filed a
cross-complaint against KCC, GIANT, Burt Sugarman, Terry Christensen
and David Malcolm alleging causes of action for fraud, breach of
contract, intentional interference with prospective economic
advantage, negligent interference with prospective economic advantage
and unfair business practices.  No discovery has yet been conducted. 
A status conference in this matter is set for July 3, 1997.  No trial
date has been set.

     In November 1996, Joseph Pike filed a complaint for defamation
against GIANT, KCC, Burt Sugarman, Terry Christensen, David Malcolm
and Does 1 through 50, in the San Diego County Superior Court.  The
complaint seeks an unspecified amount of general, special and
exemplary damages.  The court has tentatively denied KCC's motion to
dismiss the complaint on the grounds that it is a compulsory
counterclaim to the Los Angeles action, and the other defendants'
motion to transfer the matter to Los Angeles Superior Court.  A
hearing date for these motions is being obtained.  All defendants
(except KCC) have answered the complaint, denying its material
allegations and raising several affirmative defenses.  KCC and the
other defendants have also filed a motion to stay certain and/or to
reconsider ruling on motion to strike the complaint.  Both motions
are scheduled to be ruled upon on April 4, 1997. KCC denies all
wrongdoing and intends to vigorously defend itself in this action. 
It is not possible to predict the outcome of the action at this time.

     Since management does not believe that the previously mentioned
lawsuits contain meritorious claims, management believes that the
ultimate resolution of the lawsuits will not materially and adversely
affect the Company's financial position or results of operations.

     The Company has an employment contract with the Chairman of the
Board, President and Chief Executive Officer of the Company that
expires on December 31, 2000.  The contract calls for a annual base
salary of $1,000 and an annual bonus determined, year to year, by the
compensation committee of the Board of Directors. 

<PAGE>

               Report of Independent Public Accountants

To the Board of Directors of
GIANT GROUP, LTD.:

We have audited the accompanying consolidated balance sheets of GIANT
GROUP, LTD. (a Delaware corporation) and subsidiaries as of December
31, 1996 and December 31, 1995, and the related consolidated
statement of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1996.  These
consolidated financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and perform
the audits 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of GIANT GROUP, LTD. and subsidiaries as of December 31,
1996 and December 31, 1995, and the results of its operations and its
cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.


                                             ARTHUR ANDERSEN LLP



Los Angeles, California
March 25, 1997


<PAGE>
               Report of Independent Public Accountants

To the Board of Directors of
GIANT GROUP, LTD.:

We have audited the accompanying consolidated statements of
operations, stockholders' equity and cash flows of GIANT GROUP, LTD.
and subsidiaries for the year ended December 31, 1994.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audit.  We did not audit the
financial statements of Rally's Hamburgers, Inc. for the year ended
December 31, 1994, and the investment in which is accounted for by
the equity method.  The Company's equity in Rally's net assets of
$25,497,000 at December 31, 1994, and equity of ($8,463,000) in the
net loss of Rally's for the year ended December 31, 1994 are included
in the accompanying financial statements.  Those financial statements
of Rally's were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it
relates to the aforementioned amounts included for Rally's, is based
upon the report of other auditors.

We conducted our audit 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 audit and the report of
the other auditors provide a reasonable basis for our opinion.

In our opinion, based upon our audit and the report of other
auditors, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
GIANT GROUP, LTD. and subsidiaries as of December 31, 1994, and the
consolidated results of their operations and their cash flows for the
year ended December 31, 1994 in conformity with generally accepted
accounting principles.




COOPERS & LYBRAND L.L.P.



Philadelphia, Pennsylvania
March 10, 1995


<PAGE>
<TABLE>
<CAPTION>
                                       GIANT GROUP, LTD.
                                    QUARTERLY FINANCIAL DATA
                        (Dollars in thousands, except per share amounts)
                                          (Unaudited)

1996                                               Quarter Ended
                                  --------------------------------------------------------
                                  March 31        June 30      September 30    December 31
                                  ----------     ----------      ----------      ---------
<S>                               <C>            <C>             <C>             <C>

Income                            $ 1,452        $ 2,612         $ 2,815         $ 1,139 

Costs and expenses                  1,042          1,155           1,313           1,088

Proxy contest and related legal        -             736              -               16

Exchange Offer and related expenses   388            130              -               -

Gain on sale of investment in
   affiliate                           -           3,197              -            2,980

Equity in income (loss) of 
   affiliate                          397           (168)             88              50

Expense (benefit) for income taxes     -          (8,563)             51          (1,137)

Net income (loss)                     419         12,183           1,539           3,771

Earnings (loss) per common share
   and common equivalent share       0.08           2.33            0.32            0.77


1995                                               Quarter Ended
                                  --------------------------------------------------------
                                  March 31        June 30      September 30    December 31
                                  ----------     ----------      ----------      ---------

Income                            $ 1,110        $   915         $   859         $ 1,212

Costs and expenses                  1,053          1,165           1,001           1,421

Equity in income (loss) of
   affiliate                       (1,671)          (611)         (8,207)        (11,585)

Net loss                           (1,614)          (861)         (8,349)        (11,508)

Loss per common share and
   common equivalent share          (0.31)         (0.17)          (1.64)          (2.28)

</TABLE>

<PAGE>
<page-42>

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

          None.
                               PART III

ITEM 10, 11, 12 and 13.  

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by these items, other than information
set forth in this Form 10-K under Item I, "Executive officers of
registrant", is omitted because the Company is filing a definitive
proxy statement pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report which
includes the required information.  The required information
contained in the Company's proxy statement is incorporated herein by
reference.



                                PART IV

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

(a)  Documents Filed as Part of this Report:

     The following financial statements and schedules of Rally's are
     attached:
     
     Management's Discussion and Analysis of Financial Condition and
     Results of Operations 
     
     Consolidated Balance Sheets as of December 29, 1996 and December
     31, 1995
      
     Consolidated Statements of Operations for each of the three
     fiscal years in the period ended December 29, 1996
     
     Consolidated Statements of Stockholders' Equity for each of the
     three fiscal years in the period ended December 29, 1996
     
     Consolidated Statements of Cash Flows for each of the three
     fiscal years in the period ended December 29, 1996
      
     Notes to Consolidated Financial Statements
     
     Report of Independent Public Accountants
     
     Schedule II - Valuation and Qualifying Accounts, for each of the
     three fiscal years in the period ended December 29, 1996
     
     (2)  Exhibits
     
      No.           Description of Exhibit
     -----     -------------------------------
     
     3.1.1     Restated Certificate of Incorporation of the Company,
                    as amended through May 21, 1987 (filed as Exhibit 3.1
                    to the Company's Quarterly Report on Form 10-Q for the
                    quarter ended June 30, 1987, and incorporated herein
                    by reference).
     
     3.1.2     Certificate of Amendment to Restated Certificate of
                    Incorporation of the Company, dated June 1, 1990
                    (filed as Exhibit 3.1 to the Company's Quarterly
                    Report on Form 10-Q for the quarter ended June 30,
                    1990, and incorporated herein by reference).
     
     3.1.3     Certificate of Amendment to Restated Certificate of
                    Incorporation of  Company, dated November 9, 1992
                    (filed as Exhibit 1 to the Company's Current Report on
                    Form 8-K, dated November 10, 1992, and incorporated
                    herein by reference).
     
     3.1.4     Certificate of Amendment to Restated Certificate of
                    Incorporation, dated May 9, 1994 (filed as Exhibit
                    3.1.4 to the Company's Annual Report on Form 10-K,
                    dated March 28, 1995, and incorporated herein by
                    reference).
     
     3.1.5     Certificate of Designation of Series A Junior
                    Participating Preferred Stock, dated January 12, 1996
                    (filed as Exhibit 3.1.5 to the Company's Annual Report
                    on Form 10-K, dated March 29, 1996, and incorporated
                    herein by reference).
     
     3.1.6     Certificate of Amendment to Restated Certificate of
                    Incorporation to Authorize Non-Voting Common Stock,
                    dated July 20, 1996 (Proposal No. 4 in the Notice of
                    Annual Meeting of Stockholders held on July 12, 1996,
                    filed with the SEC on June 7, 1996 and incorporated
                    herein by reference).
     
     3.2       By-laws of the Company, as amended (filed as Exhibit 1
                    to the Company's Current Report on Form 8-K, dated
                    January 14, 1996, and incorporated herein by
                    reference).
     
     4.1       Rights Agreement of the Company, dated January 4, 1996
                    (filed as Exhibit 1 to the Company's Form 8-K, dated
                    January 4, 1996, and incorporated herein by
                    reference.)
     
     10.1      1985 Non-Qualified Stock Option Plan, as amended
                    (filed as Exhibit 10.1.2 to the Company's Annual
                    Report on Form 10-K, dated March 28, 1995, and
                    incorporated herein by reference).
     
     10.4      Tax Sharing and Indemnification Agreement, dated as of
                    September 27, 1994 between the Company and Giant
                    Cement Holding, Inc. ("GCHI") (filed as Exhibit 1 to
                    the Company's Current Report on Form 8-K, dated
                    October 14, 1994, and incorporated herein by
                    reference).
     
     10.5      Indemnification and Release Agreement, dated as of
                    September 27, 1994, among the Company, KCC , GCHI
                    (filed as Exhibit 2 to the Company's Current Report on
                    Form 8-K, dated October 6, 1994 and incorporated
                    herein by reference).
     
     10.6      Note purchase agreement ($16 million face value bonds)
                    between GIANT (seller) and Rally's (buyer), dated
                    January 29, 1996 (filed as Exhibit 10.7 to the
                    Company's Annual Report on Form 10-K, dated March 28,
                    1996, and incorporated herein by reference).
     
     10.7      Note purchase agreement ($6 million face value bonds)
                    between GIANT (seller) and Rally's (buyer), dated
                    January 29, 1996 (filed as Exhibit 10.8 to the
                    Company's Annual Report on Form 10-K, dated March 28,
                    1996, and incorporated herein by reference).
     
     10.8      Short-term promissory note ($4.1 million) between
                    GIANT (payee) and Rally's (maker), dated January 29,
                    1996 (filed as Exhibit 10.9 to the Company's Annual
                    Report on Form 10-K, dated March 28, 1996, and
                    incorporated herein by reference).
     
     10.9      Promissory note for advances of up to $2 million
                    between GIANT (payee) and Rally's (maker), dated
                    February 1, 1996 (filed as Exhibit 10.10 to the
                    Company's Annual Report on Form 10-K, dated March 28,
                    1996, and incorporated herein by reference).
     
     10.10     Letter of Credit Reimbursement Agreement between GIANT
                    and Rally's, dated February 1, 1996. (filed as Exhibit
                    10.11 to the Company's Annual Report on Form 10-K,
                    dated March 28, 1996, and incorporated herein by
                    reference).
     
     10.11     Letter of Credit Agreement between GIANT and Bank of
                    America National Trust and Savings Association, dated
                    February 23, 1996 (filed as Exhibit 10.12 to the
                    Company's Annual Report on Form 10-K, dated March 28,
                    1996, and incorporated herein by reference).
     
     10.12     Amendment Number 1, dated March 18, 1996, to Letter of
                    Credit Agreement between GIANT and Bank of America
                    National Trust and Savings Association, dated February
                    23, 1996 (filed as Exhibit 10.13 to the Company's
                    Annual Report on Form 10-K, dated March 28, 1996, and
                    incorporated herein by reference).
     
     10.13     GIANT GROUP, LTD. 1996 Employee Stock Option Plan
                    (Exhibit A in the Notice of Annual Meeting of Stock-
                    holders held on July 12, 1996, filed with the SEC on
                    June 7,1996, and incorporated herein by reference).
     
     10.14     GIANT GROUP, LTD. 1996 Stock Option Plan for Non-
               Employee Directors (Exhibit B in the Notice of Annual
                    Meeting of Stockholders held on July 12, 1996, filed
                    with the SEC on June 7, 1996, and incorporated herein
                    by reference).
     
     10.15     Promissory note ($5 million) between GIANT and CBI
                    dated September 27, 1996 (filed as Exhibit 10.1 to the
                    Company's Form 10-Q for the third quarterly period
                    ended September 30, 1996, and incorporated herein by
                    reference).
     
     10.16     Guaranty between GIANT and CKE on $5 million
                    promissory note, dated September 27, 1996 (filed as
                    Exhibit 10.2 to the Company's Form 10-Q for the third
                    quarterly period ended September 30, 1996, and
                    incorporated herein by reference).
     
     10.17*    Employment Agreement dated February 24, 1997, between
                    the Company and Burt Sugarman.
     
     10.18     Amended and Restated Credit Agreement dated as of
                    November 22, 1996 among Checkers, CKE as Agent, and
                    the lenders listed therein (filed as Exhibit 4.1 to
                    Checkers Current Report on Form 8-K dated November 22,
                    1996, and incorporated herein by reference).
     
     10.19     Warrant to Purchase Common Stock of Checkers Drive-In
                    Restaurants, Inc. dated November 22, 1996 (filed as
                    Exhibit 4.3 to Checkers Current Report on Form 8-K
                    dated November 22, 1996, and incorporated herein by
                    reference).
     
     11*       Statement re: Computation of Per Share Earnings.
     
     16        Letter from Coopers & Lybrand L.L.P. to the SEC dated
                    January 29, 1996 (filed as Exhibit 1 to the Company's
                    Current Report on Form 8-K, dated January 25, 1996,
                    and incorporated herein by reference).
     
     21*       List of Subsidiaries.
     
     23.1*     Consent of Arthur Andersen LLP
     
     23.2*     Consent of Arthur Andersen LLP
     
     23.3*     Consent of Coopers & Lybrand L.L.P.
     
     27*       Financial Data Schedules 
     
                    
     * filed herewith
     
     
     (b)       Reports on Form 8-K:
     
               During the quarter ended December 31, 1996, the
     Company filed the following reports on Form 8-K:
     
                    On October 31, 1996, the Company's formation of a
                    new, wholly-owned subsidiary, GIANT MARINE GROUP, LTD.
                    and the purchase of two yachts.
     
     (c)       Exhibits Required by Item 601 of Regulation S-K:
     
               Described in Item 14 (a) (1) of this Annual Report on
                    Form 10-K.
     
     (d)       Separate Financial Statements and Schedules
     
               See Item 14 (a) (2) for financial statements for 50%
                    or less owned persons and schedules included.
     
     
     <PAGE>
     
                            SIGNATURES
     
          Pursuant to the requirements of section 13 or 15(d) of the
     Securities Exchange Act of 1934, the registrant has duly caused
     this report to be signed on its behalf by the undersigned,
     thereunto duly authorized.
     
     
                                   GIANT GROUP, LTD.
                                        Registrant
     
     
     
     Date:  March 25, 1997             By:  /s/Burt Sugarman
                                        ---------------------
                                            Burt Sugarman
                                            Chairman 
     
          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.
     
     
     Date:  March 25, 1997             By:  /s/ Burt Sugarman
                                            ----------------------
                                            Burt Sugarman
                                            Chairman of the Board and 
                                            Chief Executive Officer
     
     
     Date:  March 25, 1997             By:  /s/Cathy L. Wood
                                            ----------------------
                                            Cathy L. Wood
                                            Vice President, Chief
                                            Financial Officer,
                                            Secretary and Treasurer
                                            (Principal Financial and
                                            Accounting Officer)
     
     
     Date:  March 25, 1997             By:  /s/David Gotterer
                                            -----------------------
                                            David Gotterer
                                            Director
     
     
     Date:  March 25, 1997             By:  /s/Terry Christensen
                                            -------------------------
                                            Terry Christensen
                                            Director
     
                   
     Date:  March 25, 1997             By:  /s/ David Malcolm
                                            ------------------------
                                            David Malcolm
                                            Director
     
     
     
     <PAGE>                      
                    ANNUAL REPORT ON FORM 10-K
                   YEAR ENDED DECEMBER 29, 1996
                          ITEM 14(a)(2)
                FINANCIAL STATEMENTS AND SCHEDULES
                     RALLY'S HAMBURGERS, INC.
     
     
     ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                   CONDITION AND RESULTS OF OPERATIONS
     
          This has been a significant year for the Company on many
     fronts.  In order to more readily understand the Company's
     improved performance, the following table provides a comparative
     view of the Company's underlying operations.
     
                 <PAGE>
<TABLE>
     <CAPTION>
                                                           (In thousands)
                                                         Fiscal Years Ended
                                           ----------------------------------------------
                                            January 1,      December 31,     December 29,
                                               1995             1995             1996
                                           ------------     ------------     ------------
     <S>                                   <C>              <C>               <C>
     Income (loss) from operations before
        restaurant closures and other       $    2,623       $   (5,425)      $    4,110
     Provision for restaurant closures
        and other                              (17,259)         (31,045)             (20)
                                           ------------     ------------     ------------
     Income (loss) from operations             (14,636)         (36,470)           4,090
     
     Total other expense                        (9,619)          (9,910)          (8,057)
                                           ------------     ------------     ------------
     
     Loss before income taxes and
        extraordinary items                    (24,255)         (46,380)          (3,967)
     Provision (benefit) for income
        taxes                                    4,982             (539)             675 
     Extraordinary items, net of tax                -                -             5,280 
                                           ------------     ------------     ------------
     Net income (loss)                      $  (19,273)      $  (46,919)      $    1,988
                                           ============     ============     ============
     
     </TABLE>
          <PAGE>
     The extraordinary gain, net of tax, of approximately $5.3
     million or $.31 per share from the Company's early retirement of
     certain of its outstanding Senior Notes, at amounts below
     carrying value, resulted in the Company reporting net income for
     fiscal 1996.  The transactions involving the Senior Notes were
     opportunities created by the Company's conservation of cash
     during the second half of 1995 and the depressed market price of
     the Senior Notes during the year.  In addition, the transactions
     resulted in a reduction of net interest expense in 1996 of
     approximately $1.3 million and $2.1 million as compared to 1994
     and 1995, respectively.  These transactions are more fully
     described in Note 10 to the accompanying consolidated financial
     statements.
     
          As more fully discussed in Note 13 to the accompanying
     financial statements, the Company's effective tax rate applied
     to its book operating losses is significantly below statutory
     rates, due primarily to concerns as to the ultimate realiza-
     bility of net operating loss carryforwards.  Until circumstances
     otherwise indicate that realization becomes more likely than
     not, no additional benefit will be recognized.
     
          As evidenced in the table above, the provision for
     restaurant closures and other was significantly reduced in 1996
     from the prior year levels.  This reduction is primarily
     attributable to the current year strengthening of the store
     level economics which have improved the Company's ability to
     recover, at a minimum, its store level investment and to prior
     writedowns of underperforming assets, thereby reducing the need
     at this time for additional writedowns or disposals of Company
     assets.  See the section below entitled "Restaurant Closures and
     Other" for a more detailed discussion.
     
          The Company's income from operations before restaurant
     closures and other in fiscal 1996 represented a substantial
     improvement of approximately $9.5 million over the prior year. 
     This improvement  in the Company's financial performance is
     primarily attributable to a turnaround plan, predominately
     formulated in the first half of 1996, which the Company has been
     implementing over the balance of the year.  The Plan focuses on
     four key strategies to stem the prior negative operational
     performance trend: (i) strengthen the balance sheet and reduce
     fixed costs, (ii) improve store level profitability, (iii)
     establish an effective brand positioning, and (iv) pursue
     opportunistic new store development.  The results of each
     strategy of the Plan are more fully discussed below.
     
          Although the Company's debt level is still high, the
     Company has made substantial progress in improving its balance
     sheet and reducing fixed costs.  The debt load was significantly
     reduced through the retirement of approximately $22 million face
     value of the Company's Senior Notes in January 1996 and an
     additional $4.7 million during the fourth quarter.  As a result,
     the Company's annual interest expense related to the Senior
     Notes has been reduced by approximately $2.6 million.  In
     addition, $10.8 million in gross proceeds were generated through
     the Company's Rights Offering completed in September 1996.  The
     proceeds from the Offering have been used to pay off debt of
     $4.5 million approximately and the remainder will be used for
     new store construction, refurbishment of some existing
     restaurants and for other general corporate purposes, including
     possible further debt reduction.  Outstanding warrants from the
     Rights Offering and from a separate issuance of 1,500,000
     additional warrants in December 1996, if exercised, could raise
     an additional $17.4 million in cash proceeds.  The Company also
     made progress in disposing of surplus assets, as assets held for
     sale declined by over $4 million from the end of 1995.  Lastly,
     the Company reduced its general and administrative costs by over
     $3.5 million during the year.
     
          The Company has also made progress in the second key
     strategy of its turnaround plan, as store-level profitability
     has improved.  Much of this improvement resulted from the
     Company's cost reduction actions related to food, paper and
     labor which were implemented in the beginning of the second
     quarter of 1996 and are further discussed in "Results of
     Operations."  The primary impact of these changes was realized
     during the third and fourth quarters and was reflected in the
     Company's store profit margins.  Improvement in store level
     profitability also resulted from improvements in the Company's
     cost structure, reflecting the elimination of heavy discounting
     that drove traffic increases but did not materially improve the
     Company's profitability.
     
          The Company's third key strategy in its turnaround plan
     will be the primary focus going into 1997.  Although the Company
     generated net income from operations, same store sales continued
     to decline since 1995.  To combat this negative trend in sales,
     management believes an effective brand positioning must be
     established in order to grow same store sales.  The new brand
     positioning, referred to as "Bigger, Better Burgers," was
     developed during the fourth quarter of 1996 with the assistance
     of the Company's new advertising agency, Mendelsohn/Zien.  The
     new positioning is based on an improved burger product line
     including two new premium burgers; new, more impactful menu
     boards; and new advertising.  The new advertising mirrors the
     successful campaign created by Mendelsohn/Zien for the Carl's
     Jr. chain.  The new positioning was rolled out to three of the
     Company's markets in December 1996 and to the remaining Company
     markets by late February 1997.  The Company's franchisees have
     also begun conversion to the new brand positioning and, in
     general, are very supportive.  Although preliminary sales
     results have been encouraging, management does not expect to see
     the full impact of this new strategy prior to the second quarter
     of 1997.  Management believes that new brand positioning will
     result in a gradual increase in sales over time.
     
          The final strategy in the Company's turnaround plan is to
     increase focus on new store development.  Faced with declining
     same store sales and profitability over the three years prior to
     1996, the Company had concluded at various times that a
     constriction of operations through store closures was necessary. 
     Given the progress against its plan, management believes that
     the Company can once again start focusing on growing sales
     through new store development.  In 1996, the Company opened 6
     stores and franchisees opened 15 stores, for a total of 21 new
     stores.  For 1997, management expects to open 15 Company stores
     and 20 franchised stores.  In addition, as a result of improved
     store level economics and in an effort to improve future cash
     flows, management has decided to reopen three stores previously
     closed and to continue to operate one store that had been
     designated for closure.  These decisions were made possible by
     the improvements in controllable cost performance in the second
     half of the year.
     
          Further discussion of the factors affecting results of
     operations is included below.
     
     PROPOSED TRANSACTIONS
     
          On March 25, 1997, the Company agreed in principle to a
     merger transaction pursuant to which the Company would become a
     wholly-owned subsidiary of Checkers Drive-In Restaurants, Inc.,
     a Delaware corporation ("Checkers").  Checkers, together with
     its franchisees, operates approximately 478 double drive-thru
     hamburger restaurants primarily located in the Southeastern
     United States.  Under the terms of the letter of intent executed
     by the Company and Checkers, each share of the Company's Common
     Stock will be converted into three shares of Checkers' common
     stock upon consummation of the merger.  The transaction is
     subject to negotiation of definitive agreements, receipt of
     fairness opinions by each party, receipt of stockholder and
     other required approvals and other customary conditions.
     
     RESTAURANT CLOSURES AND OTHER
     
          Certain charges in fiscals 1994, 1995 and 1996 have been
     aggregated and segregated into the caption "Provision for
     Restaurant Closures and Other" in the accompanying Statements of
     Operations.  These items represent estimates of the impact of
     management decisions which have been made at various points in
     time in response to the Company's sales and profit performance
     and the then-current revenue building and profit enhancing
     strategies and are discussed in further detail below.
     
          The Company entered 1993 with plans to rapidly develop and
     open over 100 new Company restaurants.  Many of these units were
     targeted for new or underdeveloped markets.  Under the Company's
     1993 expansion strategy, the Company believed that rapid
     penetration of new or underdeveloped markets would result in the
     same favorable operating leverage and marketing efficiencies
     that it had experienced in its more developed markets.
     
          In late 1993, the Company decided to reassess the pace of
     its growth strategy, as it became apparent that many of its new
     restaurants, primarily those in certain of the new markets, were
     not performing at expected levels, despite allocation of
     incremental advertising funds into those markets.  This alloca-
     tion of advertising funds, the Company now believes, was
     unsuccessful in driving incremental sales in those certain
     markets and, moreover, reduced the Company's ability to maintain
     overall share of voice in its existing markets.  The impact of
     the poor performance of those certain markets, therefore,
     decreased overall store level profitability while unfavorably
     impacting general and administrative cost ratios.
     
          As a result of these, and other factors, the Company
     decided in late 1993, to (i) significantly slow down its
     development of new restaurants and ultimately to close certain
     restaurants, (ii) exit certain markets and (iii) not to enter
     other markets.  The Company also began developing plans to
     reduce restaurant operating expenses, general and administrative
     costs and costs associated with the development of new
     restaurants.  The Company believed these strategies would help
     it maintain its everyday low price strategy for its products in
     the future and provide the best opportunity for improved
     profitability.
     
          During 1994, the Company implemented strategies designed to
     increase sales and profits at restaurant level.  These
     strategies included, among others, discounting its products for
     certain periods of time in certain markets to respond to
     increased competition and the introduction of certain limited
     time only products and premium quality sandwiches which the
     Company believed would increase guest frequency and ticket
     averages.  The Company's advertising campaign was also reviewed
     during 1994 resulting in the replacement in late 1994 of the
     Company's advertising agency.  In July 1994, the Board of
     Directors reinstated a senior management team led by longtime
     Company restaurant operators to increase focus on improved
     operations.  Despite these strategies, sales and profits of
     Company-owned restaurants, as a whole, did not adequately
     respond.
     
          Additionally, throughout 1994, the Company continued to
     monitor its growth strategy in relation to operating performance
     and available financial and management resources, and periodi-
     cally made decisions to further reduce its planned new
     restaurant openings.  Due to the individual decisions made at
     various times during the year, provisions of $9.3 million were
     made in the accompanying financial statements for the write-off
     of assets related to the previously incurred costs on construc-
     tion projects to be abandoned, for the expected occupancy-
     related costs until disposal of sites which will not be
     developed, and for reduction to net realizable values of assets
     which, as a result of such decisions, were then considered to be
     surplus or impaired.  These charges are discussed in more detail
     below.
     
          In November 1994, the Board of Directors retained outside
     professional consultants to assist the Board and management in a
     critical evaluation of the Company's business.  The culmination
     of this work was a plan, which was adopted by management,
     designed to improve earnings and cash flow .  Part of the plan
     called for significant curtailment of new Company-owned
     restaurant development in 1995 and concentration of the
     Company's management and resources in certain of its existing
     Company markets.  The plan also called for improving cash flows
     through (i) building revenues through premium sandwich offerings
     and limited time offers and (ii) selling all non-productive
     assets.  The Company's management, therefore, began efforts to
     franchise or selectively otherwise divest of approximately 60
     Company-owned stores.  This strategy was expected to allow the
     Company to concentrate on regaining sales, profit and cash flow
     momentum in its other markets through stronger focus on a
     smaller number of its most profitable markets.  The Company
     believed that franchisees would be better able to concentrate on
     the units that had not been top performers and achieve near term
     improvement in the performance of those units.  Efforts to
     franchise or divest of these stores were expected to encompass a
     combination of strategies such as sale, joint venture, leasing
     arrangements and external management contracts.  As a result of
     this plan, the Company recorded a charge of $8.0 million in
     1994, representing an estimate of the difference between the
     estimated net realizable value, given the then most likely
     divestiture/disposal plan, and the net book value of these
     restaurants and markets.  The charge included approximately
     $3.2 million as a reserve against identifiable goodwill,
     territory rights and other intangible assets.  The remaining
     $4.8 million was recorded as a reserve against property and
     equipment.
     
          Early in 1995, six of the 60 units, five of which were in
     one market, were closed and sublet.  During the third quarter,
     1995, management concluded that it was unlikely that much of the
     1994 plan of disposal described above would be executable.  For
     this reason, the Company decided to close up to 16 of the
     remaining restaurants, resulting in an additional charge in the
     third quarter, 1995 of approximately $400,000 to reflect
     additional writedown of the property and equipment to currently
     estimated net realizable values and $2.3 million to record
     reserves for expected future occupancy related costs.  Eight of
     these restaurants were closed as of December 31, 1995.  Six
     additional restaurants were closed in 1996.  The Company decided
     in 1996 to continue to operate 2 of these 16 restaurants until
     such time that the leases have expired or the properties have
     been sublet.  The Company decided to continue to operate the
     remaining 38 stores previously included in the original 60
     restaurants.  With the restaurant closures discussed above and
     without the burden of impending closure associated with the
     prior plan regarding these markets, management believes that the
     markets represent acceptable growth opportunities for future
     development.
     
          Management also decided to close nine non-profitable
     restaurants in certain of its core markets resulting in charges
     in the third quarter 1995 of approximately $1.9 million related
     to the writedown of assets to their net realizable values and
     $1.9 million to record expected future occupancy related costs. 
     Seven of these restaurants were closed as of December 31, 1995.
     The Company decided in 1996 to continue to operate two of these
     restaurants, one of which is being operated by CKE, as part of a
     management agreement with the Company.
     
          During the third quarter 1995, charges were recorded of
     approximately $3.3 million to dispose of the assets located on
     eight sites which had been operated as Company units and then
     leased to a former franchisee.  The Company decided not to
     refranchise these units due to failure to identify a suitable
     franchise candidate which management believed had adequate and
     evident financial resources to successfully open the Houston
     market.  This charge consisted of a writedown of approximately
     $2.7 million of the assets to their estimated net realizable
     values and reserves of approximately $600,000 for expected
     future occupancy related costs. 
     
          In 1995, 18 additional modular buildings became excess, as
     expected Company development continued to be reduced and
     decisions were made regarding other restaurant closures.  At
     December 31, 1995, the Company had available 54 substantially
     completed modular restaurant buildings, which were not expected
     to be assigned to future Company development.  In order to
     recognize the impact of the additional excess buildings and to
     more competitively price all of the modular buildings, the
     Company recorded charges of approximately $1.6 million in the
     third quarter, 1995 and $458,000 in the fourth quarter, 1995. 
     The charges of $2.3 million related to third quarter 1995
     closure decisions, described above, also included approximately
     $1.5 million related to an additional write-down on modular
     buildings which were previously utilized at those locations. 
     During 1996, the Company sold 20 buildings, resulting in 34
     buildings available for sale at December 29, 1996 which are
     being marketed to franchisees and others.  Current expectations
     of net realizable value are based on the Company's experience
     related to marketing the buildings.
     
          The Company recorded approximately $1.5 million in charges
     in the third quarter, 1995 related to further writedowns on
     excess land idled by slowdowns in the Company's expansion plans. 
     Such land had been scheduled to be auctioned during the fourth
     quarter, 1995.  These auctions occurred in the fourth quarter
     and closed in the first quarter, 1996.  The absolute auctions
     generated lower than anticipated sales prices, and additional
     losses of $1.1 million were recorded in the fourth quarter,
     1995.  As further discussed in "Liquidity and Capital
     Resources," these sales provided cash flow of approximately $2.4
     million, primarily in the first quarter, 1996.
     
          During the fourth quarter, 1995 the sublessee of five of
     the six sites closed under the November 1994 plan, defaulted on
     the terms of the sublease agreements, resulting in charges of
     $483,000 related to occupancy and $430,000 to reduce the
     carrying value of the tangible assets to management's estimate
     of fair value less cost to sell.
     
          Due to concerns for obsolescence and abnormal wear and tear
     associated with transport and storage of surplus equipment,
     management recorded an $820,000 writedown in December, 1995 of
     the equipment's carrying value.  Additionally, fourth quarter,
     1995 charges totaling approximately $1.1 million were recorded
     to reflect changes in the estimated net realizable values of the
     Company's remaining surplus assets and properties.
     
          The $9.3 million of charges recorded in 1994, discussed
     above, included the following.
     
          The Company recorded charges of $2.6 million related to
     abandoned projects, $300,000 related to the write-off of certain
     identifiable intangibles which were not expected to be recover-
     able and $450,000 to increase reserves previously provided on
     surplus assets due to the continued slowdown in the development
     of new restaurants.  The costs related to abandoned projects
     represent writeoffs of recorded amounts not expected to be
     recovered ($1.6 million) and estimated occupancy costs until
     disposal ($1.0 million).
     
          Management decided to exit one of its non-core, under
     performing markets and, at that time, recorded a charge of
     approximately $1.1 million primarily to cover writedown of
     assets ($800,000) and occupancy exposure ($300,000).
     
          Additionally, the Company wrote off intangible assets
     associated with an abandoned project site ($131,000), provided
     for the estimated occupancy exposure on abandoned project sites
     ($430,000) and provided for asset write-offs on projects to be
     abandoned ($443,000).
     
          Based upon the Company's estimates of the number of excess
     modular buildings and the then current estimate as to recover-
     ability, the Company recorded a charge of $1.2 million in 1994. 
     Included in the $2.6 million of charges noted above is $300,000
     related to an additional writedown on modular buildings which
     had been assigned to projects subsequently abandoned after the
     end of the third quarter.
     
          During 1994, management determined that portions of the
     equipment, training, and installation expenditures related to
     its point of sale and back office restaurant systems' rapid
     installation resulted in higher costs or overbillings and did
     not ultimately add to the value of the Company's systems. 
     Approximately $1.3 million of these costs were deemed to have no
     probable future economic benefit and were written off.  In
     addition, due to the further curtailment of new store develop-
     ment, the writedown of the Company's point of sale and back
     office software recorded in 1993 was increased (approximately
     $300,000).  Further, management also decided to remove from
     operation and not pursue further deployment of its high tech
     video ordering technology and, therefore, recorded a charge of
     $600,000 related to the hardware and software costs of this
     endeavor.
     
          The Company also recorded charges in 1994 of approximately
     $400,000 related to the recorded values of projects abandoned in
     1994.
     
          The $12.6 million of charges recorded in 1993 included the
     following.
     
          The Company recorded charges of $11.9 million related to a
     major business restructuring program and other restaurant
     closings designed to improve the Company's profitability.  As a
     result of these actions, the Company closed 20 restaurants in 8
     markets (including certain markets which the Company has exited
     entirely), and abandoned its plans to build an additional 46
     restaurants then under development.
     
          The restructuring program resulted in a charge against
     operations of approximately $9.6 million.  Approximately $8
     million of the charge related to asset writedowns, including
     writedowns to recoverable amounts of certain other assets whose
     recovery was dependent on previous development plans and the
     balance represented future occupancy-related expenses.  The
     decision to close other restaurants resulted in an additional
     charge against operations during 1993 of approximately $2.3
     million, of which approximately $1.8 million related to
     writedowns of assets, and the balance represented future
     occupancy-related expenses.
     
          In addition to the charges discussed above, the Company
     reached decisions during 1993 to reduce the carrying value of
     certain underperforming assets in non-core markets by approxi-
     mately $700,000.
     
          As described above, a substantial portion of the charges in
     fiscals 1993, 1994 and 1995 related to asset writedowns.  The
     remainder of the charges related substantially to the establish-
     ment of reserves for expected future occupancy-related costs. 
     During 1996, the Company revised its estimate of net realizable
     value for five of its poor performing restaurants in Montgomery,
     Alabama based upon an existing agreement to sell the restaurants
     to a non-affiliated restaurant operator.  Such change in
     estimate resulted in a reduction of approximately $232,000 in
     related reserves.  In addition, during the fourth quarter of
     1996, management decided to reopen three units previously closed
     and to continue to operate a fourth unit that had been
     designated for closure, resulting in a reduction in the reserves
     for future occupancy-related costs of approximately $659,000. 
     In addition, approximately $87,000 in other charges for net
     changes in estimated asset recovery were recorded during 1996. 
     Such adjustments to the reserves are included in the caption
     "Provision for restaurant closures and other" on the accompany-
     ing Statement of Operations.  Total minimum lease commitments
     associated with surplus properties are $11.2 million.  As of
     December 29, 1996, approximately $5.8 million remained in the
     reserve for expected future occupancy-related costs, which is
     net of amounts representing interest, discounted at 12%, as well
     as estimated future sublease recoveries.  Assets held for sale
     of $2.0 million at December 29, 1996 resulting from the actions
     noted above consist mainly of surplus land, buildings and
     equipment.  The expected disposal dates for these assets are
     over the next 3 to 24 months.  The carrying amounts of such
     assets to be disposed of are shown separately on the accompany-
     ing consolidated balance sheets.
     
          In addition to the charges described above, 1995 results
     include approximately $13.7 million of certain charges recorded
     in the fourth quarter related to the adoption of Statement of
     Financial Accounting Standards No. 121 "Accounting for the
     Impairment of Long-Lived Assets and for Long-Lived Assets to Be
     Disposed Of" (SFAS 121).  This charge represents impairment of
     the carrying value of the assets of 37 stores based on manage-
     ment's future cash flow estimates given then current base lines
     and reasonable trend assumptions. Additional impairment reserves
     of approximately $824,000 were recorded during 1996, primarily
     related to three additional restaurants determined to be
     impaired.  See Note 16 to the accompanying consolidated
     financial statements.
     
     GENERAL
     
          Rally's revenues are derived primarily from Company-
     owned restaurant sales and royalty fees from franchisees.  The
     Company also receives revenues from the award of exclusive
     rights to develop Rally's restaurants in certain geographic
     areas (area development fees) and the award of licenses to use
     the Rally's brand and confidential operating system (franchise
     fees).  Systemwide sales consist of aggregate revenues of
     Company-owned and franchised restaurants (including CKE-
     operated).  Company revenue also includes payments resulting
     from an operating agreement with CKE, referred to as Owner fee
     income in the accompanying consolidated financial statements. 
     Restaurant cost of sales, restaurant operating expenses,
     depreciation and amortization, and advertising and promotion
     expenses relate directly to Company-owned restaurants.  General
     and administrative expenses relate to both Company-owned
     restaurants and franchise operations.  Owner expenses relate to
     CKE-operated restaurants and consist primarily of depreciation
     and amortization.
     
     
     <TABLE>
     
     The table below sets forth the percentage relationship to total revenues, unless
     otherwise indicated, of certain items included in the Company's consolidated statements
     of income and operating data for the periods indicated:
     
     <CAPTION>
                                                        Fiscal Years Ended
                             -------------------------------------------------------------
                              Jan. 3,      Jan. 2,      Jan. 1,      Dec. 31,     Dec. 29,
                                1993         1994         1995         1995         1996   
                             ---------    ---------    ---------    ---------    ---------
     <S>                     <C>          <C>          <C>          <C>           <C> 
     Revenues:
     Restaurant sales           93.6%        95.1%        95.8%        96.2%        96.1%  
     Franchise revenue
       and fees                  6.4          4.9          4.2          3.8          3.6
     Owner fee income              -            -            -            -           .3
                             ---------    ---------    ---------    ---------    ---------
                               100.0%       100.0%       100.0%       100.0%       100.0%
     
     Costs and expenses:
     Restaurant cost of 
        sales(1)                34.7%        35.2%        35.0%        35.7%        34.3%
     Restaurant operating
        expenses(1)             38.6         42.9         43.7         46.4         45.5
     General and administra-
        tive expenses            9.4         10.1          9.7         10.0          9.4
     Advertising and promo-
        tion expenses(1)         5.5          7.0          6.1          7.3          5.0
     Depreciation and 
        amortization(1)          4.8          6.1          7.9          7.2          6.3
     Owner expense (2)             -            -            -            -        169.1
     Other charges (credits)       -          7.2          9.3         16.4            -
     
     Income (loss) from
        operations              12.5         (4.0)        (7.9)       (19.3)         2.5
     Total other (expense)       (.7)        (3.7)        (5.1)        (5.3)        (5.0)
                             ---------    ---------    ---------    ---------    ---------
     Net income (loss) 
        before income taxes
        and extraordinary
        items                   11.8         (7.7)       (13.0)       (24.6)        (2.5)
     
     Net income (loss)           7.7%        (5.1)%      (10.3)%      (24.8)%        1.2%
                             =========    =========    =========    =========    =========
     Number of restaurants:
     Restaurants open at the
        beginning of period      333          450          520          542          481
                             ---------    ---------    ---------    ---------    ---------
     Company restaurants 
        opened (closed or
        transferred), net
        during period             81           55           (2)         (11)         (30)
     Franchised restaurants
        opened (closed or
        transferred), net
        during period             36           15           24          (50)          16
                             ---------    ---------    ---------    ---------    ---------
     Total restaurants 
        opened (closed or 
        transferred, net
        during period            117           70           22          (61)         (14)
                             ---------    ---------    ---------    ---------    ---------
     Total restaurants open
        at end of period         450          520          542          481          467
                             =========    =========    =========    =========    =========
     
     (1)   As a percentage of restaurant sales.
     (2)   As a percentage of owner fee income.
     
          /TABLE
<PAGE>
RESULTS OF OPERATIONS
     
     FISCAL YEAR ENDED DECEMBER 29, 1996 COMPARED WITH FISCAL YEAR
     ENDED DECEMBER 31, 1995
     
          Systemwide sales declined 11% for 1996 to approximately
     $316.7 million compared with approximately $355.7 million a year
     ago.  This decrease is attributable to the comparatively lower
     number of units in operation in 1996 and to same store sales
     declines of  7% systemwide.  The decline in same store sales is
     primarily due to the lower customer counts experienced upon the
     elimination of deep discounting programs in the third and fourth
     quarters of 1996 and to the reduced media spending in the fourth
     quarter of 1996. 
     
          Total Company revenues decreased 14% to approximately
     $162.8 million in 1996 compared with approximately $188.9
     million in 1995.  Company-owned restaurant sales decreased 14%
     to approximately $156.5 million due to fewer Company units in
     operation, a 6% decline in same store sales, and a decline of
     approximately $9 million due to the Company's operating
     agreement with CKE, as discussed in "Liquidity and Capital
     Resources."  Year-to-date, the Company opened 6 units, closed 8
     units, and transferred operational responsibility to CKE for 28
     units.  Franchisees, exclusive of CKE, opened 15 units and
     closed 26 units.  Five of the Company closures which were in the
     Montgomery DMA were sold in September, 1996.  
     
          Restaurant cost of sales, as a percentage of sales,
     decreased to 34.3% for 1996 compared with 35.7% for 1995.  This
     decrease is attributable primarily to various cost reduction
     actions taken during the second half of 1996, partially offset
     by higher food and paper costs as a percentage of sales in the
     first six months of 1996.  These cost reduction actions include
     selective changes in some product and packaging specifications
     as well as re-negotiation of purchase terms and selection of
     alternative vendors.  Management intends to continue to consumer
     test and implement such cost saving strategies in its stores,
     where appropriate.  The increase in cost of sales in the first
     half of 1996 resulted primarily from a carryover of deep
     discounting programs in the first quarter of 1996 and to a shift
     in product mix sold, reflecting the impact of a larger percent
     of Big Buford sandwich sales in the first two quarters of 1996
     compared to the same period of 1995.  While this product carries
     a significantly higher dollar profit per unit, it does carry a
     higher food cost percentage than did the products formerly
     comprising its share of the total product mix.  The Company from
     time to time negotiates purchase contracts for certain items
     used in its restaurants in the normal course of business. 
     Although some of these contracts contain minimum purchase
     quantities, such quantities do not exceed expected usage over
     the term of such agreements.  The Company from time to time
     negotiates purchase quantities, such quantities do not exceed
     expected usage over the term of such agreements.
     
          Restaurant operating expenses were 45.5% of sales for 1996
     compared with 46.4% for 1995.  The reduction is primarily due to
     management's cost reduction actions in the labor area and better
     fixed cost coverage in stores operating during the second half
     of the year, partially offset by increased bonus costs
     associated with store management compensation.  This better
     fixed cost coverage is the result of closing poorer performing
     units and of transferring operational responsibility for certain
     higher fixed cost restaurants in Western markets to CKE.  The
     identified and implemented changes in staffing levels and labor
     deployment in certain stores have yielded savings in management
     and crew labor.  Management believes that these cost reduction
     actions should favorably influence ongoing operating expense
     performance; however, their impact may be partially offset by
     future increases in the minimum wage.
     
          General and administrative expenses on a year-to-date basis
     are lower than 1995, on both a dollar and a percentage of sales
     basis.  This decrease is caused primarily by reductions in the
     corporate and field operations staffs, and by lower levels of
     bad debt and other dead project charges, partially offset by
     higher legal fees.
     
          Advertising expenses decreased approximately $5.4 million
     to 5.0% of sales for 1996 compared to 7.3% for 1995 due
     primarily to decreases in levels of radio advertising, outdoor
     advertising, and television advertising.  During the fourth
     quarter, management decided to limit media spending until work
     with the new advertising agency on new creative and brand
     positioning was completed.  Company-wide spending on the new
     advertising campaign did not begin until late February 1997.
     
          Depreciation and amortization on a year-to-date basis
     decreased to approximately $9.8 million as compared to approxi-
     mately $13.0 million for the same period in the prior year. 
     This decrease is primarily due to asset writedowns associated
     with the adoption of SFAS 121 at the beginning of the fourth
     quarter 1995, to a decrease in the number of properties being
     operated by the Company, and to a segregation into Owner expense
     of depreciation and amortization associated with the CKE-
     operated properties.
     
          Owner expenses of approximately $744,000 for 1996 represent
     the Company's segregated ownership cost related to the 28 units
     operated by CKE.  These expenses consist primarily of deprecia-
     tion and amortization associated with the properties.
     
          Interest expense decreased 19.3% to approximately $8.6
     million for 1996 as compared to approximately $10.7 million for
     1995 primarily due to the early extinguishment of debt, as
     previously discussed.  See "Liquidity and Capital Resources" and
     Note 10 to the accompanying consolidated financial statements,
     for further discussion.
     
          Interest income was higher for 1996 as compared to 1995 due
     to increases in the average daily invested amounts.
     
          The Company's decrease in Other is due primarily to the
     current year storage costs related to excess modular buildings.
     
          The Company's net tax provision on a year to date basis is
     approximately $675,000 (obtained by adding the tax provision
     line to the tax expense of approximately $1,350,000 which has
     been netted against the extraordinary gain).  $575,000 of this
     amount is related to state taxes expected to be payable. 
     $100,000 relates to reduction of an IRS receivable for a NOL
     carryback to 1987, 1988, and 1989, further described in Note 13
     to the accompanying consolidated financial statements.  See
     earlier discussion above concerning the extraordinary gain.
     
     FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH FISCAL YEAR
     ENDED JANUARY 1, 1995
     
          Systemwide sales declined 4% for 1995 to approximately
     $355.7 million compared with approximately $370.1 million a year
     ago.  This decrease was the result of store closings and a
     decline of 5% in systemwide same store sales, offset in part by
     the full-year impact of 1994 store openings.
     
          Total revenue increased 1% from approximately $186.3
     million in 1994 to approximately $188.9 million in 1995. 
     Company-owned restaurant sales increased 2% to approximately
     $181.8 million.  This increase was primarily attributable to the
     impact of the acquisition of ten units in Hampton Roads,
     Virginia from a franchisee as discussed in Note 2 to the
     accompanying consolidated financial statements, offset in part
     by a 4% decline in Company-owned same store sales.  The ten
     units in Hampton Roads, Virginia were included in the Company's
     calculation of same store sales for the full year of 1995. 
     Royalty fees decreased 6% in 1995 due to a 6% decline in
     franchise same store sales and the impact of the Hampton Roads,
     Virginia acquisition.
     
          Restaurant cost of sales, as a percentage of sales,
     increased to 35.7% for 1995 compared with 35.0% for 1994.  This
     increase resulted primarily from the dramatic shift of product
     mix sold, reflecting the impact of the introduction of our Big
     Buford sandwich early in 1995.  While this product carries a
     significantly higher dollar profit per unit, it does carry a
     higher food cost percentage than did the products formerly
     comprising its share of the total product mix.  Secondary
     factors include aggressive discounting during the Company's
     tenth anniversary promotion, selective product repricing in the
     fourth quarter and significantly higher paper cost in 1995 due
     to a higher commodity cost and improved product packaging. 
     
          Restaurant operating expenses were 46.4% of sales for 1995
     compared with 43.7% for 1994.  This increase as a percentage of
     sales is primarily attributable to higher labor, occupancy and
     repair and maintenance costs and to the decline in same store
     sales resulting in the Company's inability to adequately
     leverage the non-variable components of lease costs and labor
     costs.  The higher labor costs were also impacted by an
     increased average wage rate, higher levels of management
     staffing, and poor maintenance and execution of the Company's
     store level labor management system.  
     
          General and administrative expenses in 1995, on both a
     dollar and a percentage of sales basis, were higher than in 1994
     primarily due to a charge of approximately $1.5 million related
     to uncertainty of collection of certain receivables, offset
     partly by cost reduction initiatives implemented during 1995.  
     
          Advertising expenses increased in 1995 to approximately
     $13.2 million or 7.3% of sales, as compared with approximately
     $10.9 million or 6.1% of sales in 1994.  This increase is
     primarily attributable to higher levels of advertising expendi-
     tures related to new product introductions, summer sweepstakes
     promotion and the tenth anniversary promotion.  Incremental
     advertising dollars were not effective in driving incremental
     sales dollars at rates previously achieved.
     
          Depreciation and amortization decreased in 1995 to
     approximately $13.0 million as compared to approximately $14.1
     million in 1994.  This decrease is primarily due to a decrease
     in the number of properties in operation in 1995 and asset
     writedowns associated with the adoption of SFAS 121 at the
     beginning of the fourth quarter, 1995.
     
          Interest expense increased in 1995 to approximately $10.7
     million as compared to approximately $9.7 million in 1994
     primarily due to the debt incurred as part of the Hampton Roads,
     Virginia acquisition, discussed above.
     
          Interest income was higher in 1995 than in 1994 due
     primarily to a significant increase in the average daily
     invested amounts.  
     
          The Company recognized other income of approximately
     $200,000 in 1995 as compared with other expense of approximately
     $400,000 in 1994.  The increase was primarily attributable to
     the loss recorded in 1994 of approximately $300,000 related to
     the sale of Beaman (see Note 2 to the consolidated financial
     statements).  The remainder of the increase is attributable to
     the difference in investment gains and losses between years.
     
     LIQUIDITY AND CAPITAL RESOURCES
     
          The Company's cash flow from operating activity was
     approximately $543,000 for 1996 compared with approximately 
     $8.5 million for 1995 and approximately $6.3 million for 1994. 
     The notable decrease in 1996 from 1995 resulted primarily from
     reductions in working capital which more than offset higher net
     income in 1996.  The change in working capital related primarily
     to decreased balances in accounts payable in 1996 due to
     decreased food and paper costs as a percentage of sales and to
     decreased overall sales volumes.  The decreased overall sales
     volumes are attributable to the factors discussed above in the
     year to year comparison.  The decrease in 1995 from 1994 is
     primarily a result of declining net income, somewhat offset by
     higher accrued liabilities associated with advertising, workers
     compensation costs, and other miscellaneous accruals.
     
          Capital expenditures of approximately $2.3 million  for
     1996 were funded primarily through sales of surplus properties
     and existing cash balances.  Approximately $1,286,000 of these
     expenditures were for the construction or conversion of new
     stores,  six of which opened in 1996 and five of which opened
     within the first two months of fiscal 1997.  The Company spent
     approximately $220,000 for the replacement of three existing
     store buildings, constructed in the late eighties, with surplus
     modular buildings.  Such actions were taken to provide increased
     operational flexibility and to reduce maintenance costs in these
     units given the low cash outflow necessary to utilize certain of
     the surplus modular buildings.  Remaining capital expenditures
     were primarily for the purchase and installation of certain
     replacement equipment.
     
          The Company plans to open fifteen units in 1997 and reopen
     three units previously closed (see further discussion above). 
     Full year capital expenditures are expected to be in the range
     of approximately $6 million to $8 million, inclusive of replace-
     ment capital.  This level of new unit development exceeds that
     of 1996 (six units) and 1995 (three units) but is significantly
     less than that of 1994 (36 units).
     
          In January 1996, the Company repurchased, in two trans-
     actions, approximately $22 million face value of its 9 7/8%
     Senior Notes due in the year 2000.  The Notes were purchased
     from GIANT GROUP, LTD. ("GIANT") at a price of $678.75 per
     $1,000 principal amount, representing the market closing price
     on the last business day prior to the repurchase date.  The
     first transaction involved the repurchase of approximately $16
     million face value of the Notes for approximately $11.1 million
     in cash.  The second transaction involved the purchase of
     approximately $6 million face value of the Notes in exchange for
     a short-term note of approximately $4.1 million due in three
     installments of principal and interest, bearing interest at
     prime.  The Company paid the final installment together with
     accrued interest on this note on September 27, 1996.  Prior to
     the Senior Notes repurchases, the Company's Board of Directors
     had received an independent opinion from an investment banking
     firm as to the fairness of the transactions.  Additionally, in
     four separate transactions during the fourth quarter 1996, the
     Company repurchased approximately $4.7 million face value of the
     Notes from various other bondholders for approximately $4.5
     million in cash.  As a result of these debt repurchases, the
     annualized ongoing interest payments on the Senior Notes have
     been reduced by approximately $2.6 million per year to
     approximately $5.8 million.
     
          Principal payments of debt and capital leases totaled
     approximately $21.8 million during 1996, inclusive of the
     approximately $11.1 million, the approximately $4.1 million and
     the approximately $4.5 million related to the Senior Notes
     repurchased, as discussed above.  The Company is required to
     make a mandatory sinking fund payment on June 15, 1999
     calculated to retire 33 1/3% in aggregate principal amount of
     the Senior Notes issued with the balance maturing on June 15,
     2000.  The repurchase discussed above reduces such sinking fund
     requirement to approximately $1.6 million from approximately
     $28.3 million.
     
          In February 1996, the Company obtained a one-year credit
     facility from GIANT.  Concurrent with the completion of its
     Rights Offering on September 20, 1996, this credit facility was
     terminated by agreement of the parties.
     
          The Company is actively marketing the assets included in
     the caption "Assets held for sale" in the accompanying consoli-
     dated balance sheet and expects realization in cash over the
     next 3 to 24 months, although actual timing of such cash flows
     cannot be predicted.  The assets contained in this caption are
     recorded at management's current estimate of fair market value
     less costs to sell.  There can be no assurances that these
     values will be realized.  Of the approximate $3.7 million
     generated during 1996 from the sale of land and buildings,
     approximately $1.9 million was generated during the first quart
     of 1996 from the closing of the sales of eleven properties
     auctioned in the fourth quarter 1995. 
     
          During 1996, the Company received funds (approximately
     $90,000) on land contracts which are the subject of an aggregate
     amount of approximately $1.8 million of sale/leaseback
     financing.  The interest rate on such facility is approximately
     12.5%.  The holder of such contracts has been unable to complete
     contractual requirements to fund such transactions.  During the
     first quarter of 1997, the Company has received an additional
     $100,000 in funds on one of these properties.  The Company
     continues to consider alternatives offered by the holder
     including substitution of a different buyer or extension of time
     available to fund the agreements.
     
          On July 1, 1996, the Company entered into a ten-year
     operating agreement with Carl Karcher Enterprises, Inc., a
     subsidiary of CKE Restaurants, Inc. (collectively referred to as
     "CKE").  Pursuant to the agreement, 28 Rally's-owned restaurants
     located in California and Arizona are being operated by CKE. 
     The Company retains ownership in the restaurants  and receives
     from CKE a percentage of gross revenues referred to in the
     financial statements as Owner fee income.  This income is offset
     by the Company's segregated ownership costs related to these
     units, referred to as Owner expenses in the financial statements
     and consists primarily of noncash expenses of depreciation and
     amortization.  The agreement has improved profitability and cash
     flow, generating approximately $340,000 cash flow in the last
     six months of 1996.  
     
          The Company completed its Shareholder Rights Offering on
     September 20, 1996.  The Offering raised over $10.8 million in
     gross proceeds, offset by legal and other issuance costs of
     approximately $437,000.  In addition to the approximate $10.8
     million of gross proceeds provided by the Offering, the Warrants
     issued could provide approximately $10.8 million for the
     Company's future growth.  The proceeds from the Offering have
     been used to pay off debt of $4.5 million approximately and the
     remainder will be used for new store construction, refurbishment
     of some existing restaurants and for other general corporate
     purposes, including possible further debt reduction.
     
          On October 21, 1996, the Company was notified by the
     indenture trustee that the bondholder consent it had been
     soliciting had been approved by the required majority of the
     holders of record of its 9 7/8% Senior Notes due 2000.  The
     consent will allow two of the Company's current stockholders,
     CKE and Fidelity National Financial, Inc. and/or their
     affiliates, to acquire 35% or more of the outstanding shares of
     the Company's common stock without triggering "Change in
     control" provisions requiring the Company to offer to purchase
     the Senior Notes at 101% of their face value.  This gives the
     Company greater flexibility to raise capital in the future, and
     it gives two of its largest stockholders the ability to increase
     their investment in the Company.
     
          On December 20, 1996, the Company issued warrants (the
     "Warrants") to purchase an aggregate of 1,500,000 restricted
     shares of its Common Stock to CKE and Fidelity National
     Financial, Inc.  The Warrants have a three-year term and are not
     exercisable until December 20, 1997.  The exercise price is
     $4.375 per share, the closing price of the Common Stock on
     December 20, 1996.  The underlying shares of Common Stock have
     not been registered with the Securities and Exchange Commission
     and, therefore, are not freely tradable.  Upon exercise, the
     Warrants will provide approximately $6.6 million in additional
     capital to the Company.  See Note 4 to the accompanying
     consolidated financial statements for further discussion.
     
          The Company believes existing cash balances and cash flow
     from operations should be sufficient to fund its current
     operations and obligations.  The ability of the Company to
     satisfy its obligations under the Senior Notes, however,
     continues to be dependent upon, among other factors, the Company
     successfully increasing revenues and profits.
          <PAGE>
<PAGE>
     <TABLE>
     
     Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     
     <CAPTION>
     
                         RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEETS
                       AS OF DECEMBER 31, 1995 AND DECEMBER 29, 1996
                    (In thousands, except shares and per share amounts)
     
                                                           December 31,       December 29,
                                                               1995                1996
                                                           ------------       ------------
     <S>                                                   <C>                <C>
     ASSETS
     Current assets:
        Cash and cash equivalents                          $    8,811          $    2,285
        Restricted cash                                           683               1,649
        Investments                                             4,933               1,958
        Royalties receivable, including $483 and $0 
          from related parties at December 31, 1995  
          and December 29, 1996, respectively, net of  
          a reserve for doubtful accounts of $922 and 
          $1,405 at December 31, 1995 and December 29, 
          1996, respectively                                      818                 437
        Accounts and other receivables, including $23 
          and $565 from related parties at December 31, 
          1995 and December 29, 1996, respectively, net 
          of a reserve for doubtful accounts of $453  
          and $301 at December 31, 1995 and December 29,  
          1996, respectively                                     2,131               1,698
        Inventory, at lower of cost or market                   1,056                 794
        Prepaid expenses and other current assets               1,131                 999
        Assets held for sale                                    2,506                 596
                                                           ------------       ------------
            Total current assets                               22,069              10,416
     
     Assets held for sale                                       3,517               1,426
     Net property and equipment, at historical cost            78,683              69,806
     Notes receivable, including $175 and $127 from 
        related parties at December 31, 1995 and 
        December 29, 1996, respectively, net of a 
        reserve for doubtful accounts of $542 and
        $853 at December 31, 1995 and December 29, 
        1996, respectively                                        789                 773
     Goodwill, less accumulated amortization of  
        $1,704 and $2,243 at December 31, 1995 and 
        December 29, 1996, respectively                        10,921              10,482
     Reacquired franchise and territory rights, less 
        accumulated amortization of $1,202 and $1,984 
        at December 31, 1995 and December 29, 1996, 
        respectively                                           12,261              11,439
     Other intangibles, less accumulated amortization  
        of $2,344 and $2,459 at December 31, 1995 and 
        December 29, 1996, respectively                         5,262               4,769
     Other assets, less accumulated amortization of 
        $1,638 and $1,101 at December 31, 1995 and 
        December 29, 1996, respectively                         3,890               3,147
                                                          ------------        ------------
            Total assets                                   $  137,392          $  112,258
                                                          ============        ============
     
     LIABILITIES AND SHAREHOLDERS' EQUITY
     Current liabilities:
        Accounts payable                                   $    8,773          $    4,884
        Accrued liabilities                                    15,959              13,600
        Current maturities of long-term debt  
          and obligations under capital leases                 17,544               1,484
                                                          ------------        ------------
            Total current liabilities                          42,276              19,968
     
     Senior notes, less current maturities, net 
        of discount of $768 and $429 at December 
        31, 1995 and December 29, 1996, respectively           69,034              57,897
     Long-term debt, less current maturities                    5,749               4,775
     Obligations under capital leases, less current 
        maturities                                              5,631               5,408
     Other liabilities                                          8,030               4,845
                                                          ------------        ------------
            Total liabilities                                 130,720              92,893
                                                          ============        ============
     
     Commitments and contingencies (Note 12) 
     
     Shareholders' equity:
     Preferred stock, $.10 par value, 5,000,000 shares 
        authorized, no shares issued                               -                   -
     Common stock, $.10 par value, 50,000,000 shares 
        authorized; 15,927,000 and 20,788,000 shares 
        issued at December 31, 1995 and December 29, 
        1996, respectively                                      1,593               2,079
     Additional paid-in capital                                60,804              71,023
     Less: Treasury shares, 273,000 shares at 
        December 31, 1995 and December 29, 1996                (2,108)             (2,108)
     Retained deficit                                         (53,617)            (51,629)
                                                          ------------        ------------
            Total shareholders' equity                          6,672              19,365
                                                          ------------        ------------
            Total liabilities and shareholders' equity     $  137,392          $  112,258
                                                          ============        ============
     
     The accompanying notes to consolidated financial statements are an integral part
                          of these consolidated financial sheets.
     </TABLE>
          
     
     
     <PAGE>
     <TABLE>
     <CAPTION>
                         RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF OPERATIONS
       FOR THE YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
                         (In thousands, except per share amounts)
     
                                                          Fiscal Years Ended
                                                ------------------------------------------
                                                January 1,    December 31,   December 29,
                                                    1995          1995            1996
                                                ------------   ------------   ------------
     <S>                                        <C>            <C>            <C>
     REVENUES:
        Restaurant sales                        $  178,476     $  181,778     $  156,445
        Franchise revenues and fees                  7,842          7,081          5,867
        Owner fee income                                -              -             440
                                                ------------   ------------   ------------
          Total revenues                           186,318        188,859        162,752
     
     COSTS AND EXPENSES:
        Restaurant costs of sales                   62,518         64,813         53,712
        Restaurant operating expenses exclusive 
          of depreciation and amortization and 
          advertising and promotion expenses        78,072         84,305         71,155
        General and administrative expenses         18,068         18,972         15,426
        Advertising and promotion expenses          10,898         13,188          7,767
        Depreciation and amortization               14,139         13,006          9,838
        Owner expense                                   -              -             744
        Provision for restaurant closures  
          and other                                 17,259         31,045             20
                                                ------------   ------------   ------------
            Total costs and expenses               200,954        225,329        158,662
                                                ------------   ------------   ------------
     Income (loss) from operations                 (14,636)       (36,470)         4,090
                                                ------------   ------------   ------------
     
     OTHER INCOME (EXPENSE):
        Interest expense                            (9,742)       (10,682)        (8,622)
        Interest income                                477            538            614
        Other                                         (354)           234            (49)
                                                ------------   ------------   ------------
            Total other (expense)                   (9,619)        (9,910)        (8,057)
                                                ------------   ------------   ------------
     Loss before income taxes and  
        extraordinary items                        (24,255)       (46,380)        (3,967)
     
     PROVISION (BENEFIT) FOR INCOME TAXES           (4,982)           539           (675)
                                                ------------   ------------   ------------
     Loss before extraordinary items            $  (19,273)    $  (46,919)    $   (3,292)
     EXTRAORDINARY ITEMS (net of tax  
        expense of $1,350)                              -              -           5,280
                                                ------------   ------------   ------------
            Net income (loss)                   $  (19,273)    $  (46,919)    $    1,988
                                                ============   ============   ============
     
     Earnings (loss) per common share:
       Earnings (loss) before  
         extraordinary item                     $    (1.42)    $    (3.00)    $     (.19)
       Extraordinary item                               -              -             .31
                                                ------------   ------------   ------------
     Earnings (loss) per common share           $    (1.42)    $    (3.00)    $      .12
                                                ============   ============   ============
     Weighted average shares outstanding            13,564         15,620         17,007
                                                ============   ============   ============
     
     The accompanying notes to consolidated financial statements are an integral part
                        of these consolidated financial statements.
     </TABLE>
     
     
     <PAGE>
     <TABLE>
     <CAPTION>
                         RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                      (In thousands)
                                                                
                                                         Treasury
                                                         Stock and 
                   Common Stock      Preferred Stock     Contingent
              --------------------- -----------------     Shares      Add'l  Retained
               Shrs    Shrs          Shrs    Shrs     -------------- Paid-In Earnings  
              Authrzd  Iss'd  Amt   Authrzd Iss'd Amt  Shrs   Amt    Capital (Deficit)
              ------- ------ ------ ------- ----- --- ----- -------- ------- ---------
     <S>      <C>     <C>    <C>    <C>     <C>   <C> <C>   <C>      <C>     <C>
     Balances 
     at Jan. 2, 
     1994      25,000 13,268 $1,327    -      -   $-  (239) $(2,009) $50,634 $ 12,575 
     
     Issuance 
     of common
     stock        -    2,569    257    -       -   -    -        -     9,976       -
     Net loss     -       -      -     -       -   -    -        -        -   (19,273)
              ------- ------ ------ ------- ----- --- ----- -------- ------- ---------
     Balances 
     at Jan. 1, 
     1995      25,000 15,837  1,584    -       -   -  (239)  (2,009)  60,610   (6,698)
     
     Amendment 
     to the 
     Charter
     (A)       25,000     -      -     -       -   -    -        -        -        -
     Issuance 
     of common 
     stock        -       90      9    -       -   -    -        -       194       -
     Treasury 
     stock
     acquired     -       -      -     -       -   -   (34)     (99)      -        -
     Net loss     -       -      -     -       -   -    -        -        -   (46,919)
              ------- ------ ------ ------- ----- --- ----- -------- ------- ---------
     Balances 
     at Dec. 31, 
     1995      50,000 15,927  1,593    -       -   -  (273)  (2,108)  60,804  (53,617)
     
     Issuance 
     of common 
     stock        -       35      3    -       -   -    -        -        74       -
     Authorization
     of preferred
     stock(B)     -       -      -  5,000,000  -   -    -        -        -        -
     Shareholders
     Rights 
     Offering     -   4,826     483    -       -   -    -        -     9,975       -
     Issuance of
     compensatory
     stock options
     and warrants -      -       -     -       -   -    -        -       170       -
     Net income   -      -       -     -       -   -    -        -        -     1,988
              ------- ------ ------ ------- ----- --- ----- -------- ------- ---------
     Balances 
     at Dec. 29, 
     1996      50,000 20,788 $2,079 5,000,000  -  $-  (273) $(2,108) $71,023 $(51,629)
              ======= ====== ====== ======= ===== === ===== ======== ======= =========
     
     (A)  On May 13, 1995, stockholders of the Company approved a proposal to amend the
               Certificate of Incorporation to increase the number of authorized shares of Common
               Stock from 25,000,000 shares to 50,000,000.
     
     (B)  On July 10, 1996, stockholders of the Company ratified the authorization of
               5,000,000 shares of Preferred Stock at a par value of $.10.
       
     The accompanying notes to consolidated financial statements are an integral part
                        of these consolidated financial statements.
     </TABLE>
     
     
     <PAGE>
     <TABLE>
     <CAPTION>
                         RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF CASH FLOW
                                      (In thousands)
     
                                                             Fiscal Years Ended
                                                 -----------------------------------------
                                                 January 1,    December 31,   December 29,
                                                     1995           1995            1996
                                                 ------------   ------------   -----------
     <S>                                         <C>            <C>            <C>
     CASH FLOWS PROVIDED FROM OPERATING 
       ACTIVITIES:
     Net income (loss)                           $   (19,273)   $   (46,919)   $    1,988
     Adjustments to reconcile net income (loss) 
        to net cash provided by operating 
        activities:
        Depreciation and amortization                 14,139         13,006        10,482
        Extraordinary items, before tax expense                                        
          of $1,350                                       -              -         (6,630)
        Provision for restaurant closures
          and other                                   17,259         31,045            20
        Provision for losses on receivables              377          1,507           968
        Other                                            568          2,276           879
        Changes in assets and liabilities net 
          of effects from business combinations:
          (Increase) decrease in assets:
            Receivables                               (1,810)           775          (306)
            Inventory                                    (14)           (63)          262
            Prepaid expenses and other current 
              assets                                     752            185           161
            Other assets                              (2,563)           292          (121)
           Increase (decrease) in liabilities:
            Accounts payable and accrued liabilities     187          7,815        (6,011)
            Deferred income taxes                     (1,524)            -             -
            Other liabilities                         (1,824)        (1,424)       (1,535)
                                                 ------------   ------------   -----------
              Net cash provided by operating 
                activities                             6,274          8,495           543
                                                 ------------   ------------   -----------
     
     CASH FLOWS PROVIDED FROM (USED IN) 
       INVESTING ACTIVITIES:
        (Increase) decrease in investments             9,022           (848)        2,975
        Notes receivable                                 429            154           312
        Pre-opening costs                               (832)           (45)         (156)
        Capital expenditures                         (19,808)        (3,405)       (2,306)
        Proceeds from the sale of property and 
          equipment                                    2,525          4,266         4,392
        (Increase) decrease in intangible assets      (1,436)          (111)          (39)
        Acquisition of businesses, net of cash 
          acquired                                    (1,836)        (1,931)           -
        Proceeds from the sale of a business              -           2,730            -
                                                 ------------   ------------   -----------
           Net cash provided by (used in) 
             investing activities                    (11,936)           810         5,178
                                                 ------------   ------------   -----------
     
     CASH FLOWS PROVIDED FROM (USED IN) FINANCING 
        ACTIVITIES:
        (Increase) in restricted cash                     -            (683)         (966)
        Payment of organization and development 
          costs                                           (4)            (3)           -
        Principal payments of debt                    (5,538)        (2,114)       (1,696)
        Senior Notes retirement                           -              -        (19,612)
        Issuance of common stock, net of costs of 
          issuance                                    10,233            203        10,535
        Principal payments on capital lease 
          obligations                                   (393)          (604)         (508)
                                                 ------------   ------------   -----------
           Net cash provided from (used in) 
             financing activities                      4,298         (3,201)      (12,247)
                                                 ------------   ------------   -----------
           Net increase (decrease) in cash            (1,364)         6,104        (6,526)
     
     CASH AND CASH EQUIVALENTS, beginning of 
        period                                         4,071          2,707         8,811
                                                 ------------   ------------   -----------
     CASH AND CASH EQUIVALENTS, end of period    $     2,707     $    8,811     $   2,285
                                                 ============   ============   ===========
     
     The accompanying notes to consolidated financial statements are an integral part of
                         these consolidated financial statements.
     </TABLE>
     
     
           <PAGE>
<PAGE>
            RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (tabular dollars in thousands, except per share amounts)
     
     
     1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     
          a)   Financial Statement Presentation and Organization
     
          The consolidated financial statements include Rally's
     Hamburgers, Inc. and its wholly-owned subsidiaries, each of
     which is described below.  Rally's Hamburgers, Inc. and its
     subsidiaries are collectively referred to herein as the context
     requires as "Rally's" or the "Company".  All significant
     intercompany accounts and transactions have been eliminated.
     
          Rally's is one of the largest chains of double drive-
     thru restaurants in the United States.  At December 29, 1996,
     the Rally's system included 467 restaurants in 19 states,
     primarily in the Midwest and the Sunbelt, comprised of 209
     Company-owned and operated, 231 franchised and 27 Company-owned
     restaurants in Western markets which are operated as Rally's
     restaurants by CKE Restaurants, Inc. ("CKE"), a significant
     shareholder of the Company, under an operating agreement which
     began July, 1996.  One additional Company-owned store covered by
     the operating agreement has been converted to the Carl's Jr.
     format and is not included in the above store count. The
     Company's restaurants offer high quality fast food.  The Company
     serves the drive-thru and take-out segments of the quick-service
     restaurant industry.  The Company opened its first restaurant in
     January 1985 and began offering franchises in November 1986.
     
          Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self
     Service Drive Thru, Inc. and Hampton Roads Foods, Inc. own and
     operate Rally's restaurants in various states.  Additionally,
     Rally's Hamburgers, Inc. operates as franchisor of the Rally's
     brand.  Rally's Management, Inc. provides overall corporate
     management of the Company's businesses.  Rally's Finance, Inc.
     was organized for the purpose of making loans to Rally's
     franchisees to finance the acquisition of restaurant equipment
     and modular buildings.  RAR, Inc. was organized for the purpose
     of acquiring and operating a corporate airplane and is currently
     inactive.  The Company's wholly-owned subsidiary, ZDT Corpora-
     tion, was formed to own the Zipps brand and franchise system. 
     MAC 1 was organized for the purpose of acquiring a manufacturer
     of modular buildings.  The manufacturing business was sold in
     January 1995 (see Note 2).
     
          The preparation of the financial statements in conformity
     with generally accepted accounting principles requires
     management to make estimates and assumptions that affect the
     reported amounts of assets and liabilities and disclosures of
     contingent assets and liabilities at the date of the financial
     statements and the reported amounts of revenues and expenses
     during the reporting period.  Actual results could differ from
     those estimates, when actual transactions anticipated are
     consummated.  In addition, despite management diligence, changes
     in estimates do and will continue to occur due to changes in
     available relevant data and consummation of the events and
     transactions.  The statements are prepared on a going concern
     basis.  Certain of the most significant estimates include useful
     lives assigned to depreciable/amortizable assets, fair value
     less costs to sell of long-lived assets held for sale, fair
     value of long-lived assets held for use, future net occupancy
     costs related to closed/disposable properties, accruals for the
     Company's self-insured and high deductible insurance programs,
     and disclosures regarding commitments and contingencies.
     
          b)   Revenue Recognition
     
          The Company recognizes franchise fees as income on the date
     a restaurant is opened, at which time the Company has performed
     its obligations relating to such fees.  Area development fees
     are generated from the awarding of exclusive rights to develop,
     own and operate Rally's restaurants in certain geographic areas
     pursuant to an Area Development Agreement.  Such fees are
     recognized as income on a pro rata basis as the restaurants are
     opened or upon the cancellation or expiration of an Area
     Development Agreement.  Both franchise fees and area development
     fees are non-refundable.  The Company also receives royalty fees
     from franchisees in the amount of 4% of each franchised
     restaurant's gross revenues, as defined in the Franchise
     Agreement.  Royalty fees are recognized as earned.
     
          c)   Property and Equipment
     
          Property and equipment are depreciated using the straight-
     line method for financial reporting purposes and accelerated
     methods for income tax purposes.  The estimated useful lives for
     financial reporting purposes are the shorter of 20 years or the
     lease life plus available renewal options for buildings and
     property held under capital leases, eight years for furniture
     and equipment, five years for software and computer systems and
     the life of the lease for leasehold improvements.  Expenditures
     for major renewals and betterments are capitalized while
     expenditures for maintenance and repairs are expensed as
     incurred.
     
          d)   Interest Costs
     
          Interest costs incurred during the construction of
     restaurants are capitalized as a component of the cost of the
     restaurants and are amortized on a straight-line basis over the
     estimated useful lives of the restaurants.  The amounts
     capitalized for the fiscal years ended January 1, 1995,
     December 31, 1995 and December 29, 1996 were approximately
     $490,000, $30,000 and $7,000, respectively.
     
          e)   Inventory
     
          Inventory is valued at latest invoice cost which approxi-
     mates the lower of first-in, first-out cost or market.
     
          f)   Supplemental Disclosures of Cash Flow Information
     
                                        Fiscal Years Ended
                                  -------------------------------
                                  Jan. 1,    Dec. 31,    Dec. 29,
                                    1995       1995        1996
                                  --------   --------    --------
          Interest paid (net of
           amount capitalized)    $  9,760   $ 10,679    $  8,639
         
          Income taxes paid            163        212         983
          Capital lease obliga-
           tions incurred               -       1,616         111
     
          The purchase of HRF described in Note 2 was recorded as
               follows: 
                                                         Fiscal
                                                      Year Ended
                                                       ---------
                                                        Dec. 31,
                                                          1995
                                                       ---------
               Fair value of assets acquired            $ 9,133
               Cash paid                                 (2,125)
                                                       ---------
               Liabilities assumed                      $ 7,008
                                                       =========
     
          As a result of the sale of Beaman discussed in Note 2, the
     Company recorded the net present value of a non-interest bearing
     note of approximately $347,000.  The Company recorded in 1996
     approximately $547,000 in notes receivable primarily as the
     result of the sale of five of its restaurants in Montgomery,
     Alabama.  These non-cash transactions have been excluded from
     the consolidated statement of cash flows.
     
          During fiscal 1995 and 1996, the Company accepted notes due
     within two to five years, bearing interest at rates previously
     specified in the underlying franchise agreements, for certain
     receivables from franchises in the aggregate amount of approxi-
     mately $542,000 for 1995 and approximately $340,000 for 1996. 
     There were no such notes in 1994.
     
          For purposes of the consolidated statement of cash flows,
     the Company considers all highly liquid debt instruments with an
     original maturity of three months or less at the date of
     purchase to be cash equivalents.  Cash equivalents at December
     31, 1995 and December 29, 1996 were approximately $6.8 million
     and $976,000, respectively. 
     
          g)   Earnings (Loss) Per Common Share
     
               Earnings (loss) per common shares is calculated based
     upon the weighted average shares and common equivalent shares
     outstanding during the periods.
     
          h)   Goodwill, Reacquired Franchise Rights, Other
                    Intangibles and Other Assets
     
               Goodwill, reacquired franchise and territory rights,
     other intangibles and other assets are being amortized using the
     straight-line method over the following periods:
     
                                        Amortization Period
                                        -------------------
               Goodwill                 5, 20 - 25 years
               Reacquired franchise 
                and territory rights       15 - 20 years
               Other intangibles            3 - 25 years
               Other assets                 5 - 25 years
     
          Subsequent to the intangibles' acquisition, the Company
     evaluates whether later events and circumstances have occurred
     that indicate the remaining estimated useful life of goodwill
     and other intangibles may warrant revision or that the remaining
     balance of goodwill and other intangibles may not be recover-
     able.  When factors indicate that goodwill or other intangibles
     should be evaluated for possible impairment, the Company uses an
     estimate of the related undiscounted cash flows over the
     remaining life of the goodwill and other intangibles in
     measuring whether the goodwill and other intangibles are
     recoverable.  The amount of any such impairment is determined as
     the difference between carrying value and fair value based upon
     discounted cash flows.  No such impairment was recorded in any
     period presented except as disclosed in Note 16.
     
          i)   Owner Fee Income and Expense
     
          Revenue received as a result of the operating agreement
     with CKE is referred to as Owner fee income in the accompanying
     consolidated financial statements.  Expenses related to the
     ongoing investment in the CKE-operated restaurants consist
     primarily of depreciation and amortization and are referred to
     as Owner expenses in the accompanying consolidated financial
     statements.
     
          j)   Advertising Costs
     
          It is the Company's policy to expense advertising costs as
     incurred.
     
          k)   Reclassification
     
          Certain items have been reclassified in the accompanying
     consolidated financial statements for prior periods in order to
     be comparable with the classification adopted for the fiscal
     year ended December 29, 1996.  Such reclassifications had no
     effect on previously reported net income.
     
     2.   ACQUISITION AND DISPOSITION
     
          On February 13, 1995, the Company acquired all of the
     shares of common stock of Hampton Roads Foods, Inc. (a Louisiana
     corporation) and certain of the assets of HRF, Inc. (a Virginia
     corporation), collectively referred to as "HRF", for approxi-
     mately $7.2 million, of which approximately $2.1 million was
     paid in cash and the remainder to be paid over the ensuing six
     years pursuant to a secured promissory note, bearing interest at
     9%.  In addition, the Company assumed approximately $654,000 of
     notes payable and other liabilities and HRF's lease obligations,
     including capital lease obligations of approximately $1.3
     million.  HRF owned and operated a total of ten Rally's
     restaurants and owned the exclusive right to develop additional
     Rally's restaurants in the Hampton Roads and Norfolk, Virginia
     areas.  The acquisition of HRF was accounted for as a purchase.
     
          The total purchase price of approximately $9.1 million has
     been allocated in the accompanying balance sheet as net property
     and equipment (approximately $2.1 million) and as intangible and
     other assets (approximately $6.7 million).  The remainder of the
     purchase price, approximately $319,000, was allocated to various
     current assets.  The intangible and other asset amounts include
     a non-compete (approximately $150,000) which is being amortized
     over five years and reacquired franchise and territory rights
     (approximately $6.6 million) which are being amortized over 15
     years.
     
          The impact on operations of this acquisition was not
     significant for any of the periods presented, and, therefore,
     proforma amounts are not presented giving effect to this
     acquisition.
     
          On January 30, 1995, the Company sold all of the shares of
     common stock of Beaman Corporation, its wholly-owned modular
     building subsidiary, for approximately $3.1 million, of which
     approximately $2.7 million was paid in cash, and the remainder
     to be paid pursuant to a non-interest bearing, unsecured
     promissory note.
     
     3.   RESTAURANT CLOSURES AND OTHER
     
          Certain charges in fiscals 1994, 1995 and 1996 have been
     aggregated and segregated into the caption "Provision for
     Restaurant Closures and Other" in the accompanying Statements of
     Operations.  These items represent estimates of the impact of
     management decisions which have been made at various points in
     time in response to the Company's sales and profit performance
     and the then-current revenue building and profit enhancing
     strategies.
     
          In summary and chronologically, the decisions that had been
     reached in 1994 were to abandon additional real estate develop-
     ment projects and certain investment in infrastructure
     (approximately $5.3 million) and to abandon additional projects
     and franchise or otherwise dispose of up to 60 Company
     restaurants (approximately $12.0 million).  During 1995, the
     Company concluded that much of its 1994 plan of disposal would
     not be executable.  As a result, the Company decided to
     (i) close up to 16 of the original 60 restaurants included in
     the 1994 disposal plan, (ii) close nine poor performing
     restaurants in its core markets, (iii) writeoff estimated
     exposure resulting from the default of a subleasee/franchisee in
     a former Company market, (iv) record additional writedowns of
     modular building value, (v) record writedowns to sales price
     less cost to sell of all properties auctioned in fourth quarter,
     1995 (vi) record asset writedowns and occupancy exposure related
     to the default of a tenant for five of the units closed under
     the 1994 plan and (vii) record other changes in estimates
     related to the Company's surplus properties.  The charges for
     the above 1995 items totaled approximately $17.3 million.  Also
     reflected in this caption for fiscal 1995 is an approximate
     $13.7 million charge related to the Company's adoption of
     Statement of Financial Accounting Standards No. 121 ("SFAS 121")
     further discussed in Note 16.
     
          Included in this caption for fiscal 1996 are charges of
     approximately $679,000 related to the writedown and sale of
     assets offset by approximately $659,000 resulting from a
     reduction in surplus property reserves related to Management's
     decision to re-open three units previously closed and to
     continue to operate a fourth unit that had been designated for
     closure.  See also "Management's Discussion and Analysis of
     Financial Condition and Results of Operations "Restaurants
     Closures and Other."
     
     4.   RELATED PARTY TRANSACTIONS
     
          a)   Issuance of Warrants
     
          On December 20, 1996, the Company issued warrants (the
     "Warrants") to purchase an aggregate of 1,500,000 restricted
     shares of its Common Stock to CKE and Fidelity National
     Financial, Inc.  The Warrants were granted as an incentive to
     CKE and Fidelity to continue to participate in the identifi-
     cation and exploitation of synergistic opportunities with the
     Company.  The Warrants have a three-year term and are not
     exercisable until December 20, 1997.  The exercise price is
     $4.375 per share, the closing price of the Common Stock on
     December 20, 1996.  The underlying shares of Common Stock have
     not been registered with the Securities and Exchange Commission
     and, therefore, are not freely tradable.  Upon exercise, the
     Warrants would provide approximately $6.6 million in additional
     capital to the Company.  The Company obtained a valuation
     analysis from an investment banking firm of national standing. 
     Such analysis estimated the value of the Warrants to be
     approximately $960,000.  Approximately $24,000 has been expensed
     during 1996 within General and Administrative expenses.  The
     remaining value will be expensed in fiscal 1997 over the
     remainder of the vesting period of the underlying Warrants.
     
          b)   West Coast Operating Agreement
     
          On July 1, 1996, the Company entered into a ten-year
     Operating Agreement with Carl Karcher Enterprises, Inc., a
     subsidiary of CKE Restaurants, Inc. (collectively referred to as
     "CKE").  CKE is the operator of the Carl's Jr. restaurant chain. 
     Pursuant to the agreement, 28 Rally's owned restaurants located
     in California and Arizona are being operated by CKE.  Such
     agreement is cancelable after an initial five-year period, at
     the discretion of CKE.  A portion of these restaurants, at the
     discretion of CKE, will be converted to the Carl's Jr. format. 
     To date, one restaurant has been converted.  The agreement was
     approved by a majority of the independent Directors of the
     Company.  Prior to the agreement, the Company's independent
     Directors had received an opinion as to the fairness of the
     agreement, from a financial point of view, from an investment
     banking firm of national standing.
     
          Under the terms of the Operating Agreement, CKE is
     responsible for conversion costs associated with transforming
     the restaurants to the Carl's Jr. format, as well as the
     operating expenses of all the restaurants.  Rally's retains
     ownership of all 28 restaurants and is entitled to receive a
     percentage of gross revenues generated by each restaurant. 
     Subsequent to the agreement, the Company's revenues have been,
     and will continue to be, reduced by the absence of the
     restaurants' sales, somewhat offset by the fee paid to the
     Company by CKE.  For the first six months of the current year,
     the restaurants covered by this Operating Agreement had sales of
     approximately $10.5 million.  The Company anticipates that the
     agreement will continue to positively impact both net income and
     cash flow.  While the overall impact of the agreement is not
     expected to be material to the financial statements, it will
     allow management to concentrate its efforts in more fully
     developed Rally's markets.  The agreement will also allow the
     Company to take advantage of any improvements in restaurant
     operations attained by CKE by implementing these improvements in
     Company stores.  In the event of a sale by Rally's of any of the
     28 restaurants, Rally's and CKE would share in the proceeds
     based upon the relative value of their respective capital
     investments in such restaurant.
     
          c)   Option Grants to Non-employees
     
          During 1996, the Company granted 150,000 options to certain
     individuals not employed by the Company for services provided. 
     Approximately $84,000 has been expensed for these grants in
     General and Administrative Expenses in the accompanying State-
     ment of Operations.  Such options were granted at the market
     values on the dates of grant, were immediately exercisable and
     expire in five years.
     
          d)   Other Transactions
     
          The Company has had transactions with certain companies or
     individuals which are related parties by virtue of having
     stockholders in common, by being officers/directors or because
     they are controlled by significant stockholders or officers/
     directors of the Company.  Such transactions which impacted the
     Company's consolidated financial statements are summarized
     below.  Information with respect to related party rent is
     disclosed in Note 12.  The Company and its franchisees each pay
     1/2% of sales to the Rally's National Advertising Fund (the
     "Fund"), established for the purpose of creating and producing
     advertising for the chain.  The Fund is not included in the
     consolidated financial statements, although the Company's
     contributions to the Fund are included in the Advertising and
     Promotion Expenses in the Company's consolidated Statements of
     Operations.
     
                                              Dec. 31,   Dec. 29,
                                                1995      1996
                                              --------   --------
               Balance Sheet Amounts
               ---------------------  
               Royalties receivable            $ 483     $  -
               Accounts receivable                23       565
               Notes receivable                  175       127
               Accounts payable                  307        95
               Accrued liabilities                -         60
      
                                        Fiscal Years Ended
                                 -------------------------------
                                 Jan. 1,     Dec. 31,   Dec. 29,
                                  1995        1995       1996
                                 -------     -------    -------
          Revenue Amounts
          ---------------
          Repurchase of Senior
            Notes (gross)       $    -       $   -      $6,339
          Royalty fees            2,129       2,407         -
          Owner fee income           -           -         440
          Rental income             195         262         -
          Interest income            93          16         49
                                 -------     -------    -------
                                 $2,417      $2,685     $6,828
                                 =======     =======    =======
     
          Expense Amounts
          ---------------
          Legal                  $  923      $  777     $1,024
          Owner expense              -           -         744
          Interest expense           -           -         180
          Compensatory stock
            options and warrants     -           -         170
          Other                      14          -          -
                                 -------     -------    -------
                                 $  937      $  777     $2,118
                                 =======     =======    =======
     
     5.   RESTRICTED CASH
     
          Restricted cash consists of amounts held in various
     Certificates of Deposit as collateral for Letters of Credit and
     daily Automated Clearing House ("ACH") transactions.
     
     6.   INVESTMENTS
     
          Excess funds are being invested in U.S. Treasury and
     investment grade corporate debt securities.  These securities
     are deemed as "available-for-sale" under SFAS 115, "Accounting
     for Certain Investments in Debt and Equity Securities" and are
     reported at fair value.  Unrealized holding gains and losses,
     excluding those losses considered to be other than temporary,
     are reported as a net amount in a separate component of
     shareholders' equity.  No net unrealized losses were reported
     for any period presented.  Provisions for declines in market
     value are made for losses considered to be other than temporary. 
     No such provision was necessary for the years ended December 31,
     1995 and December 29, 1996.  The provision for the year ended
     January 1, 1995 was approximately $95,000.  The market value of
     the portfolio was determined based on quoted market prices for
     these investments.  Realized gains or losses from the sale of
     investments are based on the specific identification method.
     
          The carrying value is equal to the market value of invest-
     ments at December 31, 1995 and December 29, 1996 and consist of
     the following:
     
          December 31, 1995
          -----------------
          Unites States government and its agencies    $4,933
          Corporate debt instruments                       -
                                                       ------
          Total                                        $4,933
                                                       ======
     
          December 29, 1996
          -----------------
          United States government and its agencies    $  500
          Corporate debt instruments                    1,458
                                                       ------
          Total                                        $1,958
                                                       ======
     
          The contractual maturities of these investments at December
     29, 1996 were as follows:
     
               1997           $   500
               2002               248
               2012               299
               2013               597   
               2017               314
                              --------
                              $ 1,958
                              ========
     
          The proceeds from the sale of investments and related gross
     gains and losses for the twelve months ended January 1, 1995,
     December 31, 1995 and December 29, 1996 were as follows:
     
                                         Fiscal Years Ended
                                 --------------------------------
                                 Jan. 1,     Dec. 31,    Dec. 29,
                                   1995        1995        1996
                                 --------    --------    --------
          Proceeds from the
            sale of investments  $17,798     $15,653     $10,531
          Gross gains realized       137          56          -
          Gross losses realized     (364)         -           (4)
     
     7.   NET PROPERTY AND EQUIPMENT
     
          Property and equipment consists of the following:
     
                                         Dec. 31,       Dec. 29,
                                           1995           1996
                                        ---------      ---------
          Land                          $ 14,310       $ 14,074
          Buildings and leasehold
           improvements                   46,520         47,463
          Equipment, furniture and
           fixtures                       45,036         41,312
                                        ---------      ---------
                                         105,866        102,849
          Less accumulated depreciation  (32,049)       (37,518)
                                        ---------      ---------
                                          73,817         65,331
                                        ---------      ---------
          Property held under capital
           lease                           6,208          6,145
          Less accumulated amortization   (1,342)        (1,670)
                                        ---------      ---------
                                           4,866          4,475
                                        ---------      ---------
          Net property and equipment    $ 78,683       $ 69,806
                                        =========      =========
     
     8.   ACCRUED LIABILITIES
     
               Accrued liabilities consist of the following:
     
                                         Dec. 31,       Dec. 29,
                                           1995           1996
                                         ---------     ---------
          Payroll and payroll taxes      $  3,013      $  2,245
          Closed store reserve              2,767         1,964
          Workers compensation              2,102         2,367
          Advertising                       1,819           316
          Other                             6,258         6,708
                                         ---------     ---------
                                         $ 15,959      $ 13,600
                                         =========     =========
     
     9.   OTHER LIABILITIES
     
               Other liabilities consist of the following:
     
                                         Dec. 31,       Dec. 29,
                                           1995           1996
                                         ---------     ---------
          Closed store reserve           $  6,908      $  3,881
          Unfavorable lease loss              890           748
          Other                               232           216
                                         ---------     ---------
                                         $  8,030      $  4,845
                                         =========     =========
     
     10.  SENIOR NOTES
     
          On March 9, 1993, the Company sold approximately $85
     million of 9 7/8% Senior, Notes due 2000 (the "Notes").  The
     Company is required to make a mandatory sinking fund payment on
     June 15, 1999 to retire 33 1/3% in aggregate principal amount of
     the Notes issued.  The Notes are carried net of the related
     discount, which is being amortized over the life of the Notes. 
     Interest is payable June 15 and December 15.  The Notes include
     certain restrictive covenants which, among other restrictions,
     limit the Company's ability to obtain additional borrowings and
     to pay dividends, as well as impose certain change of control
     provisions, as defined. 
     
     On January 29, 1996, the Company repurchased, in two transac-
     tions, at a price of approximately $678.75 per $1,000 principal
     amount, approximately $22 million face value of its 9 7/8%
     Senior Notes due in the year 2000 from GIANT GROUP, LTD.
     ("GIANT").  The price paid in each transaction represented the
     market closing price on January 26, 1996.  The first transaction
     involved the repurchase of approximately $16 million face value
     of the Notes for approximately $11.1 million in cash.  The
     second transaction involved the purchase of approximately $6
     million face value of Notes in exchange for a short-term note of
     approximately $4.1 million, due in three installments of
     principal and interest, issued by Rally's.  The Company paid the
     final installment on this note, together with accrued interest
     thereon, on September 27, 1996.  The purchases were approved by
     a majority of the independent Directors of the Company.  Prior
     to the purchases, the Company's independent Directors had
     received an opinion as to the fairness of the transactions, from
     a financial point of view, from an investment banking firm of
     national standing.  Due to the repurchases in January 1996, the
     redemption price of approximately $15.2 million has been
     classified in the caption "Current Maturities of Long-Term Debt
     and Obligations Under Capital Leases" in the accompanying
     consolidated balance sheet for fiscal 1995. 
     
          Additionally, in four separate transactions during the
     fourth quarter 1996, the Company repurchased approximately $4.7
     million face value of the Notes from various other bondholders
     for approximately $4.5 million in cash.
     
          These purchases resulted in extraordinary gains in 1996 net
     of tax, totaling approximately $5.3 million or $.31 per share. 
     As a result of these debt repurchases, the annualized ongoing
     interest payments on the Senior Notes have been reduced by
     approximately $2.6 million per year to approximately $5.8
     million.  In addition, these repurchases have reduced the
     sinking fund requirement discussed above to approximately $1.6
     million from approximately $28 million.
     
          The remaining outstanding Notes are publicly traded and at
     December 29, 1996 had a market value of approximately $54.5
     million based on the quoted market price for such notes.
     
          On September 5, 1996 by Consent Solicitation Statement, the
     Company solicited consent of its bondholders whereby the
     beneficial ownership of 35% or more of the voting stock of the
     Company by GIANT, Fidelity National Financial, Inc., CKE and/or
     any of their affiliates would not constitute a change of control
     for purposes of Section 4.14 of the Indenture.  On October 21,
     1996, the bondholder consent was approved by a majority of the
     holders of record as of the date of the Consent Solicitation.
     
     11.  LONG-TERM DEBT
     
               Long-term debt consists of the following:
     
                                          Dec. 31,       Dec. 29,
                                            1995           1996
                                          ---------     ---------
     Notes payable to banks, maturing
      at various dates through February
      10, 2002, secured by property and/
      or equipment, bearing interest 
      ranging from 1/2% above prime to 
      9.25%.  The notes are payable in 
      monthly principal and interest 
      installments ranging from $848 
      to $41,033.                         $  1,883      $  1,006
          
     Note payable to finance company 
      due October 1998, secured by certain 
      equipment, bearing interest at a rate
      of 7.3%.  The note is payable in 
      monthly principal and interest 
      installments of $6,762.                  384           133
     
     Note payable to Company for acquisi-
      tion of certain markets, secured
      by certain property and equipment,
      maturing November 30, 1998, bearing
      interest of 8.3%.  The note is payable
      in monthly principal and interest
      installments of $11,494.                 205            79
     
     Secured notes payable to a bank used
      to finance equipment and/or modular
      buildings for franchises (the 
      Franchise Loans), maturing at
      various dates through July 15, 2000,
      bearing interest at prime plus 1/2%.
      The notes are payable in monthly
      principal installments of $4,875.
      Interest is payable monthly.             261           195
     
     Notes payable to former owners for
      acquisition of market, secured by
      common stock of Hampton Roads Foods,
      maturing March 13, 2001, with 
      outstanding balances due after last
      monthly payments, bearing interest
      of 9.0%.  The notes are payable in
      monthly principal and interest 
      installments ranging rom $4,742 to
      $50,211.                               4,814         4,461
                                          ---------     ---------
                                             7,547         5,874
     Less - Current portion                 (1,798)       (1,099)
                                          ---------     ---------
                                          $  5,749      $  4,775
                                          =========     =========
     
          At December 29, 1996, the prime rate was 8.25%.  There were
     no short-term borrowings in the year ended December 31, 1995.
     
          The following are the maturities of long-term debt for each
     of the next five years and thereafter:
     
                      Year
                    -------
                      1997              $   1,099
                      1998                    722
                      1999                    727
                      2000                    590
                    Thereafter              2,736
                                        ----------
                                        $   5,874
     
          The Company is subject to certain restrictive covenants
     under its debt agreements.
     
          The market value of the Company's long-term debt approxi-
     mated book value at December 29, 1996.  Debt related to the
     acquisition of Hampton Roads Foods was entered into in 1995 and
     bears interest at rates which approximate current rates for debt
     with similar terms.  The majority of the remaining long-term
     debt has contractual rates which vary based on fluctuations in
     market rates.
     
     12.  COMMITMENTS AND CONTINGENCIES
     
          (a)  Lease Commitments
      
               The Company leases certain land and buildings
     generally under agreements with terms of or renewable to 15 to
     20 years.  Some of the leases contain contingent rental
     provisions based on percentages of gross sales.  The leases
     generally obligate the Company for the cost of property taxes,
     insurance and maintenance.  Following is a schedule by year of
     future minimum lease commitments under all leases at December
     29, 1996:  
     
                                         Capital      Operating
                  Year                   Leases         Leases
          -----------------------       ---------    ---------
          1997                          $ 1,087       $ 8,475
          1998                            1,010         7,870
          1999                              973         7,216
          2000                              906         6,413
          Thereafter                      6,772        33,052
                                        ---------     ---------
          Total minimum lease
           commitments                   10,748       $63,026
                                                      =========
          Less amounts representing
           interest, discounted at
           rates ranging from 10% to
           12%                           (4,955)
                                        ---------
          Present value of minimum
           lease payments                 5,793
          Current portion of capital
           lease obligations               (385)
                                        ---------
          Long-Term lease obligations   $ 5,408
                                        =========
     
               The discount rates applicable to the Company's capital
     leases approximate currently available market rates.  Minimum
     operating lease payments have not been reduced by minimum
     sublease rentals of $10 million due in the future under
     noncancelable subleases.
     
               Rent expense consists of:
                                           Fiscal Years Ended
                                     ----------------------------
                                     Jan. 1,   Dec. 31,  Dec. 29,
                                      1995       1995      1996
                                     -------   -------   -------
          Minimum rentals - related
           parties                   $   261   $   292   $   470 
          Minimum rentals - others     6,514     6,641     4,681
          Contingent rentals - 
           others                        136       173       122
                                     -------   -------   -------
                                     $ 6,911   $ 7,106   $ 5,273
                                     =======   =======   =======
     
          (b)  Litigation
     
          In January and February 1994, two putative class action
     lawsuits were filed, purportedly on behalf of the stockholders
     of Rally's in the United States District Court for the Western
     District of Kentucky, against Rally's, Burt Sugarman and GIANT
     and certain of Rally's present and former officers and directors
     and its auditors.  The complaints allege defendants violated the
     Securities Exchange Act of 1934, among other claims, by issuing
     inaccurate public statements about the Company in order to
     arbitrarily inflate the price of its common stock.  The
     plaintiffs seek unspecified damages.  On April 15, 1994, Rally's
     filed a motion to dismiss and a motion to strike.  On April 5,
     1995, the Court struck certain provisions of the complaint but
     otherwise denied Rally's motion to dismiss.  In addition, the
     Court denied plaintiffs' motion for class certification; the
     plaintiffs renewed this motion, and despite opposition by the
     defendants, the Court granted such motion for class certifica-
     tion on April 16, 1996, certifying a class from July 20, 1992 to
     September 29, 1993.  In October 1995, the plaintiffs filed a
     motion to disqualify Christensen,  Miller, Fink, Jacobs, Glaser,
     Weil & Shapiro, LLP ("Christensen, Miller") as counsel for
     defendants based on a purported conflict of interest allegedly
     arising from the representation of multiple defendants as well
     as Ms. Glaser's position as both a former director of Rally's
     and a partner in Christensen, Miller.  Defendants filed an
     opposition to the motion, and the motion to disqualify Christen-
     sen, Miller was denied.  The action was stayed between May 30
     and July 31, 1996 to facilitate settlement discussions.  One
     settlement conference has been conducted; no others are
     currently scheduled.  The Court denied the motion in the fall of
     1996 and refused to disqualify Christensen, Miller.  Fact
     discovery is set to close in April 1997.  No trial date has been
     scheduled yet.  Management is unable to predict the outcome of
     this matter at the present time or whether or not certain
     available insurance coverages will apply.  The defendants deny
     all wrongdoing and intend to defend themselves vigorously in
     this matter.  Discovery is proceeding.  Because these matters
     are in a preliminary stage, the Company is unable to determine
     whether a resolution adverse to the Company will have a material
     effect on its results of operations or financial condition. 
     Accordingly, no provisions for any liabilities that may result
     upon adjudication have been made in the accompanying financial
     statements.  An estimate of defense costs reimbursable under the
     Company's directors' and officers' insurance is included in
     "Other Assets" in the accompanying consolidated financial state-
     ments.
     
          In July 1994, the Company entered into an agreement with
     Red Line Burgers, Inc. ("Red Line") whereby Red Line leased from
     the Company all of its assets being operated as Rally's
     restaurants in Houston, Texas.  Additionally, the agreement
     called for Red Line to convert Red Line's eight competing units
     in the Houston market to the Rally's brand.  Red Line failed to
     make certain lease payments and on June 20, 1995, the Company
     filed an action in the United States District Court for the
     Southern District of Texas, Galveston Division, seeking recovery
     of damages from Red Line for its breach of the leases and
     subleases entered into with the Company.  The action alleges
     that Red Line also committed events of default under the terms
     of all of its Franchise Agreements with the Company.  As a
     result of such defaults, the Company terminated such Franchise
     Agreements, and on August 3, 1995, the Company filed suit in the
     United States District Court, Western District of Kentucky,
     alleging breach of contract due to Red Line's failure to pay
     royalties and other payments required by the Franchise
     Agreements and its failure to pay approximately $400,000 plus
     interest owed on certain promissory notes issued to the Company
     in lieu of such payments.  The Company also seeks accountability
     for approximately $660,000 in conversion costs paid by the
     Company for conversion of Red Line's Houston restaurants. 
     Subsequent to the commencement of the foregoing actions, Red
     Line filed for reorganization under Chapter 11 of the United
     States Bankruptcy Code.  In connection with such proceedings,
     the Company's actions against Red Line have been stayed.  In
     November, 1996, Red Line filed a First Amended Disclosure
     Statement and First Amended Liquidating Plan of Reorganization
     (the "Plan") which disputed Red Line's obligation to pay the
     Company any of the foregoing monies.  By Bankruptcy Court Order
     entered February 28, 1997 (the "Confirmation Order"), the
     Company's general unsecured claims were allowed in the amount of
     approximately $615,000.  The Confirmation Order also approved
     the Plan.  The Plan provides for, among other things, mutual
     releases among the Company and Red Line (such releases do not
     affect the allowed general unsecured claims described above) and
     the sale of Red Line's assets.  Cash from those sales will be
     insufficient to pay all secured claims, taxes and administrative
     claims.  Some of the Red Line assets are to be acquired by New
     Red Line, Inc., an entity involving certain insiders and/or
     affiliates of Red Line.  Unsecured creditors of Red Line
     (including the Company) will receive under the Plan a minority
     stock interest in New Red Line, Inc.  At this time, the likeli-
     hood of realizing any value on account of such minority stock
     interest is considered extremely speculative.  The receivable
     balances have been fully reserved.
     
          In February 1996, Harbor Finance Partners ("Harbor")
     commenced a derivative action, purportedly on behalf of Rally's
     against GIANT and certain of Rally's officers and directors
     before the Delaware Chancery Court.  Harbor named Rally's as a
     nominal defendant.  Harbor claims that the directors and
     officers of both Rally's and GIANT, along with GIANT, breached
     their fiduciary duties to the public shareholders of Rally's by
     causing Rally's to repurchase from GIANT certain Rally's Senior
     Notes at an inflated price.  Harbor seeks "millions of dollars
     in damages", along with rescission of the repurchase transac-
     tion.  In the fall of 1996, all defendants moved to dismiss the
     action.  The Chancery Court conducted a hearing on November 26,
     1996, but has not yet ruled on the pending motions.  The Company
     denies all wrongdoing and intends to vigorously defend the
     action.  It is not possible to predict the outcome of this
     action at this time.
     
          Rally's filed a lawsuit on August 12, 1996 against Arkansas
     Investment Group, Inc. ("AIGI"), a franchisee that currently
     operates ten Rally's restaurants located in Arkansas.  The
     lawsuit seeks to recover royalties and contributions to the
     Rally's National Advertising Fund owed by AIGI pursuant to the
     applicable franchise agreements, which total approximately
     $500,000 with accrued interest as of December 29, 1996.  After
     falling in arrears on its royalties and advertising fund
     contributions, Rally's and AIGI negotiated a written agreement
     to allow AIGI to make payments under a revised payment schedule. 
     AIGI also defaulted on that written obligation.  AIGI has filed
     an Answer and Counterclaim in which it alleges it does not owe
     the royalties and advertising contributions due to its alleged
     disagreement with operational and marketing decisions of Rally's
     and Rally's alleged failure to rebate sums obtained from
     suppliers.  AIGI has asserted causes of action for breach of
     contract, violation of the Arkansas Franchise Practices Act,
     unjust enrichment and fraud.  The Counterclaim alleges that AIGI
     has been damaged in excess of approximately $75,000 (the minimum
     jurisdictional amount for federal court), but no specific amount
     of damages is identified in the Counterclaim.  Rally's denies
     AIGI's allegations and intends to vigorously defend the Counter-
     claim.  Because the litigation is in a preliminary stage, the
     Company is unable to determine whether a resolution adverse to
     the Company will have a material effect on its results of
     operations or financial condition.  Accordingly, no provisions
     for any liabilities that may result upon adjudication have been
     made in the accompanying financial statements.
     
          In December 1994, Rally's entered into two franchise
     agreements with Kader Investments, Inc. ("Kader") for the
     development and operation of Rally's Hamburgers restaurants in
     Anaheim, California and Tustin, California.  Rally's assisted
     the franchisee in developing and opening the restaurants.  On
     November 27, 1996, Kader filed a six-count Complaint against
     Rally's in the California Superior Court for Orange County (Case
     No. 772257) alleging material misrepresentation, respondent
     superior, breach of contract, breach of the implied covenant of
     good faith and fair dealing, fraud and unfair competition. 
     These claims arise out of allegations concerning Rally's offer
     and sale of two franchises (under a two-store development
     agreement), and Rally's actions during the term of the agree-
     ments.  The Complaint seeks as relief rescission of the parties'
     franchise and development agreements; general damages of at
     least $1,494,277 and $1,400,000 for the material misrepresenta-
     tion and fraud counts, respectively; general damages in
     unspecified amounts as to the other counts; punitive damages in
     unspecified amounts; and attorneys' fees.  Rally's filed an
     Answer, and intends to file a Cross-Complaint alleging breach of
     contract.  The court has permitted the parties to hold discovery
     in abeyance for a short period pending settlement discussions. 
     Rally's is currently attempting to settle the claim.  However,
     the outcome of such settlement discussion is uncertain at this
     time.  Should discussions not result in a settlement, Rally's
     intends to vigorously defend against the claims.  Because the
     litigation is in a preliminary stage, the Company is unable to
     determine whether a resolution adverse to the Company will have
     a material effect on its results of operations or financial
     condition.  Accordingly, no provisions for any liabilities that
     may result upon adjudication have been made in the accompanying
     financial statements.
     
          The Company is involved in other litigation matters
     incidental to its business.  With respect to such other suits,
     management does not believe the litigation in which it is
     involved will have a material effect upon its results of
     operation or financial condition.
     
          (c)  Other Commitments
     
          The Company is contingently liable on certain franchisee
     lease commitments totaling approximately $366,000.  The Company
     from time to time negotiates purchase contracts for certain
     items used in its restaurants in the normal course of business. 
     Although some of these contracts contain minimum purchase
     quantities, such quantities do not exceed expected usage over
     the term of such agreements.
     
     13.  INCOME TAXES
     
          The asset and liability method contemplated by Statement of
     Financial Accounting Standards No. 109 requires recognition of
     deferred tax assets and liabilities for the expected future tax
     consequences of substantially all temporary differences between
     the tax bases and financial reporting bases of assets and
     liabilities (excluding goodwill).
     
          The major components of the Company's computation of
     deferred tax assets and liabilities at December 31, 1995 and
     December 29, 1996 are as follows:
     
                                          Dec. 31,     Dec. 29,
                                             1995         1996
                                          ---------    ---------
          Excess of tax depreciation 
           over book depreciation         $ 11,390     $  8,430
          Acquired intangibles with no
           tax basis                         2,199        2,070
          Other                                  8           30
                                          ---------    ---------
            Gross deferred tax
             liabilities                  $ 13,597     $ 10,530
                                          =========    =========
     
          Net operating loss carry-
           forwards                       $ 13,070     $ 12,824
          Amounts accrued for financial
           reporting purposes not yet
           deductible for tax purposes      17,122       12,885
          Alternative minimum tax and 
           targeted job tax credit
           carryforwards                       937          937
          Other                              1,267        1,514
                                          ---------    ---------
             Gross deferred tax assets      32,396       28,160
          Less valuation allowance          18,799       17,630
                                          ---------    ---------
             Net deferred tax asset       $ 13,597     $ 10,530
                                          =========    =========
     
          The primary changes from December 31, 1995 in the
     components of the above assets and liabilities relate to the
     Company's changes and business strategies, restructuring, other
     restaurant closings (see Note 3) and impact of SFAS 121 (See
     Note 16) offset by current year tax depreciation in excess of
     book depreciation.  The alternative minimum tax credit carry
     forward has no expiration.  The net operating loss carryforwards
     will expire approximately $641,000 in 2008, approximately $20.2
     million in 2009 and approximately $17.5 million in 2010 and
     approximately $1.6 million in 2011.  The targeted jobs tax
     carryforward expires approximately $118,000 in 2006, approxi-
     mately $184,000 in 2007 and approximately $200,000 in 2008.  A
     valuation allowance of approximately $17.6 million has been
     established due to the uncertainty of realizing the benefit
     associated with the net operating loss carryforwards generated
     in the current and previous years.
     
          Income tax expense consists of the following:
     
                                       Fiscal Years Ended
                               ----------------------------------
                                Jan. 1,      Dec. 31,    Dec. 29, 
                                 1995          1995        1996
                               ---------    ---------   ---------
          Current              $ (3,458)    $   539     $   (675)
          Deferred               (1,524)          -           -
                               ---------    ---------   ---------
          Total tax (benefit)
           expense             $ (4,982)    $   539     $   (675)
                               =========    =========   =========
     
          Income tax expense for year ended December 29, 1996
     consists of a benefit of $1,350,000 related to the extraordinary
     gain recognized from the purchase of bonds, $575,000 in state
     income tax expense and $100,000 in expense related to a
     reduction in a receivable from the IRS resulting from a NOL
     carryback to the years 1987, 1988 and 1989.
     
          A reconciliation of the provisions for income taxes with
     the federal statutory rate is as follows:
     
                                       Fiscal Years Ended
                               ----------------------------------
                                Jan. 1,      Dec. 31,    Dec. 29,
                                 1995          1995        1996
                               ---------    ---------   ---------
          Provision (benefit)
           computed at
           statutory rate      $ (8,247)    $(15,770)   $ (1,349)
          State and local 
           income taxes, net
           of federal income
           tax benefit              162          736         380
          Valuation allowance     3,446       15,352         182
          Other                    (343)         221         112
                               ---------    ---------   ---------
                               $ (4,982)    $    539    $   (675)
                               =========    =========   =========
     
     14.  STOCK-BASED COMPENSATION PLANS
     
          The Company currently has three stock option plans in
     effect, the 1990 Stock Option Plan (the "Employees' Plan"), the
     1990 Stock Option Plan for Non-Employee Directors (the "1990
     Directors' Plan"), and the 1995 Stock Option Plan for Non-
     Employee Directors (the "1995 Directors' Plan").  Additionally,
     the Company has an employee stock purchase plan (the "1993
     Purchase Plan").  Although there are existing options outstand-
     ing under the 1990 Directors' Plan, no additional grants will be
     made pursuant to this plan.  The Company accounts for these
     plans under APB Opinion No. 25, under which approximately
     $66,000 of compensation cost has been recognized in fiscal 1996
     related to 157,000 options granted to directors under the 1995
     Directors Plan.  Such compensation represents the difference
     between the market values on the dates of grant and the measure-
     ment date, July 10, 1996, the date when the grants were
     ultimately approved by the shareholders at the annual meeting. 
     No compensation cost was recognized in any other period
     presented.
     
          During 1996, a total of 350,000 additional options were
     granted to five of the current directors.  These options were
     not granted pursuant to an option plan.  The options were
     granted at a price equal to the stock's market price on the date
     of grant.  The options were immediately exercisable and expire
     after five years.
     
          Had compensation cost for all option grants to employees
     and directors been determined consistent with FASB Statement No.
     123, the Company's net income and earnings per share would have
     been reduced to the following pro forma amounts:
     
                                              1995        1996
                                           ----------  ----------
        Net Income (Loss):  As Reported    $ (46,919)  $   1,988
                            Pro Forma        (47,154)       (699)
     
        Earnings (Loss)
         Per Common Share:  As Reported    $   (3.00)  $     .12
                            Pro Forma          (3.02)       (.04)
     
          Because the Statement 123 method of accounting has not been
     applied to options granted prior to January 2, 1995, the
     resulting pro forma compensation cost may not be representative
     of that to be expected in future years.  Additionally, the pro
     forma amounts include approximately $16,000 and $12,000 in 1995
     and 1996, respectively, related to the purchase discount offered
     under the 1993 Purchase Plan.
     
          The Company may sell up to 500,000 shares of stock to its
     employees under the 1993 Purchase Plan.  The Company has sold
     approximately 36,000 shares, 51,000 shares, and 25,000 shares in
     1994, 1995, and 1996, respectively, and has sold approximately
     126,000 shares through December 29, 1996 since the inception of
     this plan in 1993.  The Company sells shares at 85% of the
     stock's market price at date of purchase.  The weighted average
     fair value of shares sold in 1995 and 1996 was approximately
     $2.06 and $3.03, respectively.
     
          Options to purchase an aggregate of 5.5 million shares of
     the Company's Common Stock may be granted under the stock option
     plans, at a price not less than the market value on the date of
     grant.  The Company has granted options on approximately 2.4
     million shares under the stock option plans.  Outstanding
     options expire ten years after grant under the Employees' Plan,
     except with regard to shares granted to the Company's President
     and Chief Executive Officer pursuant to his employment agreement
     which expires in five years.  Options outstanding under the two
     directors' plans expire five years after grant.  Options are
     exercisable over various periods ranging from immediate to three
     years after grant depending upon their grant dates and the plan
     under which the options were granted.
     
          On August 26, 1994, the Board of Directors authorized an
     option exchange program, subject to shareholder approval,
     pursuant to which options to purchase 1,042,000 common shares at
     prices ranging from $8.00 to $21.50 per share were terminated. 
     These options were reissued, subject to shareholder approval, at
     $4.125 per share, which was the closing price of the Company's
     Common Stock on August 26, 1994.  The option exchange program
     was approved by the shareholders at the annual meeting held on
     May 13, 1995.
     
          A summary of the status of all options granted to employees
     and directors, as well as those options granted to non-employees
     (see Note 4), at January 1, 1995, December 31, 1995, and
     December 29, 1996, and changes during the years then ended is
     presented in the table and narrative below:
     
          <PAGE>
<TABLE>
     <CAPTION>
     
                              December 31, 995         December 29, 1996
                            --------------------      -------------------
                                     Wtd. Avg.                  Wtd. Avg.
                            Shares   Ex. Price        Shares    Ex. Price
                            -------   ----------      --------  ---------
     <S>                    <C>       <C>              <C>      <C> 
     Outstanding at
      beginning of year      2,225       $4.74         2,219      $4.24
     Granted at price
      equal to market          676        2.88         2,154       2.63
     Granted at price 
      greater than market       -           -            350       1.75
     Exercised                  -           -             (9)      3.05
     Forfeited                (412)       3.93          (201)      3.34
     Expired                  (270)       5.38          (667)      5.62
                            -------                   -------- 
     Outstanding at
      end of year            2,219        4.24         3,846       2.92
                            =======                   ======== 
     Exercisable at end
      of year                1.048        5.09         2.359       3.21
     Weighted average
      of fair value of
      options granted        $1.76                     $1.31
     
     </TABLE>
     
          The Company had approximately 1,910,000 options outstanding
     as of January 2, 1994 at prices ranging form $2.67 to $21.50. 
     During fiscal 1994, approximately 1,925,000 options were granted
     at prices ranging from $2.875 to $11.25; approximately 34,000
     options were exercised at prices ranging form $2.66 to $6.92;
     and approximately 1,576,000 options were terminated with prices
     ranging from $4.125 to $21.50.  These transactions resulted in
     approximately 2,225,000 options outstanding as of January 1,
     1995, with prices ranging form $2.67 to $9.333.  At January 1,
     1995, approximately 756,000 options were exercisable at prices
     ranging from $2.67 to $6.50.
          <PAGE>
<TABLE>
     
     The following table summarizes information about stock options outstanding at December
     29, 1996:
     
     <CAPTION>
                          Options Outstanding                   Options Exercisable
     --------------------------------------------------------  ---------------------
                       Outstanding     Wtd. Avg.               Exercisable
       Range of           as of        Remaining     Wtd. Avg.   as of     Wtd. Avg.
       Exercise          Dec. 29,     Contractual    Exercise   Dec. 29,   Exercise
        Prices             1996          Life         Price       1996       Price
     --------------      --------     -----------    --------    -------     -----
     <S>                 <C>           <C>            <C>        <C>         <C>
     $1.25 to 2.50           982       6.9 years      $1.88          80      $2.36
      2.50 to 3.75         2,047       5.1             2.93       1,679       2.92
      3.76 to 5.00           817       5.1             4.16         599       4.16
     --------------      --------                                -------
     $1.25 to 5.00         3,846       5.6             2.92       2,358      3.21
                         ========                                =======
     
     </TABLE>
          The fair value of each option grant is estimated on the
     date of grant using the Black-Scholes option pricing model with
     the following weighted-average assumptions used for grants in
     fiscal 1995 and 1996, respectively: expected volatility of 45.0
     percent and 45.7 percent; risk-free interest rates of 6.75
     percent and 6.82 percent for options granted to employees and
     6.54 percent and 6.59 percent for options granted to directors;
     and expected lives for fiscal 1995 and 1996 of eight years for
     options granted to employees and five years for options granted
     to directors.  An expected dividend yield of 0 percent per share
     was used for all periods based on the Company's history of no
     dividend payments.
          <PAGE>
<TABLE>
     15.  UNAUDITED QUARTERLY FINANCIAL DATA
     
     <CAPTION>
                                        First    Second      Third     Fourth 
                                       Quarter   Quarter    Quarter    Quarter    Total 
                                       --------  --------   --------   --------  ---------
     <S>                               <C>       <C>        <C>        <C>       <C>
     Year Ended December 31, 1995
        Revenues                       $ 42,470  $ 49,843   $ 49,851   $ 46,695  $188,859
        Income (loss) from operations      (993)    1,205    (14,803)   (21,879)  (36,470)
        Net loss                         (3,509)   (1,244)   (17,316)   (24,850)  (46,919)
        Loss per common share              (.22)     (.08)     (1.11)     (1.59)    (3.00)
     
     Year Ended December 29, 1996
        Revenues                       $ 41,912  $ 47,357   $ 38,781   $ 34,702  $162,752
        Income (loss) from operations    (3,369)    2,413      2,632      2,414     4,090
        Net income                          838       111        414        625     1,988
        Earnings (loss) per common share:
          Earnings (loss) before
            extraordinary item             (.24)      .01        .01        .01      (.19)
          Extraordinary item                .29        -         .02        .02       .31
                                       --------  --------   --------   --------  ---------
        Earnings (loss) per common share    .05       .01        .03        .03       .12
                                       ======== =========   ========   ========  =========
          /TABLE
<PAGE>
16.  IMPAIRMENT OF LONG-LIVED ASSETS
     
          The Company adopted Statement of Financial Accounting
     Standards No. 121, "Accounting for the Impairment of Long-
     Lived Assets and Long-Lived Assets to Be Disposed of"
     (SFAS 121), at the beginning of the fourth quarter, 1995.  This
     Statement establishes accounting standards for the impairment of
     long-lived assets, certain identifiable intangibles and goodwill
     related to those assets to be held and used, and for long-lived
     assets and certain identifiable intangibles to be disposed of. 
     SFAS 121 requires that impairment for long-lived assets and
     identifiable intangibles to be held and used, if any, be based
     on the fair value of the asset.  Long-lived assets and certain
     identifiable intangibles to be disposed of are to be reported at
     the lower of carrying amount or fair value less cost to sell. 
     For purposes of applying this statement, the Company determines
     fair value utilizing the present value of expected future cash
     flows using a discount rate commensurate with the risks
     involved.
     
          Long-lived assets considered for impairment under SFAS 121
     are required to be grouped at the "lowest level for which there
     are identifiable cash flows that are largely independent of the
     cash flows of other groups."  The Company believes the most
     correct application of this standard is obtained by examining
     individual restaurants where circumstances indicate that an
     impairment issue may exist.  This belief is primarily based on
     the fact that it is at individual restaurant level that most
     investment and closure decisions are made on an ongoing basis. 
     In addition, if an asset being tested for recoverability was
     acquired in a business combination accounted for using the
     purchase method, the goodwill that arose in that transaction is
     included as part of the asset being evaluated and in determining
     the amount of any impairment.
     
          Prior to the issuance of SFAS 121, the Company recorded
     impairment of long-lived assets deemed to be permanently
     impaired.  Generally, such assessment of permanent impairment
     arose concurrent with a management decision to dispose of such
     an asset at which time the asset was written down to estimated
     net realizable value.  In general, other long-lived assets were
     reviewed for impairment only if there were dramatic changes in
     operating results or cash flows of a segregable group of
     outlets, indicating a likelihood that a permanent impairment has
     occurred.
     
          The Company's past practices of estimating net realizable
     value for assets to be disposed of are consistent with the
     Statement's requirements to write down such assets to fair
     market value less costs to sell and no adjustment regarding such
     assets was necessary upon adoption of the Statement.  The
     expected disposal dates for these assets are over the next 3 to
     24 months and consist mainly of surplus land, buildings and
     equipment.  The carrying amounts of such assets to be disposed
     of are shown separately on the accompanying balance sheets.  The
     majority of assets held for sale resulted from constriction of
     the Company's development plan and other associated store
     closings further discussed in Note 3.
     
          The Company's fourth quarter, 1995 review relating to
     assets to be held and used indicated that 37 of its 238
     operating restaurants met the Company's criteria for impairment
     review.  All of the indicated restaurants were deemed to be
     impaired based on current estimates of their underlying cash
     flows and a provision for impairment was recorded in the fourth
     quarter, 1995 of approximately $13.7 million related to
     writedowns of the assets associated with these restaurants.  
     Approximately $824,000 of associated intangible assets was
     included in this writedown.  The writedown is included in the
     caption "Restaurant Closures and Other."  The writedown of these
     assets resulted in reduced depreciation and amortization expense
     in the fourth quarter, 1995 of approximately $351,000.
     
          The magnitude of the writedown noted above resulted
     primarily from two factors: (1) the review of assets to be held
     and used at individual restaurant level, a lower level than used
     in the past and (2) the recent historical and continuing poor
     operating performance of the restaurants themselves (including
     the restaurant's 1995 full year performance).
     
          During the first quarter of 1996, two additional
     restaurants, due to their continued poor operating performance,
     were determined to be impaired, resulting in charges of
     approximately $754,000 included in the caption, "Restaurant
     Closures and Other".  No additional restaurants were determined
     to be impaired in 1996.  As required by the SFAS 121, the
     Company will continue to periodically review its assets for
     impairment where circumstances indicate that such impairment may
     exist.
     
     17.  SHAREHOLDER RIGHTS OFFERING
     
          A Shareholder Rights Offering (the "Offering") was
     completed on September 20, 1996. The Company distributed to
     holders of record of its Common Stock, as of the close of
     business on July 31, 1996 (the "Record Date"), transferable
     subscription rights ("Right(s)") to purchase Units consisting of
     one share of Common Stock and one Warrant to purchase an
     additional share of Common Stock.  Stockholders received one
     Right for each share of Common Stock held on the Record Date. 
     For each 3.25 Rights held, a holder had the right to purchase
     one Unit for $2.25 each.  The Offering consisted of 4,825,805
     Units.  Each Warrant may be exercised to acquire an additional
     share of Common Stock at an exercise price of $2.25 per share
     and expires on September 26, 2000.  The Company may redeem the
     Warrants, at $.01 per Warrant, upon 30 days' prior written
     notice in the event the closing price of the Common Stock equals
     or exceeds $6.00 per share for 20 out of 30 consecutive trading
     days ending not more than 30 days preceding the date of the
     notice of redemption.  The Offering was fully subscribed and
     raised over approximately $10.8 million in gross proceeds offset
     by legal and other issuance costs of approximately $437,000. 
     The proceeds from the Offering have been used to pay off debt of
     approximately $4.5 million and the remainder will be used for
     new store construction, refurbishment of some existing
     restaurants and for other general corporate purposes, including
     possible further debt reduction.  The net proceeds from the
     Offering were attributable primarily to the sale of the
     Company's common stock.  The amount attributable to the warrants
     is included in "Additional paid-in capital."  
     
          In addition to the approximately $10.8 million provided by
     the Rights Offering, the Warrants issued, if exercised, could
     provide an additional $10.8 million in proceeds.  The Company
     had 15,683,869 shares of Common Stock outstanding on the Record
     Date.  Immediately after the  Offering, 20,509,674 shares of
     Common Stock and 4,825,805 Warrants were outstanding.  As of
     December 29, 1996, 4,818,597 of these Warrants were outstanding. 
     The Warrants are publicly traded and at December 29, 1996 had a
     market value of approximately $11.7 million based on the quoted
     market price for such warrants.
     
     18.  PROPOSED TRANSACTIONS
     
          On March 25, 1997, the Company agreed in principle to a
     merger transaction pursuant to which the Company would become a
     wholly-owned subsidiary of Checkers Drive-In Restaurants, Inc.,
     a Delaware corporation ("Checkers").  Checkers, together with
     its franchisees, operates approximately 478 double drive-thru
     hamburger restaurants primarily located in the Southeastern
     United States.  Under the terms of the letter of intent executed
     by the Company and Checkers, each share of the Company's Common
     Stock will be converted into three shares of Checkers' common
     stock upon consummation of the merger.  The transaction is
     subject to negotiation of definitive agreements, receipt of
     fairness opinions by each party, receipt of stockholder and
     other required approvals and other customary conditions.
     
     
     <PAGE>
     
             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
     
     To Rally's Hamburgers, Inc.:
     
          We have audited the accompanying consolidated balance
     sheets of Rally's Hamburgers, Inc. (a Delaware corporation) and
     subsidiaries as of December 31, 1995 and December 29, 1996, and
     the related consolidated statements of operations, shareholders'
     equity and cash flows for each of the three fiscal years in the
     period ended December 29, 1996.  These consolidated financial
     statements and the schedule referred to below are the responsi-
     bility of the Company's management.  Our responsibility is to
     express an opinion on these consolidated 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 misstate-
     ment.  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 financial position
     of Rally's Hamburgers, Inc. and subsidiaries as of December 31,
     1995 and December 29, 1996, and the results of their operations
     and their cash flows for each of the three fiscal years in the
     period ended December 29, 1996, in conformity with generally
     accepted accounting principles.
     
          Our audit was made for the purpose of forming an opinion on
     the basic financial statements taken as a whole.  Schedule II is
     presented for purposes of complying with the Securities and
     Exchange Commission's rules and is not part of the basic
     financial statements.  This schedule has been subjected to the
     auditing procedures applied in the audit of the basic financial
     statements and, in our opinion, fairly states in all material
     respects the financial data required to be set forth therein in
     relation to the basic financial statements taken as a whole.
     
                                        ARTHUR ANDERSEN LLP
     
     
     
     Louisville, Kentucky
     February 12, 1997
          <PAGE>
<PAGE>
     <TABLE>
     <CAPTION>
                         RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
                                        SCHEDULE II
                             VALUATION AND QUALIFYING ACCOUNTS
                                      (In thousands)
     
                                                    Additions
                                               --------------------                Balance
                                   Balance at  Charged to  Charged to                at
                                   Beginning   Costs and    Other                  End of 
             Description            Of Year     Expenses   Accounts   Deductions    Year
     ---------------------------    -------     --------   --------   ----------  --------
     <S>                            <C>         <C>        <C>        <C>         <C>
     Year Ended January 1, 1995
        Accounts receivable         $   90      $    86    $    -     $     -     $   176 
        Royalties receivable           169          291         -           58        402
                                    -------     --------   --------   ----------  --------
                                    $  259      $   377    $    -     $     58    $   578
                                    =======     ========   ========   ==========  ========
     
     Year Ended December 31, 1995
        Accounts receivable         $  176      $   376    $    18    $    117    $   453
        Royalties receivable           402          838       (267)         51        922
        Notes receivable                -           293        249          -         542
                                    -------     --------   --------   ----------  --------
                                    $  578      $ 1,507    $    -     $    168    $ 1,917
                                    =======     ========   ========   ==========  ========
     
     Year Ended December 29, 1996
        Accounts receivable         $  453      $    54    $     0    $    206    $   301
        Royalties receivable           922          697        (81)        133      1,405
        Notes receivable               542          200         81         (30)       855
                                    -------     --------   --------   ----------  --------
                                    $ 1,917     $   951    $     0    $    309    $ 2,559
                                    =======     ========   ========   ==========  ========
     </TABLE>